The residential property sector has expanded consistently, primarily due to the strong local demand

Research conducted by CEREAN, ARAI and international agencies in 2006 has indicated that the Romanian property market is the second most profitable property market in the world. Romania was also ranked by a PricewaterhouseCoopers & Channel 4 study as the top place to invest in property in Europe for the next decade. Property analysts forecast unanimously that Romania is the new golden market of Europe and that investors in the Romanian market are set to double their money in less than five years and more than quadruple it in 10 years.

Key factors driving the Romanian property market

Dan A. Negulescu

Romania is located strategically between Europe, Middle East and Asia. Its economy has recently been upgraded to investment grade by Fitch. The currency has been appreciating against US Dollar, Euro and Pound Sterling, providing additional growth potential for investors in property assets. In 2004, HVB Bank Austria reported Romania’s GDP growth of 8.5 per cent, just behind Latvia (8.7 per cent), at the top of the Central and Eastern European (CEE) league.

The Romanian economy is rapidly moving from an industrial and agricultural economy to a modern information and services society. With 22.5 million people, out of which over 12 million live in urban areas, Romania experiences a significant urban population growth rate and mass migration to the big cities. The residential property sector has expanded consistently, primarily due to the strong local demand. The construction and development industry is still young and the few national companies and small regional developers have not been able to match the local demand. The construction industry only has the capacity to produce 55,000 units a year, while more than 150,000 people are looking for a new home in major cities. This provides an unprecedented opportunity for real estate investors and developers, given the relatively easy way to get approval to build new flats. The sustainability of the real estate market is also strongly influenced by the mortgage affordability. Between 2002 and 2004, the total lending volume has quadrupled.

Other factors contributing to these positive trends are enlisted below:

1. EU membership

Evidence from the new EU members (from 2004) shows that the prospect of EU membership added stability and created a recurring pattern of dynamic growth, based upon:

• Affluent expats working in these countries, buying or renting property;
• Increasing local wealth;
• Greater choice of mortgages and affordable financing;
• Speculative investments in anticipation of the EU entry;
• Demand for land and property outstripping supply;
• Opening the market to an avalanche of tourists; potential buyers of property or land.

Along with the EU membership, Romania will receive in excess of €30 billions over the next decade and much of this money will go into major infrastructure development projects such as airports expansion and public transport modernisation. This will add a longer term boost to the economic and foreign investment growth, competitiveness and new job creation.

2. Booming economy

According to Eurostat 2004, Romania is among most rapidly developing countries in the South East of Europe. The economy has enjoyed a GDP growth consistently above the EU region, unemployment rates on a down trend (currently stand at 6 per cent, which is below EU’s average of 8.8 per cent.). The Romanian economy is combining steadily increasing levels of GDP and significantly higher levels of FDI than its neighbours: Hungary, Bulgaria and Slovakia.

The economy was forecast to grow by 5.2 per cent per year in 2005-2006, based on the rapid expansion of foreign investment and continued strong consumption growth. The buying power of the locals is rising and the potential for buying property is surging. Property and land prices are responding to this factor and are steadily appreciating. Prime Minister Tariceanu has announced the maintenance of the economic and fiscal policies which have so far yielded excellent results, and further focus on two major objectives: more investments and raising the standard of living. Other government priorities are the economic growth by means of large investments in infrastructure and human resources, and the competitiveness increase through cheap labour, more investments in education, research and professional training.

• Political Stability

For more than 16 years, the country has been one of the most stable ones in CEE . Not surprisingly, in March 2004 Romania became a full member of NATO. Romania is now governed by democratically elected representatives since the fall of the communist regime in 1989. The country has consistently enhanced its political stability since 2000, and strengthened relationships with both European and US administrations. Currently, a centre right coalition is in power after winning elections in 2004. Its key mandate has revolved around EU accession and EU membership preparation and has voiced commitment to building strong external cooperation.

3. Foreign Direct Investment

In the last couple of years Romania received more foreign investment than in the previous ten years. Romania has the highest FDI level in all of the CEE countries, with more then €4 billion invested in the country in 2006. Romania is the first country in Eastern Europe to reach US$10 billion FDI by 2003. National Bank of Romania reported a total volume of foreign investments above US$5.2 billion in 2004 and in 2005 this reached US$6.2 billion. As the economy continuously grows, it is predicted that international investment will increase in key areas: manufacturing, automobiles and auto parts, furniture, electronics, IT, real estate and services.

The total number of UK investors in Romania doubled in 2005. The second foreign investor, the UK, ranks fourth in the real estate investors charts, after Italy, Austria and Israel.

Romania became attractive to foreign investors for a multitude of reasons, including:

• Low labour cost for highly educated workforce;
• Low, uniform tax rate of 16 per cent;
• Large population, of 22.5 million, accounting for 40 per cent of South East Europe’s population;
• Strategic geographical location;
• Modern telecommunications;
• EU standard fiscal legislation;
• Significant infrastructure investment programme.

The best types of property to invest in

High profile projects are available to investors with high entry level investment, while the average level investor equally has opportunities ranging from pure land acquisition to participating in off-site projects. The prospects for capital growth in the Romanian property market are unmatched throughout Europe in the following segments:

• Residential & industrial land investment;
• Tourism developments, particularly in the ski resorts of Poiana Brasov, Predeal & Sinaia.
• Industrial Property, recently developed for transnational companies.

The most popular areas to buy in

Most investors coming to Romania like to locate in the nation’s capital - Bucharest. That is a smart move, but not the only one. Other areas investors often consider are Brasov, Constanta and Timisoara. Each of these markets are compelling for different and similar reasons; if investing wisely the markets bring good profit, these markets, however, are saturated.

For a really good profit, the biggest opportunities are in the outside regions such as the city of Iasi and Moldova. The sense of wealth is very prevalent in the city of Iasi. There are two major shopping malls that illustrate this particularly well. Iasi may well be the cleanest and nicest city in all of Romania. Something of a living museum, Iasi has more churches per square metre than almost anywhere else in Europe. There is also a large palace, a theatre, and a thriving university centre. The rental market here is dynamic and actually one of the biggest businesses. Your rent in Iasi would be 20 per cent less than in Bucharest, but property prices are significantly lower.

What is the legal procedure of buying a property in Romania?

The key directives ruling real estate transactions and ownership are enclosed in Laws 247/2005, 656/2002 and 31/1990. Currently foreigners can directly buy property without any restrictions in Romania, with all the privileges and duties of the locals. There can be a fair bit of bureaucracy to get through, but the process is still relatively straightforward. Fluency in English is quite common with Romanian professionals, so finding a bilingual lawyer should not prove too difficult. All documentation relating to property ownership or reclamation should be thoroughly checked by a number of independent parties to be sure it is above-board.

A buyer of Romanian property will need to check whether the property is being sold with or without land. If the Property comes with land, formation of a Romanian company will be necessary, which then owns the land (this law will change on Romania’s entry into the EU). After that, a final price will have to be agreed with the current owner/vendor. Next, an initial contract will have to be drawn up and agreed, allowing the property to be removed from the market. At this stage a payment of a refundable deposit of around 10 per cent is required.

What taxes are there to be paid?

The UK, US and most Western countries have dual-tax agreements with Romania. This means that if you need to pay any taxes in Romania, these taxes can be declared on the tax return form in your country to avoid your having to pay tax twice.

If investing in a number of properties on a commercial basis, it may be more sensible to set-up a Romanian limited company. This is an easy and widely used approach and the costs of operating a Romanian company are relatively low. This means that as long as profits are re-invested in the company, no tax needs to be paid! This is why many companies, particularly from France, Germany and Holland, are investing in Romania.

1. VAT

If both the vendor and purchaser are VAT registered, then VAT on buying a property in Romania will be “reverse chargeable” i.e. the net VAT cost for both parties will be zero and no payment of VAT (usually 19 per cent) needs to be made.

2. Corporation tax

CIT is only relevant if you have gone through the Romanian company formation process and is charged at the standard rate of 16 per cent. This charge only applies to the purchasing of properties in Romania that come with land. This tax liability is reportable to the Romanian tax authorities on an accounting year basis.

3. Capital Gains Tax

This is not payable should you own your property in Romania for more than three years. If you sell your Romanian property within three years, you will be liable to Capital Gains Tax at a rate of 16 per cent.

One factor that could be an issue for many investors in Romanian property is the fact that foreign property investors are unable to obtain a mortgage in Romania as of yet. This will change though as the market matures and with Romania’s entry into the EU. Investors looking to buy a property in Romania will need to have cash to invest up front or find alternative methods to finance their Romanian property. This mortgage issue, however, should not be seen as negative. The current lack of mortgage finance availability means that fewer foreigners have bought Romanian property, which makes property prices still very low. This in turn leads to really good potential returns.

Outlook for the future

Romania will become a European super state, as it is predicted to become the ninth largest country in the EU. The country offers international tourists the mountains, the sea, city lights and village life all at once. FDI into Romania is already higher than into any of its neighbouring countries. Investors are clearly seeing what the future holds and are wasting no time in staking their claim in Romania’s fertile soil.

The planting and harvesting time in Romania is NOW. Many people have already harvested substantial returns on investments made months or years ago. The investors who have watched their property go up in value have often achieved more than a hundred per cent in an incredibly short time.Whether a long-term or a short-term investor, whether investing at a higher or lower level, profit grows here at a fast rate. This will continue for a limited time after the EU accession, but obviously cannot last forever.

There are investors who missed opportunities in the Czech Republic and Hungary and are regretting it now. Those who are still hoping to find a magical cash-producing tree, cannot afford to miss the opportunity Romania presents. The land on which Romanian trees grow is the most fertile cash-yielding land in all of the world.

Biography

Dan A. Negulescu is the President of the Central European Real Estate Associations Network (CEREAN) and Vice-president of the Romanian Association of Real Estate Agencies (ARAI)