Who will live at Forest View?
Many of Bucharest’s working class and emerging middle class traditionally live in cramped, crumbling and sub-standard apartments in the inner city. Many now aspire to live in a more modern and western standard of property, within easy access to the city and in clean, safe neighbourhoods1– everything that makes life comfortable. In fact, research conducted by the Ion Mincu University in Bucharest recently reaffirmed this in a statistical survey. The survey discovered that 43% of the local Bucharesti want to live in individual villas with private gardens2.
43% of the local Bucharesti want to live in individual villas with private gardens
Centre for Architecture and Urbanism, Ion Mincu
University, Bucharest
Property prices for new apartments in the city centre and in the recently urbanised north are high - often too high for local first time buyers and young families. So in 2005 the concept of “middle class property development” was launched by Colliers International in Bucharest3, highlighting the need for mid-to large scale developments with high-quality finishing, western standard build, and affordable prices, ideally situated within easily accessible secondary areas, such as southern Bucharest.
Forest View fits these criteria – it is within good commuting distance from the city and offers the necessary lifestyle requirements. Thus the main target group for selling a villa at Forest View will be the local market – the newly emerging middle class who are looking to escape their old inner city residences and move to better, and now increasingly affordable, homes. In fact, locals tend to purchase most of the property on the market – foreign investors acquire only between 10-20% of all the property available4.
They [middle classes] want new buildings, quality finishing, equipments and facilities required by today’s lifestyle
Colliers Romania Report 2006
Recent companies relocating to Bucharest
Deutsche Bank
Goldman Sachs
ING Bank
Nokia
Orange
Vodafone
Toyota
BMW
Oracle
IBM
Hewlett Packard
Unilever
1. Colliers “2006 Romania Report” at www.colliers.com/markets/bucharest/
2. http://www4.pmb.ro/wwwt/pug/pugs/a1_10socioA3.htm
3. Colliers “2006 Romania Report” at www.colliers.com/markets/bucharest/
4. Saceanu, C ‘New residential buyers come out of the woodwork’ at http://www.businessromania.com/Local%20affordability
Rising salaries and better jobs
The cost of living in Bucharest is lower than in all other capital cities in Europe and the population is well educated1. By joining the EU at the beginning of the year, Romania also had to meet very strict economic, political, legal and financial criteria.
This is a big attraction to large foreign companies seeking a skilled but cheap workforce within the EU, especially as accession means the ease of relocating has been greatly improved. Because of this, large companies have recently set offices up in Bucharest.
These relocating companies increase overall employment options, offer better jobs and attract more job seekers to the city. They also boost the economy and provide healthy competition for the best workers, helping to increase local salaries.
The cost of living in Bucharest is lower than in all other capital cities in Europe.
The average monthly income of the Bucharesti middle managers is already in the region of €2,0002, but this is rapidly increasing, especially with the recent EU accession. Further, these figures are over 42% higher than those of the rest of Romania3, reaffirming the fact that the purchasing power of the Bucharesti is strong.
Local mortgage market
The mortgage market in Romania is in at the beginning of its development. This sector only accounts for 4% of the country’s GDP, compared to 49% in the UK. However, the market is maturing steadily and with changes in legislation, there is no deposit required from Romanian nationals looking for mortgages as of March 20074! Despite the new legislation, the banks are not actively marketing this possibility, but are planning to - it is expected that the first 100% loan-to-value mortgages will be initiated during the next 4 months.
New legislation: no deposit required for local mortgages.
As for mortgage products, the ING Bank Romania has launched two new products with loan tenure of up to 25 years5. Alpha Bank offers 30-year Euro currency mortgages with interest rates from 6.9% for a fixed rate mortgage6. Volksbank7 and Bancpost Romania8 offer similar interest rates with loan tenures of up to
35 years.
Put simply, this means that the buying power of Bucharest’s 2 million inhabitants has massively expanded.
1. http://www4.pmb.ro/wwwt/pug/pugs/a1_10socioA3.htm
2. www.zf.ro/articol_99789/manageri_la_raport.html
3. www.insse.ro/cms/files/pdf/ro/cap4.pdf
4. Regulation no.3/2007, 14th March 2007, Romanian Official Legislative Journal
5. ING Bank Romania at www.ingbank.ro/Pr_Archive/210205/210205.html
6. www.alphabank.ro/
7. www.vbr.ro/
8. www.bancpost.ro/Default.aspx
Rental market
The rental market in Bucharest is thriving. According to local professionals, average rental yields of 15% are currently being achieved16. This won’t always be the case - as property prices grow, yields will be compressed, but it gives a strong indication of the viability of the market.
High-quality, stand-alone family homes are scarce and in constant demand from the local market. However, the rental market is not solely reliant on the locals. By joining the EU, the capital has also become increasingly attractive to foreign businesses. These companies bring with them a plethora of international professionals, looking to relocate to Bucharest with their families for short-term employment. Preferring to rent long-term rather than buy17, they represent an alternative rental market for a Forest View investment alongside the local market.
From a property investor’s viewpoint this is great news. The rental market in suburban areas within commuting distance of the city, such as Forest View, tends to cater for longer term tenants, meaning less void periods and higher demand.
Rental options
There are two rental options open to you when your Forest View Villa completes. You can either attempt to rent your villa on the open market, where we expect net yields to be around 8.4%, or you can take up the 6% optional rental guarantee that is offered by the developer.
Being a new development in a young market, the guarantee may be a better option for investors who do not have an appetite for risk. However, the higher potential income available on the open market may be more attractive to other investors, even if potential void periods are also more likely.
Rental Comparables
We have compared a broad range of rental property in southern Bucharest. Long-term let, individual homes have an average rental rate of around €10 per m2 per calendar month. As one travels further out of Bucharest, rental rates decrease. Forest View Villas are located slightly further away from the city centre than the comparable properties. The comparables are located inside the ring road, whereas Forest View Villas are outside the road, where the rental market is less mature. To account for this, we have conservatively adjusted down the expected income by 35%.
Assuming the purchase of a 140m2 Bucharest villa for €100,000, €6.50 per m2 per month would provide a monthly income of €910 - that’s an annual gross yield of 11%. Providing for an occupancy of 90% per year and management fees of 15%, the net yield would be a very healthy 8.4% p.a.
Up to 8.4% Net Yield
Rental guarantee
The developer is offering an OPTIONAL 2 year rental guarantee at 6% per annum to ease you into the market. For example, should you choose to opt for it, the developer will rent out your property and you would receive a fixed €6,000 per year on a €100,000 property. While this does not match the market potential, it does offer a risk-free option over the first 2 years of property ownership in a young market.
Overview of the economy
As a new entrant to the EU, Romania has had to make some dramatic adjustments to its economy to adhere to the convergence criteria of the Union. This has been beneficial to an economy that has rapidly been privatised from a communist regime in just 15 years. It has meant that capital market regulations and taxation accounting rules, amongst others, have been reformed to an EU standard. The country’s profile as a secure investment location has been raised and more and more property investors now feel confident about Romania.
The monetary foundations of Romania have been strengthened by a vast amount of EU structural aid – amounting to €30 billion in 2007 alone1. This funding will be spent mainly on improving the transport and infrastructure, but also on natural environment, regional development and economic competitiveness.
This structural aid will also assist in boosting economic growth. The Economist has forecast an average GDP growth of 6.1% for the next 4 years2. This is more than double the average for the rest of the EU countries. As inflation and the budget deficit are also set to fall this year, this is a great time to enter the market.
5-year GDP growth forecast twice the EU average
International interest has rapidly followed the EU accession. Investment specialists Ernst&Young have qualified the country as the most attractive country for investment with predicted Foreign Direct Investment (FDI) figures averaging €5.7 billion for the next two years3. A large chunk of this investment is directed towards the real estate sector. This is already boosting property prices and will spur the market on.
1. www.ebrd.com/new/pressrel/2004/137sep21.htm
2. www.economist.com/countries/Romania/profile.cfm?folder=Profile-Forecast
3. www.ey.com/GLOBAL/content.nsf/EYSEE/Locations_-_Romania
What does EU accession mean for Romania?
The Financial Times recently quoted “…Romania is changing, powering through the most dramatic economic expansion in its history. Reforms that were required to win EU accession are attracting billions of euros of foreign investment
every year…”1
The Economist reinforces this “…Romania has the advantage of size, demography and a newly confident elite that wants to put the country on the map of Europe…” 2
Experts often declare a country’s impending membership of the EU as a reason to invest there. The reasons are also visible from historical facts – EU accession has had a very positive effect on the economies of previous entrant countries e.g. Spain, Portugal, Ireland and Finland. Over a period of time, many previous entrants saw their property prices increase significantly both pre- and post-accession to the EU.
EU membership has traditionally meant strong economic growth and encouraged much foreign investment. This is because membership engenders economic stability and growth, which in turn attracts foreign businesses and direct investment. In addition it ensures a more predictable legal and judicial system, and a clearer and safer environment to work in.
On top of this, membership of the EU often means much needed infrastructure improvement funds are channelled into a new accession country. Romania will benefit from over €30 billion of such EU funds3. These factors drive demand for housing and property prices rise accordingly.
The table below shows that many of the more recent and comparable Central and East European 2004 entrant capitals have continued to benefit greatly post-accession and have enjoyed double-digit capital growth in their property prices.
The average capital growth increase 2 years before EU accession in the Czech Republic, Hungary and Poland was 16.25% per annum and the average increase 2 years after accession was 11.6% per annum. These cities, however, enjoyed “pre-emptive” investment before joining the EU, which resulted in a slight slowdown of investment post-accession. Bucharest did not experience as much of the pre-accession investment and is therefore only at the beginning of its growth.
There is no reason to assume that similar trends will not occur within the Romanian market now that it has joined the EU. Investment specialists Knight Frank expect to see prices continue to grow by 10-15% per year in Bucharest over the next 2 years4.
Based on historic capital growth, buying a 2-bedroom villa at Forest View for €100,000 with a non-status mortgage could more than double your money in 3 years. Please see pages 17-19 for more details.
1. http://www.ft.com/
2. www.economist.com/world/europe/displaystory.cfm?story_id=E1_RQJNVQJ
3. www.ebrd.com/new/pressrel/2004/137sep21.htm
4. www.triinvestments.co.uk/