Romania: Can the Property Market Withstand the Pressure?

Romania: Can the Property Market Withstand the Pressure?

Romania News Watch have published a briefing article by the Oxford Business Group suggesting that speculation in the country’s property market, especially from abroad, may be reaching dangerous levels. In particular, the interest of foreign property investment funds may not be a sign of commitment to Romanian real estate and that the first signs of weakening in prices could send them running for cover.

Since the beginning of the decade there has been an enormous rise in the prices of apartments. In central Bucharest, the country’s most important real estate market, prices have risen from 7,000 euros seven years ago to 100,000 to 150,000 euros this year. According to Global Property Guide, Bucharest apartment prices average 2,350 euros a square metre and the rental yield is a respectable 7.83%, which places it in a similar bracket to Tallinn, Prague and Brussels.

So, who are the property funds showing an interest in the Romanian market and how much can we find out about the colour of their money? One especially encouraging player is the Global Property Fund, managed by Global Finance of Greece (Investment Director,Theodore Kiakidis) in which the EBRD, no less, took a stake of at least 20%.

This fund has as its aim fostering development of the primary and secondary real estate markets by developing institutional quality properties which still only fragmentally exists in South Eastern Europe. This will provide much needed liquidity and encourage equity investors to expand their participation in the real estate sector in the region.

At the start of this month Lewis Charles Romania Property Fund of Guernsey floated on the AIM market. This is a closed end fund (2013) with three initial projects in residential, office and retail totalling a commitment of 33 million euros . Lewis Charles securities also manage the AIM listed Lewis Charles Sofia Property Fund. At the beginning of August the latter was showing a 37% rise in share price over the previous 12 months.

Since the beginning of the month it has only shown a slight decrease, performance that has been matched by the Romania property fund. The 65m euro Fabian Romanian Property Fund (also AIM listed) has shown a slight drop since its inception just over six months ago until mid August and a further decline in the last week.

Less specialised funds include Tri Investments European Residential Property Fund, which has recently acquired the Perla (apartment) residence in Bucharest for 12.8m euros and the European Convergence Development Company (ECDC) AIM listed recently by Charlemagne Capital to invest in property developments in Bulgaria, Romania and Turkey. Another fund that has been investing in Romania is Dawnay, Day Carpathian which announced the purchase of a multi-purpose development site in Cluj for 14.3m euros on 15th August.

The general picture is one of a low degree of volatility in share prices by these funds which, given the turbulence in the financial markets this month, is surprising. To put this in context the Bucharest index is down roughly 5% from its level at the start of the month but about 35% higher than the level a year ago. The worst performing property fund appears to be Equest Balkan which is now trading at below its price one year ago after a steep fall in July.

However, the foreign direct investment into Romanian property does not seem to be feeling the ill effects the global credit crunch or showing of signs of drawing back from investing in Romania because of a looming ready-to-burst bubble. That said Romanian investment opportunities need careful research, especially if opportunities away from Bucharest are being considered and investing through a fund seems safer than going it alone. Furthermore, there is evidence of overheating in the Romanian economy as a whole.