RomaniaRomania PropertyProperty MarketMarket ReviewReview FallFall 20102010 Dear Clients and Partners

We are pleased to present our latest report on the Romanian real estate market.

Recent years have seen tremendous global economic changes, resulting in a diversity of macro and micro economic adjustments within each country’s business environment. The large scale global governmental interventions meant to limit the effects of the financial crisis were followed by a series of successive market “shockwaves” with different magnitudes for each country’s economy according to its size and structural maturity.

The property market was hugely affected and had to adjust to the new realities. Property prices dropped drastically and rental rates saw negative corrections, vacancy rates escalated to double digit figures while take-up rates slowed to historical levels. This has created an uncertain environment for landlords, investors and occupiers, however, these significant changes will also create future opportunities in all market segments once demand revives to normal levels.

Recovery is most likely to start in Western Europe before filtering into the CEE, although some green shoots have indicated that the recovery has already started.

King Sturge is committed to the Romanian market and is ready to support the business decisions of its present and future clients, through insightful and innovative professional advice covering all property sectors and specialities.

Radu Boitan Ben Binns Director Senior Associate King Sturge: Romania Property Market Review Fall 2010

Contents

Executive summary 2

Market analysis General market overview 3 Investment market 5 Residential market 8 Office market 11 Retail market 14 Industrial & logistics market 17 Land market 20

Professional services Valuation & consultancy 21 Project management 22 Agency 24 Property and asset management 26

1 King Sturge: Romania Property Market Review Fall 2010

Executive summary now some evidence that the market is recovering, with leasing activity increasing and vacancy rates The Romanian economy was severely affected stabilising. by the global financial crisis, and overall GDP is expected to decline again this year. Whilst there are In the Bucharest retail market, new shopping centre tentative signs of recovery in certain sectors, the development has slowed sharply. A number of government’s austerity measures to address the established schemes, which have traditionally been fiscal deficit will have a negative impact on growth virtually 100% occupied, now have some vacant in the short-term. Forecasters are now not generally units. Retailer demand has fallen significantly, expecting a return to growth until 2011/2012. although a handful of international brands, notably in fashion and footwear, are seeking to increase their The economic and financial turbulence hit all parts store networks. Shopping centre rents in Bucharest of the Romanian real estate sector and markets are have softened, and even more so in the regional only now beginning to see some patchy signs of markets. The High Street market has experienced stabilisation. A chronic lack of finance and liquidity similar trends with increasing vacancies on some will mean that the pace of any recovery will be slow. of Bucharest’s most prominent locations. However, there are now tentative signs of stabilisation in the Investment markets remain characterised by very market. Whilst consumer spending and confidence limited activity. There is a lack of investment grade remain weak, the longer-term fundamentals stock, and demand is subdued, with many of the for Romania are good in terms of its potential to large western European institutional investors support more retail provision. still unwilling to re-enter the market. The supply of ‘distressed assets’ has been relatively modest The Bucharest industrial and logistics market is to date, because banks have been reluctant to showing signs of improvement with a higher level foreclose on breached loan agreements. However, of take-up in H1 2010 compared with the same the supply is likely to increase going forward, period of 2009. However, the overall vacancy rate especially for ‘postponed’ development projects. which stood at 12% at the start of the year could rise to 15% by the year-end, if new deliveries are The residential market in Bucharest was one of the not occupied. The market balance still favours first victims of the credit crunch, and over the past tenants, with the major retailers, in particular, in a two years prices and rental levels have fallen sharply. strong negotiating position. The market showed some signs of improvement in the first half of 2010, but transaction volumes remain The market for land has seen the sharpest price well below pre-recession levels and new apartment corrections. Values for prime sites have fallen by 30 deliveries this year will be less than a third of the to 40%, whilst plots of a more speculative nature level in 2009. A two-tier market is emerging, with have seen their value decline by 50 to 60%. stronger price differentials between prime and secondary residential schemes, which represents a The Romanian economy and real estate sectors step forward in terms of market sophistication and continue to face a range of difficult challenges and maturity. uncertainties remain. However, economic forecasts suggest an improving outlook over the medium- The sharp contraction in economic activity in 2009 term. In this climate, there is a stronger need for hit the Bucharest office market very hard, and led to all participants to seek sound market analysis and a slump in occupier demand and a rise in vacancy, professional advice. which was highest among the newly developed stock. Whilst headline rents fell comparatively modestly, tenants have been able to secure generous incentives, particularly in the form of rent free periods and fit-out contributions. There is

2 General market overview from 19% to 24% as an alternative option in order to cover Romania’s financial deficit. Macro economic This decision may have a detrimental effect on The Romanian economy has been severely perceptions of the country’s competitive position affected in all sectors despite its minor exposure to within the region, and for the foreign companies the main original factors that generated the global investing in Romania especially, as the other financial crisis. The last 12 months have seen the countries in the region benefit from lower VAT rates most severe economic corrections, especially for and more attractive corporate taxation. the public sector where the reforms were most needed. Chart 1: Tax overview in Central and Eastern European countries 30% The very high dependence on foreign capital inflows 25% 24% 25% 22% 23% and external demand from Western European 20% 20% 19% markets, combined with the general value 20% 18% depreciation of all the asset classes which ‘froze’ 15% 10% bank lending, have ‘dried out’ financial inflows into 4.7% the economy and created massive investment and 5% 0% consumption contractions in all sectors. The local 1.8% -4% -4.20% -5% -5.1% -6.5% -5.8% market has been widely affected by uncertainties -7.1% -10% Poland Hungary Serbia Bulgaria Czech Romania Croatia Slovakia in respect of the scale of the economic decline and Republic the expected timeframe for the recovery. VAT Corporate tax Dividend Tax GDP 2009 Source: King Sturge, INNSSE The IMF and European regulatory commission’s recent review of the economic strategies pursued The government’s austerity measures designed by the Romanian government, exposed a much to consolidate the general fiscal environment will weaker than expected position in public finances. have an additional short term negative impact on The budget deficit was set to reach 9.1% of GDP economic growth, given that private consumption by the end of 2010 without immediate corrections. accounts for more than 64% of GDP. The fiscal budget execution degraded substantially and consolidation would not have been possible Real GDP contracted further in the first quarter without radical measures on the expenditure, and/ of this year, declining by around 0.3% from Q4 or the revenue side, of the budget. 2009 and 2.6% compared with the previous year. Whilst this highlights that the rate of contraction Following meetings with the IMF, the Romanian is moderating, it also shows that the economic authorities decided to focus mainly on public recovery is more difficult than expected. expenditure cost cutting and undertook to cut public wages by 25%, starting 1st of June, and to As a result, growth forecasts for this year have cut social transfers by 15% (essentially pensions been downgraded with recent GDP forecasts and unemployment benefits). The disbursement moving down from around +1% to a further GDP of the new tranches of funds from the external contraction of around -2.5%. package agreed in 2009 was conditional upon the completion of the required governmental actions The monthly inflation rate was recorded at 0.35% towards the effective implementation of these in April, which is slightly higher than in the previous austerity measures. two months. The annual inflation rate is slightly higher at 4.28% in April, up from 4.2% in March. In June 2010, following the Constitutional Court’s In July, after VAT increased from 19% to 24%, veto of the government’s decision to cut public the inflation rate jumped to 7.14% from 4.38% pensions, the government decided to increase VAT recorded in June. Considering the National Bank

3 King Sturge: Romania Property Market Review Fall 2010

of Romania’s (NBR) declared policy of targeting consecutive growth rates together with an inflation through a mix of monetary and financial increase in external demand (exports). In addition, measures, the predictions are for the inflation rate the improved absorption of available EU funding, to remain close to this level by June and to increase greater stability of the RON and an improvement in slightly in the third quarter towards 4.8% YOY, the banking sector are some of the essential factors before returning to a downward trend in Q4. to properly back up this trend.

Chart 2: Romania’s GDP vs inflation Real estate sector 10% 7.85 7.9 8% 6.3 The significant period of turbulence for the world 5.59 6% 7.3 2 economy and businesses is not over, and whilst 4% 4.84 there are now some signs of improvement in 2% -2 market conditions in parts of Europe, it is clear 0% -2% -2.5 that the process of recovery will be a slow one. -4% The chronic lack of finance and relevant risk pricing -6% references, impacts on every aspect of the market, -7.1 -8% 2007 2008 2009 2010(f) 2011(f) with a lack of business confidence translating into reduced occupational demand, with the result that GDP Inflation rate the majority of development work has now been Source: King Sturge, Finance Ministry, INSSE, EUROSTAT delayed or ceased altogether.

In the long run, all the austerity measures outlined It is apparent that after severe corrections in above, in conjunction with the IMF’s financial property prices during 2009 a two-tier market is support, are meant to consolidate the public sector emerging, reflecting wider trends across the entire finances and encourage the positive trends already European property spectrum. Values for prime registered by some economic sectors to create a property in Romania stabilised in the first half of much more sustainable recovery. 2010, not due to effective transactions completed in this period, but rather because of a general The traditional signals for an upturn in the Romanian perception that these properties could service their economy are the manufacturing sector recording debt packages and produce positive cash-flows.

Romania: Key macroeconomic indicators - annual percentage change % of 2009 1992- GDP 2004 2005 2006 2007 2008 2009 2010(e) 2011(f) GDP nominal in Bn Euro 79.7 97.8 124.7 139.7 115.9 125.2 142.4 GDP(real) 100 1.6 4.2 7.9 6.3 7.3 -7.1 -0.5 3.5 Private consumption 74 3.7 10.1 12.9 10.3 9.4 -9.2 1 3.5 Public consumption 8 0.7 3.8 -4.1 2.5 5.4 1.2 0.1 0.1 Gross fixed capital formation 31 6.5 15.3 19.9 30 16.2 -25.3 -0.5 5 Industrial output 32.1 2 7.1 5.4 2.5 -5.5 4 4 Agriculture 6.2 -27.2 3.4 -25.3 21.9 -0.4 Exports 30 11.2 7.6 10.4 7.9 8.7 -5.5 0.6 0.6 Imports 43.5 11.6 16 22.6 27.2 7.8 -20.6 -0.5 -0.5 Employment -2.1 -1.5 0.7 0.4 0.3 -0.2 0.6 0.6 Unemployment rate 6.5 7.2 7.3 6.4 5.8 7.8 9.5 8.5 Unit labour costs 66.8 21.6 4.9 15.7 14.3 10.5 8.1 8.1 Real unit labour costs -1.3 8.4 -5.1 2.6 0.2 0.7 1.4 1.4 CPI n.a. 9.1 6.6 4.9 7.9 5.7 4.5 4.5 Government gross debt n.a. 15.8 12.4 12.7 13.3 23.7 29.8 33.2 Source: INSSEE

4 However, secondary assets and land holdings, in Investment market particular those that are very speculative in nature, are still witnessing negative price corrections due There is still a lack of investment grade properties to the massive drop in demand levels for these on the market as vendors are reluctant to sell at types of properties. current adjusted prices. The lack of available market evidence and benchmarks, is a supplementary The occupational market in all sectors remain weak argument for institutional owners to postpone their and extremely selective in search of the best ‘value exit plans especially for good quality and prime for money’ options. As a result, there is reduced properties. appetite for new developments in the short-term. There remains a reduced number of planning The main cash rich investors/speculators in the permits granted in the first half of 2010, which market are hopeful that they can acquire property amounted to 19,827 compared with 23,864 in H1 cheaply, where they feel the freeholder is under 2009. The majority of new developments that are financial constraints and consequently they are taking place are for owner occupiers or those that biding their time. benefit from EU funding. Due to the restrictive lending criteria and lack Investment transactions also remain sluggish in of liquidity, creative investment strategies have 2010. Institutional property investors have yet to re- been applied, involving partial cash payments enter the Romanian market. complemented by equity and debt swap arrangements. As a result, an exact yield reference As it currently stands, the taxes associated with is hard to extrapolate for comparable deals. acquiring and holding property in Romania are relatively high compared to the wider region. To Some of the large, Western European, institutional attract future investors, specific incentives will need purchasers are still unwilling to enter the market to be offered in order to support the investment and until full re-correction of prices has occurred. Lack of development process. investor confidence and appetite towards the riskier emerging markets remains justified, especially by The current economic turmoil has exposed the strong competition provided by the attractive problems with bank lending requirements in level of returns achievable within the more mature relation to the ongoing value management for loan European property markets. securities portfolios, statutory financial reporting and preventive risk auditing. As a consequence, the Investment transactions were sporadic in Romania National Bank of Romania and the banking operators during the first half of 2010. The main investment are currently reviewing the lending process with a transaction that took place was the acquisition of view to better regulate and adapt the procedures to part of the Iris Shopping Centre in Pitesti by NEPI, the current market requirements. which also acquired a retail investment in Braila from Belrom last year.

Some of the long term investors, usually investing in the core markets, are still monitoring the market and would be prepared to acquire prime property assets at yields in the range of 8.75-9.5% with premiums of approximately 100bps for prime cities/ locations, long term institutional leases, better quality products, better covenant grading or the availability of financing at European terms/cost.

5 King Sturge: Romania Property Market Review Fall 2010

There were a few office transactions of small lot A few of the large international institutional sizes that completed at yields closer to 9 - 9.5%, but portfolio holders tried ‘’re-testing” the market most of these involved less institutional covenants by offering some of their investment assets to a or assets, with investment volumes under the 10 selective audience in search of yield references and million euro threshold, therefore remaining ‘under equity recycling options. However, due to the low the radar’ of the larger potential buyers. market liquidity for such investment volumes and uncompetitive offers compared to expectations, the Other transactions that have occurred represent exits were postponed and these institutions instead previous commitments that have come to fruition; adopted a strategy of active asset management in however, these remain important as they represent search of cash flow improvements. strong international players showing commitment and trust in the future Romanian market. For Furthermore, the recent political unrest caused by example, the Ikea Group acquired the local the planned austerity measures in the public sector franchise in Baneasa Retail Park, north Bucharest has recreated uncertainty in the Romanian market. and Tri Investments acquired 69 apartments Presently, investors are waiting to see a more following completion of the Eminescu View settled political environment, with a new coherent project in Bucharest. In addition, the RREEF fund’s economic plan still to be adopted. Not least, regional acquisition of the third phase of the ‘Upground’ investors are analysing the investment alternatives project involving approximately 600 residential units available in the larger CEE area. is expected to be completed during this calendar year. The industrial/logistics sector’s income producing assets recorded the least appetite due to their However, these deals remain limited in nature, as specific characteristics – short-term leases, lower there is still a significant dearth of prime products liquidity and specialised demand and shorter available at suitable yields in line with current market development cycles. Considering the specificity expectations. This has meant there is still little of the Romanian market and the growth signals institutional grade foreign investment in Romania, recorded within the manufacturing sector, we and that any recovery will be a slow process. envisage increased activity in the development sector based on pre-let, “design and build” The presence of attractive ‘distressed asset’ agreements and longer term institutional leases. packages on the market remains very limited as This type of development should find it easier to banks continue to be reluctant to foreclose on secure bank finance and provides a more attractive breached loan agreements. product for the active investors in this sector.

Although traditional real estate investment deals The ‘distressed’ assets class is likely to increase remain limited, there is significant activity in the in both volume and quality in the second half of merger/takeovers of property asset companies 2010, especially for the ‘postponed’ development at a regional European level, which have included projects, as the banks will try to release cash and re- portfolio assets in Romania, especially within gear some of their strategic non-performing loans. the retail food sector. Examples include Lidl’s acquisition of the Plus Discount supermarket chain in Romania, and the PROFI supermarket chain’s acquisition by the Polish Enterprise fund.

Whilst there were very few open market transactions recorded in 2009 and the first half of 2010, a more positive feeling towards investment in Romania is now discernible.

6 Key Romanian transactions during 2009 & H1 2010 Price in mil. EUR City Asset Sector Size (m2) (Estimate) Vendor Purchaser Iasi Nicolina Iasi former Land 62,000 25.7 Real Estate Sticknet Investment factory site Developer Constanta Central Apartments Residential 89 units 10-12 Westhouse Group TNG Real Estate Jv Project Baumeister Bucharest 50% stake in South Residential 550 units 30 South Pacific Group Warburg Pincus Pacific Group Developer Bucharest Prodas supermarket chain Retail 4 units 13 Prodas Delhaize Group Bucharest Perla Residence Residential 66 units 15.5 Morfi Tri Investment Targoviste MODUL shopping center Retail 6,500 4.3 (11%) Equest Balkan Anakes(Cyprus) (anchors Practiker/ Technomarket) Braila European Retail Park Retail 53,000 63 (9.75 – BelRom NEPI 10%) Bucharest Prodas Supermarket chain Retail 4 units Not disclosed Prodas Delhaize Group Pitesti Iris Shopping Centre Retail 26,000 21 Avrig 35 NEPI (equity SWAP) Country Profi supermarket chain Retail Polish Investors fund Country PLUS supermarket chain Retail LIDL Bucharest UPGROUND- 2nd phase Office RREEF fund offices Bucharest Ikea Retail 26,000 30 Moaro Trading – Ikea Group local franchise Arad Atrium Centre (50% Retail 30,000 6 Atrium Centres Arcadom (Tri Granite) share) Oradea Tiago Mall Retail 25,000 30.5 Mivan Kier / Shopping Centre Unicredit Holdings Constanta POLUS center( take Retail 48,000 Immoeast TRI Granit Holding over of remaining 85% share and ongoing responsibilities for 1Euro) Arad Atrium Centre (50% Retail 30,000 6 Carpathian/Atrium Arcadom (part of Tri Equity share) Centres Granite) 13 cities WINMARKT 15 shopping Retail/Office 141,000 21 Investitori & Partneri IGD group centers portfolio (residual + 2,438 Immobiliari consolidation of 10% office share) Source: King Sturge 2010

Romanian prime investment yields as at Q2 2010 Q4 2009 H1 2010 TREND Prime modern office 9.50 – 10.00% 8.75 – 9.50% STABLE Prime modern warehouse 10.50 – 11.00% 10.00 - 10.50% STABLE Prime modern shopping centre 9.25 – 9.50 % 8.75 – 9.50 % STABLE Source: King Sturge 2010

7 King Sturge: Romania Property Market Review Fall 2010

Residential market demand and lack of affordability. The rental market generally favoured the old stock, which commands Overview more central locations. The residential market in Bucharest was one of The credit crunch has had an effect on the re- the first victims of the credit crunch crisis, and pricing of all apartments. However, the re-pricing witnessed significant price corrections. was not uniform and we can now see a two-tier market in the residential sector, with stronger The beginning of 2008 brought the first signs price differences between prime and secondary of decline, when demand for older residential residential schemes depending on location, access apartments fell, and as the year advanced this to public transport, quality of apartments, building decreasing demand spread to all sectors of the structure etc, with prices better reflecting the market. Following the credit crisis, the number individual scheme’s qualities. This can be seen as a of sales plummeted due to foreign investment step forward towards a more mature market. withdrawing from the market and lack of credit available to potential purchasers from banks, The ‘Prima Casa’ programme is designed to support combined with the excessive asking prices. first time buyers so as to support transactions through the economic downturn. The scheme is Prior to the credit crunch and subsequent recession, presently in its second phase of implementation a large proportion of apartment purchasers were where the state will guarantee a loan of up to foreign investors who acquired apartments off €75,000. plan with the intention of disposing of them at completion, and benefiting from the potential future In 2009, the programme facilitated the acquisition uplift in price, or renting them for the attractive of circa 18,000 units countrywide. However, yields offered in the market compared to the this decreased in the first six months of 2010 by financing costs. Following the credit crunch and approximately 40%. The programme’s influence on the significant price corrections of the apartments, the Bucharest primary residential market has been many investors have been left with large numbers rather limited and mostly directed towards the of vacant apartments in different stages of existing stock rather than the new supply. This will completion. continue until the price limits are adjusted to the local market’s pricing conditions. As a consequence of the reduced rental demand for new accommodation and the fact that many The state increased its support for the programme apartments were bought off plan by investors, many that is meant to improve the ‘energy efficiency’of new developments remain largely unoccupied. the old residential block of flats, mainly through facade renovations, better insulation and new The residential market showed a slight improvement thermo glazed windows in Bucharest and other at the beginning of 2010, when compared to the major cities in Romania. The refurbishment costs previous year, however the number of transactions are split between the state and the landlords, which was still well short of 2007 and 2008 levels. are allowed to spread the costs over a period of 20 years. This will gradually improve the old stock of The announcement made in June 2010 regarding residential buildings in the major cities potentially the intended large-scale redundancies from the closing the gap in quality between old and new public sector by the end of 2010 has created more stock. uncertainty which has impacted on the residential sector, as individuals are hesitant, or unable, to Demand and supply commit to long-term investments. Existing market and credit conditions have forced The rental market was also affected with a shift many of the residential developers to rethink their downwards in rental levels, due to decreased strategies. Many projects were cancelled or frozen,

8 and it is expected that the number of new housing Chart 4: Construction licenses H1 2007-2010 unit deliveries in Bucharest and in other major 35,000 29,394 cities will decrease by up to 60 per cent in 2009 30,000 25,602 23,864 and 2010. Currently, with the uncertainties present 25,000 19,827 in the market, there is little demand or motivation 20,000 for individuals to purchase new residential property, 15,000 which is reflected in the low absorption and Building permits 10,000 transactional rates. 5,000

0 It is expected that following the stabilisation of the 2007 2008 2009 2010 Source: National Institute of Statistics economy and property prices, there will be strong demand again for new apartment accommodation Chart 5: Construction licenses by region H1 2007-2010 from the latent demand that existed before the 6,000 crisis, and from new potential purchasers who will 5,000 be present in the market. 4,000

The highest demand is recorded for studios and two- 3,000 room apartments considering the overall acquisition Building permits 2,000 price, but the highest potential demand is targeting 1,000 one and two-bed apartments and is coming from 0 North-Est South South South West North Central Bucharest young couples with a child. Est Muntenia West West Ilfov Oltenia

2007 2008 2009 2010 The above average wage earners, who are in a Source: National Institute of Statistics position to buy, are far more selective in their requirements when choosing a property and benefit There remains in all the major cities of Romania, from a strong negotiation position. residential projects that have either been frozen until the market improves, or schemes that have been There still remains a significant number of vacant completed but where the majority of apartments apartment units bought off plan by foreign investors remain vacant and unsold. that have now been completed. These are likely to be kept for renting or future re-sale when market According to the official data published by the demand revives. Romanian National Institute of Statistics, the number of construction authorisations for residential The stock of new apartments rose to 16,500 units buildings issued in the first semester of 2010 was in 2010 and it is expected to reach 18,500 units 19,827. This was 16.9% less compared to the same next year, based on expected deliveries. period in 2009, which continues a similar downward trend from the 2008 figures. In total, since the first Chart 3: New apartments evolution-deliveries vs stock half of 2007, we have witnessed a drop of 29% in 20,000 18,50018, 8 7.33 the issuing of building permits. 16,53116,531 6

15,000 4 1.51.5 2 Prices 9,6199,619 10,000 -0.5-0 5 0 Prices for residential properties throughout 66,6,96,912 912 Number of unit s -2 5,7377 Romania have witnessed successive price 5,000 3,8823,882 882 -4 2,0002,000 reduction affecting both old and new stock. Whilst 1,3001,300 -6 -7.1-7-7.7 1 0 -8 prices have decreased significantly, in some cases 2008 2009 2010 2011 by up to 40%, it is still difficult to obtain mortgages Deliveries GDP from banks, restricting the number of possible Stock transactions and maintaining a very low level of Source: King Sturge, INSSE effective market demand.

9 King Sturge: Romania Property Market Review Fall 2010

In some cases, developers are offering large One of the drawbacks to purchasing new build incentives on their apartments that are either apartments or villas when compared to old stock delivered or close to delivery, for example in the is the fact that VAT has to be paid on top of the form of free parking lots, furniture, fixed exchange purchase price. Consequently, an individual will rates, and the inclusion of kitchen and white goods, have to pay a VAT rate of 5% for apartments up to a as they are trying to preserve the headline selling maximum of 120 m² or up to a price of €90,000 net. prices. They are also usually restricted from reducing For apartments larger than 120 m² and with a price the selling price by their lending covenants. above €90,000, potential purchasers are faced with a VAT rate of 24%. Average prices in Bucharest in mid location areas range from €1,200 to €1,300 per m² while in the As much of the new build apartments are located regional cities average prices are in the range of in secondary locations with much larger gross built €700 to €800 per m². Prime properties in the sought areas, the fact that a purchaser has to pay VAT after locations of Bucharest (Herastrau, Primaverii, makes them less attractive when compared to Dorobanti Capitale) command values from €2,500 the old stock located in more central areas. Legal to €3,000 per m². Other central locations, such as initiatives for a general VAT reduction or exemption Unirii, Decebal, Stefan Cel Mare etc, have values of for the new completed buildings were promoted €1,500 to €1,600 per m². Prime properties in the and are subject to parliamentary debates in order to regional cities can command values up to €1,500 try to unblock the market for this type of unit. per m².

Chart 6: Selling price evolution for Bucharest 2002-2010 3 rooms 3,500

3,000

2,500

2 2,000

/m 1,500

1,000

500

0 2002 2003 2004 2005 2006 2007 2008 2009 2010

Mid market location Top location Source: King Sturge 2010

Chart 7: Selling price evolution for Bucharest 2002-2010 2 rooms 3,500

3,00

2,500

2 2,000

/m 1,500

1,000

500

0 2002 2003 2004 2005 2006 2007 2008 2009 2010

Mid market location Top location Source: King Sturge 2010

10 Office market Tenants are using the opportunity to ‘trade-up’ to newer and more modern space that has been Overview delivered but traditionally was only available by pre- leasing up to 18 months in advance of completion. The Bucharest office market has experienced some of its highest historical vacancy rates over the last 12 months as a number of large projects have been delivered at a time when levels of take up have slowed.

The majority of these schemes secured financing and commenced work prior to the onset of the economic crisis in late 2008.

Following a slow start to 2009, the last quarter of 2009 and the start of 2010 saw an increase in leasing activity as occupiers started to implement moves and take advantage of the tenant-favouring Upground office market conditions. Vacancy rates have now started to stabilise following the turbulence of 2009 as new Several major infrastructure projects are underway supply is easing and take-up improving. in Bucharest. Upon completion, they are set to bring new areas of the capital city into the spotlight for office space, developers and potential tenants. For example, the Basarab aerial passage which connects with Splaiul Independentei will enhance the desirability of the west side of Bucharest.

Developers are increasingly conscious of energy saving measures and are beginning to incorporate such measures into their schemes. The EU legislation for ‘lower carbon emissions’ within the built environment is already incorporated and under different stages of implementation within some of the office buildings recently completed. Swan Office Park This legislation is likely to further affect both the fiscal regime and market perception within the Rental levels which have traditionally been stable at property development sector and its standards and around €20/m²/month, were affected by increasing procedure. vacancy rates, as new supply became available and take-up slowed. This was especially manifested The occupier and investor market are becoming in certain areas such as Pipera (Dimitrie Pompei increasingly focussed on the energy efficiency and Petricani) where the level of new supply was of buildings. With the current availability of office significant. space, we anticipate that when choosing new accommodation tenants will not only look at The change in the dynamics of the market, with location, but also concern themselves with the higher vacancy rates and increased supply, has lead quality of build and the energy efficiency of the to increasingly favourable terms being sought and building, considering that the occupational costs in secured by tenants including shorter lease terms, such buildings can decrease by more than half in lower rents and increased rent free periods and fit- some instances. out contributions.

11 King Sturge: Romania Property Market Review Fall 2010

Demand In terms of location, the largest supply available remains in the North Area and CBD which accounts The amount of office space taken-up in the first for 70% of total office stock. half of 2010 was circa 57,000m². During the same period in 2009, the office take-up rate was only The overall vacancy rate reached 18%, the most circa 45,000m². Lease agreements signed before affected area being Pipera located in the north of completion of the buildings (pre-lets) made a major the city, which currently has a vacancy of circa 25%, contribution to the take-up activity, accounting for due to the delivery of a significant number of new around 21,000m². schemes in the last 12 months. Vacancy rates are highest amongst the recently delivered buildings as It is too early to determine whether the office many failed to secure pre-lease agreements during occupancy market is recovering from the economic the downturn during 2009. We anticipate that slowdown. However there remains a critical mass vacancy rates for new buildings will slowly improve of demand, increasingly oriented towards prime towards the end of the year as they attract tenants quality offices in good locations, where rents are that are in a position to move. now competitive.

Main supply of new office space H1 2010 The most active companies that relocated and No. Building GLA (m2) expanded their activities in the first half of 2010 were 1 Euro Tower 16,500 the consumer services sector (40%), manufacturing 2 Piraeus HQ 10,000 industry (30%) and business services, including 3 City Gate North Tower 22,000 computer and hi-tech services. 4 Castrum Complex I 3,500 5 Castrum Complex II 11,000 Most of the large space occupiers with significant 6 HQ Victoriei 5,000 7 Multigalaxy II 7,000 portfolios of leasehold surfaces are now trying to 8 Sun Plaza Offices 10,000 optimise their operations and occupational costs 9 Lakeview 22,410 either by consolidating into less expensive locations 10 Ayash Center III 3,000 or downsizing and subletting the extra space. 11 EKA Business Center IV 2,360 12 Maergroup OB 4,000 In the short to medium-term, we expect that the Source: King Sturge 2010 commercial occupational market will face a weak and volatile covenant standing with direct negative Rents effects over the cash-flow stability and the potential rental growth perspective. The first half of 2010 saw prime office headline rents remain stable in the region of €18-20/m²/ International tenants will exercise a stronger hold month for well located A class buildings, with B over their occupational costs, considering that class office space commanding rents of around € these are usually a strategic expense within each 15-17/m²/month depending on location. company’s budget. Therefore, a stronger control over the service charge budgetary execution and Developers are providing increased incentives in reconciliations in line with the market practices will the competitive market to attract strong tenants on evolve. large surfaces. These incentives are generally in the form of fit-out contributions and rent free periods, Stock and new supply which impact on the net effective rents.

At the end of the first half of 2010, modern office Generally, the service charge remains at similar stock reached 1.7 million m² (including Class A & levels to that of 2009, which is in the region of B office space). The first half of the year saw the €3.50 – 4.00/m²/month on an open-book system. completion of 125,000m² of new office stock, a However, in some instances the negotiated 10% decrease compared with the same period last service charge includes above market practice year.

12 Top deals of H1 2010 Company Location Building Leased area (m2) Sector UniCredit Bucharest Future Unicredit HQ 15,000 Financial Sanador Bucharest Castrum Complex 11,735 Healthcare Rompetrol Bucharest City Gate 9,300 Energy Mic.ro Retail Bucharest Cubic Centre 6,000 Retail ING Insurance Cluj Amera Tower 4,000 Financial Enel Bucharest Cascade Centre 1,280 Energy WNS Bucharest West Gate 1,200 HR Romprest Bucharest Ana Offices 1,200 Public servicing Source: King Sturge 2010 services/expense categories (certain equipment replacement provisions, advertising expenses, etc.) which may increase the service charge rate to circa €5.00/m²/month.

A number of lease terms have now shortened and whilst landlords are still seeking five-year terms, tenants are seeking greater flexibility, with landlords now willing to accept three-year terms, or break options at the same time, in longer contracts giving the flexibility the tenant now requires.

Prime rents and vacancy rates H1 2010 Avg. Vacancy No. Area Rent (€) (%) 1 CBD 18-20 17 2 Baneasa-Aviatiei (North) 12-14 18 3 Dorobanti – Floreasca (Central) 16-18 18 4 Pipera (North) 9-12 25 5 Militari (West) 8-10 20 Source: King Sturge 2010

Chart 8: Prime office investment rates 10%

8%

6%

4%

2%

0% Prague Budapest Warsaw Bratislava Zagreb Bucharest Belgrade

2007 08Q2 08Q4 09Q1 09Q2 09Q3 H12010 Source: KS Office Market 2010

13 King Sturge: Romania Property Market Review Fall 2010

Retail market of up to 50% in their turnover, while the food and non-food, well-priced generalist concepts, were Overview recording much more manageable rates of decline. There has been a marked change in the retail The fundamentals for retail development in Romania landscape since 2008 and 2009 following the initial remain good, as it still has one of the highest rates rush from retailers to secure and sign pipeline of increase in retail turnover in the European Union. schemes in the preceding period. The market has However, there will be an increasing requirement moved from being arguably developer biased, with for sustainable rents and for a detailed evaluation retailers now in stronger positions, particularly of retail catchment areas, including spending power the key international players with established and and competition, before new schemes will be successful brands. developed in the future. A number of the schemes announced for 2008 This will fit with the growing emergence of the failed to be delivered on time and many continue to new international brands in Romania with a strong be delayed due to funding difficulties in the current CEE and SEE representation such as C&A, Zara, economic climate. Hervis, New Yorker, Decathlon, Kiabi, Takko and Deichmann.

Demand Demand has been significantly down relative to previous years as tenants undertake a strategy orientated towards consolidation rather than expansion. That said, certain retailers have continued to expand seeking to take advantage of the more favourable terms being offered by landlords. Among the retail market segments, those targeting the ‘value for money’ segment are faring better. Acquisitions of weaker competitors within the food sector were one of the preferred strategies of the Shopping City Sibiu last 24 months for the major international players as Delhaize, Lidl or Carrefour. Whilst the strategy for many of the international retailers has largely been better planned, a number A handful of the international brands in the fashion of the local operators have struggled due to over and footwear sector such as C&A, Zara, Kiabi, expansion without being able to fully support it Deichman, Takko and New Yorker are seeking to through their networks. increase their networks from a relatively low level given their recent market entry, in order to be able The outcome of this has been that retailers are now to benefit from their increased power of negotiation, proving to be significantly more selective regarding lower occupational costs and evident economies of their choice of schemes, and for many, it is now scale. a period of consolidation or, in a small number of cases, survival. Food retailers such as Kaufland, Penny Market and Lidl, with the recent acquisition of Plus Romania, Although there has been a strong negative continue to expand aggressively with a particular adjustment in consumer spending, there was focus on the smaller towns and cities benefiting a selective reduction in turnover. The fashion from the flexibility of their trading formats and their specialists were most severely hit with declines target customers.

14 Existing stock and new supply Rents We estimate the total modern shopping centre The overall slowdown in tenant demand has stock in Bucharest to be approximately 589,000m² had a direct impact on rents with a softening of as at the end of Q2 2010. This is forecast to rise to rental levels and increases in the overall incentive around 670,000m² by the end of 2010, with a total packages landlords are offering. Whilst average figure for Romania of around 1.4 million m². shopping centre rents in Bucharest have fallen, they have held up better than those in the regional cities The most recent significant openings have been which have experienced larger decreases. Rents for Sun Plaza in Q1 2010 (80,000m²) and AFI Cotroceni the best performing and most established schemes Mega Mall in Q4 2009 (76,000m²). The supply of in Bucharest have come close to stabilising and for new modern shopping centre space outside of prime space are in the region €60-80/m²/month Bucharest is available at the Atrium Center in Arad, (standard units). the Iulius Mall extension in Timisoara as well as Galleria at Piatra Neamt and Suceava. The situation in the regions has not been as positive and there have been a number of high-profile failures over the last 12 months. There are only a limited number of schemes that are long established and perform strongly, with average monthly rental levels in the range €30-40/m²/month.

There is an increasing number of instances where landlords are offering incentives to secure new tenants, especially in the less established shopping centre schemes. In addition to fit out works or equal capital contributions, turnover-only rental scenarios in the initial years are becoming more common. Colosseum Center However, generally these are only offered to recent market entrants with strong international brands The new supply that is anticipated to be delivered which are seen as foot fall generators and which before the end of 2011 remains weak due to the can help to re-align and strengthen the tenant mix slowdown in line with the economic crisis and of a scheme. limited financing available. High street retail has not withstood the recent A relatively new phenomenon has been the problems with an increasing number of vacancies increasing number of vacant units in some of the on some of Bucharest’s most prominent locations more established schemes in Romania which such as Calea Victoriei and Blvrd Magheru. Locations have traditionally benefited from virtually 100% on the aforementioned routes can now be secured occupancy levels. This has been due to some in the region of €70-€80/m²/month, some way casualties among local retailers but the upside below the peak figures of around€ 120/m²/month in has been the opening up of opportunities for new 2007/2008. The lack of a strong pedestrian location market entrants to secure locations in some of in Bucharest continues to be a problem for retailers Bucharest’s premier schemes. although we envisage that the historical centre of Lipscani will continue its development as a largely We anticipate that there will be a change in focus food and entertainment-based quarter. of the type and scale of schemes being developed in forthcoming years, with a greater emphasis on smaller, simple schemes such as retail parks, in line with tenant demand for lower occupational costs, efficient trading space and lower risk projects.

15 King Sturge: Romania Property Market Review Fall 2010

Chart 9: Prime retail rents 2010 a Praktiker and a Technomarket unit located in 70% Targoviste, which was sold to a Greek fund at 60 60 60% 55 55 a yield of 11.6% generating a capital value in the € 50% order of 4.6 million. In the first quarter of 2010,

40% NEPI acquired part of the Iris Shopping Centre in Pitesti, which included the anchor tenant Auchan, 30% at a yield in the order of 9%. 20% 10 10 10% The Ikea Group acquired the local franchise in 0% Q1 Q2 Baneasa Retail Park, north Bucharest, as part of a previous commitment that had come to fruition. High street retail Shopping centres Supermarkets Source: King Sturge Arcadom, part of the Hungarian contractor TriGranit, bought a 50% stake in the Atrium Centre mall in Chart 10: Secondary retail rents 2010 Arad from the investment fund Carpathian in a deal 30% 28 28 of circa €6 million. 25%

20 20% 18 Tiago Mall in Oradea was bought by Shopping Center Holding for €30.5 million. The price was 15% €40 million lower than the investment made by 10% 8 8 the Irish developer Mivan group, the developer

5% of the project. UniCredit, the lender, recovered its €30 million granted for the construction work, 0% Q1 Q2 while Mivan-Kier, the company that built it, and High street retail Shopping centres Supermarkets other unsecured suppliers had to accept a loss. The Source: King Sturge price paid accounts for only 40% of the investment made in the building of the mall, which was never opened, and is the first mall auctioned as a result of Retail investment the bankruptcy of the developer. Whilst there have only been a few investment transactions in Romania over the last 18 months, there has been some significant activity in the retail asset class, compared with other products.

NEPI acquired the European Retail Park in Braila from Belrom in the second half of last year as part of a package of three parks from the Belrom Real Estate Company for circa €63 million. Financing was provided by KBC. This transaction initially formed part of a larger more complex deal, involving cash and equity swap arrangements, through which the fund was meant to take over two other commercial parks from Belrom Real Estate in Focsani and Bacau. It is, therefore, difficult to calculate an exact overall true yield, although it is thought to be in the region of 9.75%-10%.

Another notable transaction in the second half of 2009 was that of a Matrix Retail centre comprising

16 Industrial and logistics market by small and medium-sized occupiers. The range of take up was between 1,000m² and 6,000m². Overview The biggest logistics space delivery announced in The Romanian industrial and logistics market the first half of 2010 was in Ploiesti West Park, in showed signs of improvement during Q1 & Q2 the north of Bucharest: Alinso Group delivered a 2010, compared with 2009. The beginning of 30,000m² logistics building to Unilever. this year registered a more significant number of leasehold and freehold transactions, but rental and Demand sale prices have decreased by 20%, compared with the same period in 2009. Demand revitalised during Q1 & Q2 2010, compared with the same period of 2009. Occupiers The pipeline for 2010 comprises a few logistics and started to make decisions, either downsizing their industrial projects, which started last year. Due to facilities and operations, or relocating to new the lack of financing and the increase in vacancy modern spaces, for similar lease terms. As rents rates for warehouses, developers/investors are no have decreased, renegotiations have taken place longer prepared to take risks, therefore there are between the incumbent tenant and landlord. This very few speculative projects to be delivered this trend will probably continue for the next 6 to 12 year. months.

Demand for built-to-suit industrial and logistics space is no longer dominating the market, but has not disappeared. Due to the continuous increase in vacancy rates, it is more likely that demand will focus on existing buildings. However, at the moment, requirements of more than 15,000m² to a single occupier cannot be satisfied within one compact logistics/industrial unit. Only a few developers have started to build new projects or continued the works started one or two years ago.

Ploiesti West Park Existing stock and new supply The cumulated existing stock of logistics and In Q1 and Q2 2010, occupier demand in the industrial industrial space in Bucharest amounts to circa and logistics market was driven by the relocation 950,000m² with the main part being delivered in of companies that opted for modern buildings with the last few of years (280,000m² in 2007, circa improved services and better facilities at a similar 250,000m² in 2008 and 195,000m² in 2009). The rental level, or from downsizing. stock is concentrated in the West, which accounts for approximately 810,000m², with only 120,000m² The total take-up of logistics space for H1 2010 in the South of Bucharest. was around 30,000m², mainly being represented

Logistics take-up Q1 2010 Tenant Project Leased area (m2) Location Golden Foods Millennium Logistic Park 6,000 Bucharest Pet Centar Mega Centre 1,065 Bucharest Schachermayer Monsana 1,700 Bucharest Saint Gobain Bucharest West 3,200 Bucharest Decomar A1 Business Park 1,800 Bucharest Moretti Est Catalyst Industrial, Incontro Park 5,155 Timisoara Source: King Sturge

17 King Sturge: Romania Property Market Review Fall 2010

Projects in West Bucharest Project Location Area developed Developer Europolis Park Km 13th A1 210,000 Cefin Real Estate Bucharest West Km 13th A1 120,000 Portland Trust Prologis Park Km 23rd A1 108,000 Prologis A1 Business park Km 13th A1 100,000 Cefin Real Estate/Valad Equest Logistic Center Km 13th A1 55,000 Equest Balkans Reinert Building Km 23rd A1 20,000 Reinert Mobexpert Center Km 23rd A1 12,000 Mobexpert Mercury Park Km 23rd A1 33,000 Heitman Mega Center West ring road 25,000 Mega Company Chitila Logistics Park West ring road 40,000 MLD Key Logistic Center West ring road 20,000 Mega Company Innovations Park West ring road 15,000 Helios Phoenix Domnesti Park West ring road 15,000 Valad Geodis Center West ring road 22,000 Phoenix Project New Europe Industrial Park Km 23rd A1 10,000 New Europe Real Estate Source: King Sturge 2010

Projects in South Bucharest Project Developer Area (m2) Delivery Location European Logistic Park Brickcrest 20,000 Q1 2011 DN5 Millennium Logistic Park MLP Sud 25,000 Q4 2010 DN4 Industrial park Catalunya Catalunya Imobiliare 19,000 Q4 2010 DN4 Mega Image Logistics Delhaize Group 25,000 Q4 2010 Popesti Leordeni Center Duke Logistics Park Group Millenium 2000 10,000 Q4 2010 DN4 Sabaru Industrial Park FNC Sabaru 20,000 Q4 2010 DN6 Source: King Sturge 2010

For 2010 the estimated new supply is in the region Rents for new industrial/logistic space outside of 150,000m², due to a few projects that are Bucharest range between €3.25 to €3.75/m²/ scheduled to be delivered by the end of the year. month, for ambient space, and between €6 to €10/ The vacancy rate increased to 12% at the beginning m²/month for cold storage space, depending on the of 2010 and will continue to increase to circa 15%, location, contracted area, facilities, lease period and if the logistics and industrial units delivered in 2010 development stage. are not occupied. The Bucharest prime rents are currently between Rents €3.75 and €4.25/m²/month. At the beginning of 2010, rents were as high as €4.25/m² in the regions The rents for logistics and industrial space fell and €4.5/m² in Bucharest. during the first half of 2010, due to the increase in the vacancy rate and the financial constraints on the The service charge is situated between €0.5 and existing occupiers. Incentives given by developers €1.0/m² and varies depending on the value of the are rent-free periods, additional facilities and property tax and the other services included. specialised fit-outs if required by the occupiers.

New supply (in m2) – Bucharest 2004 2005 2006 2007 2008 2009 2010f 30,000 79,000 156,000 280,000 250,000 195,000 150,000

18 Outlook The logistics and industrial market will experience a Many new developments in search of financing slowdown in 2010, because it is still being dictated solutions are submitting the necessary by the major retailers in the market. The shortage of documentation for the EU funding packages any speculative development of logistics parks will available for such regional developments, in order to continue until an upturn in the market is confirmed. offset their development risks profile and complete their LTV equity requirements. It is anticipated that the vacancy rate will increase to 15% at the end of 2010, as there are still empty logistics boxes within the existing logistics parks. This provides the opportunity for the existing tenants to expand.

Some of the major 3PL companies have announced the intention of building their own facilities next year, but the process will take a long time. In the short term, however, such companies will still prefer to lease space for temporary solutions for logistics hubs.

Logistics and industrial projects pipeline for 2010 in Romania Project Developer Area (m2) Delivery Location Ploiesti West Park Domo Group / Alinso 20,000 Q3 2010 Ploiesti Chitila Logistic Park UBM 5,000 Q4 2010 Chitila Millennium Logistic Park MLP 25,000 Q3 2010 Bucharest Mercury Park Unit 4 Heitman 10,000 Q4 2010 Bucharest, A1 Olympian Park Helios Phoenix 18,900 Q2 2010 Timisoara Arabesque Logistic Center Arabesque 10,000 Q4 2009 Oradea Mega Image Logistics Center Delhaize 25,000 Q2 2010 Bucharest A1 Business Park Ph3 Cefin 7,000 Q3 2010 Bucharest VGP Park VGP 18,000 Q4 2010 Timisoara Point Park Point Park Properties 30,000 Q4 2010 Turda European Logistic Park Brickcrest 20,000 Q4 2010 Bucharest Source: King Sturge

19 King Sturge: Romania Property Market Review Fall 2010

Land market been some transactions for small to medium size plots suitable for low density dwellings, owner Overview occupier, or administrative buildings. However, there has been no demand for the land plots Land prices were corrected the most during the located in built-up urban areas, which target high economic crisis, decreasing rapidly during the density residential apartment schemes, due to the whole of 2009. Prices seemed to have stabilised developers’ difficulty in securing financing and the in the first trimester of 2010. However, there are lack of demand from end users. still very few transactions to provide open market evidence. In the current context, it is expected that developers will start focusing on smaller plots which require The main demand for land comes from owner a smaller financial outlay to develop. The rise in occupiers, particularly from the food retail sector and demand for this type of plot will eventually stabilise DIY stores, which have expansion plans throughout price levels. Large developments will be increasingly Romania in order to increase their market share. uncommon, due to financing challenges as well as the insecurity about the future of the economy. Since the crisis, there has been an increase in interest from large scale agricultural operators to Prices acquire land for agricultural purposes. This is a new trend, as previously, much of the land was acquired Significant price corrections have already taken for alternative uses and future development place. It is estimated that the average decrease in purposes. asking prices for land plots in Bucharest has been between 30% and 60% compared with the levels Many developers/speculators have found registered during the peak period of 2007 and Q1 themselves unable to dispose of their land plots, 2008. many of which now have an alternative planning. While some try and conclude forced sales, others The re-pricing has not been consistent however, as are reviewing alternative possibilities that may be the prime, well located, land plots have witnessed available to them such as JV’s, European funding, less of a reduction (circa 30% to 40%) when etc. compared to those plots with a more speculative nature (circa 50% to 60%). Agricultural land has Demand generally maintained its value, and has good potential to increase over the next few years. Demand is currently very low, due to difficulties in securing finance from the banks, which are reluctant e to see land as equity, or allocate a very low value to Price / m² Use type Bucharest Main cities it. Consequently, a purchaser will have to provide Retail 250-500 200-300 the financial resources itself. As a result, the little Industrial 30-50 15-30 demand that there is currently, is from cash rich Logistic 50-75 25-50 individuals, who can acquire small plots in order to Medium rise residential 400-800 200-300 build their own residential dwelling, or from owner High rise 800-1,400 400 - 800 occupiers mainly in the food retail and DIY sector. Source: King Sturge 2010

Generally, plots of circa 500m² for individual dwellings are the most sought after. The retailers require land plots of 3 ha to 5 ha depending on there business model. Smaller discount operators require circa 1 ha.

With regard to the residential plots, there have

20 PROFESSIONAL SERVICES Local practice To date, there has been a general lack of transparency Valuation & consultancy associated with the Romanian property market. This general scarcity of transactional evidence has been General overview magnified by the complete dearth of transactions The credit crisis has increased awareness of the that characterise the current market conditions. importance of property valuations as an essential tool to determine the exposure of financial Valuations require a knowledge of the yields institutions, investment funds and developers. investors are prepared to pay for certain property assets in certain locations, as well as the price per There has been a significant shift in the parties m² a property asset is likely to command, whether that have requested valuations. Prior to the credit it be for rent or freehold. The best understanding crunch, demand for valuations came mainly from and evidence of this is extracted from the latest developers and investors who required financing for transactions. their projects. As financing has become increasingly difficult to obtain, valuations for this purpose have Consequently, undertaking valuations in this reduced in volume. current economic environment is very demanding, as where there is no transactional evidence of In contrast, the financial institutions that have large similar properties, educated adjustments must exposures to property assets have immediately be performed on comparable properties that are reacted and demanded new valuations of their available on the open market, where only asking portfolios. Furthermore, the need to comply with prices are stated. These only provide a guide to the the Basel II Accord has increased the pressure on owner’s expectation of value of a property asset in the lending institutions to revalue their portfolios. a certain area.

Investment funds have continued to require One problem when utilising comparables that are valuations due to their potential exposure and being offered on the open market is that there can their need to report regularly to the mature capital be large discrepancies between the description of markets. the property and the actual condition, as well as large variations between offered prices for similar The credit crisis has impacted on the values of all properties, especially when concerning potential types of property assets, with significant decreases development land. Under these circumstances, it is witnessed. As a consequence, valuation practices essential for the valuer to investigate and identify have been reviewed in order to create a co-ordinated the appropriate comparables thoroughly in order to approach. assess correctly the subject property’s value.

The IVS (International Valuation Standards) will be During Romania’s economic boom period (2004– publishing a new edition next year that will aim to 2007), many investors and property developers standardise the valuations. assembled large areas of land, mainly in secondary locations, with future development potential. As a The RICS (Royal Institution of Chartered Surveyors) result of the current lack of desire or financial ability has recently entered Romania, also providing a to develop speculative schemes, a substantial standardised approach to valuation summarised number of valuation instructions are for vacant land in the ‘Red Book’. This is specifically applicable to plots where development potential is less certain in UK-based investment funds, developers or those the current market. companies listed on the UK stock exchange that have exposure in the Romanian market, which will In the past, these land plots were valued on the require valuations performed under this standard. basis of the residual method. However, in the current market it is very difficult to determine the

21 King Sturge: Romania Property Market Review Fall 2010

actual net operating income, the occupancy rate Project management or the most likely rent evolution for a potential development scheme. Consequently, the residual This chapter highlights some of the key issues value would be based on too many assumptions to relevant to the Romanian construction sector and represent a solid basis for loan security purposes in how the Project Manager can help to manage the current market, and the comparable method is risks. It also provides a brief overview on the usually adopted instead. legal framework for energy building certificates in Romania and the impact on owners and tenants. These particular market conditions can, in some instances, create variations and discrepancies within the level of values reported. Therefore, from a client’s perspective, it is important that when instructing a valuer, especially for loan security purposes, every valuation benefits from a legal liability and that the appointed valuer has adequate professional indemnity insurance cover in order to support its valuation and professional advice.

Cost risks Through our internal audit and analysis of various projects in Romania, ranging from residential, commercial to industrial projects, we identified that project costs increased by around 10 to 15% of the initial contract price, due to insufficiently detailed tender documentation and lack of detailed design, which ultimately led to variations and claims made by the contractors during the construction phase. The Project Manager and Cost Manager, together with the design team, play a crucial role in ensuring that the design and tender documentation risks are identified and communicated to the client at an early stage.

Time risks A vast number of projects in Romania suffered from delays and late completion. Some of the key factors behind delays were usually unforeseen ground conditions (due to a lack of proper ground investigations), poor programme management, poor coordination of construction site staff, disruption due to late delivery of construction information from the design team, late order of materials and equipments (non-availability of material schedules), unskilled labour forces and abortive works due to poor design

22 documentation. All of the aforementioned risks Under the requirements of law No. 319/2006 and are manageable and require Project Managers to Government Decision no. 300/2006 regarding plan in advance and anticipate potential disruption health and safety standards for temporary/ at early stages through a risk register and design mobile sites, the client has a statutory obligation workshops with the design team, in order to assess to ensure that construction work is not started the deliverability of the project and the risks related before the preparation of a health and safety plan, to design and execution. which complies with the regulations. The plan must basically consist of the principal contractor’s Quality risks arrangements to ensure: The lack of insufficiently detailed design and errors • The health, safety and welfare of persons at work in the design, i.e. due to lack of coordination • That construction risks are accounted for between the various disciplines, i.e. architectural, structural, mechanical, electrical and plumbing, • Management organisation structure often lead to conflicts during the construction • Communications phase, resulting in a poor quality of construction work. Besides the management and design issues, • Monitoring procedures there is the factor of an unskilled labour force, • Site rules resulting in poor workmanship. Even projects within the ‘luxury segment’, were often characterised by • Emergency procedures an unacceptable quality of finishes, due to poor • Site induction procedures workmanship and poor construction methodologies. • Safe working procedures for early construction Another significant factor for poor quality is simply activities the omission of specific materials, which ultimately reduces the performance of building elements, such as through the omission of footfall sound insulation for floors, or insufficient thermal insulation for facades, terraces and balconies, which significantly reduces the energy performance of buildings.

The Project Manager plays an essential role in monitoring, recording and communicating quality issues at an early stage to the contractor. Despite the above mentioned challenges and obstacles, the Project Manager has to ensure, in conjunction with the design team, that a maximum cost/value ratio is achieved and that the product is in line with the expectation of the targeted market and the norms Energy Performance Directive and standards. In Romania, Law 372/2005 has been in force Health and safety risks since 1 January 2007. This sets out the general requirements for the energy performance audit and Health and safety in construction is still a serious the issuing of energy certificates for new and old problem in Romania, as it is usually one of the buildings. first items where developers and contractors cut costs. The biggest issue is the lack of induction and How will owners/buyers/tenants be affected training for the on site workforce, but also the lack of and what information does the energy certificate safety equipment, edge protection, and harnesses display? The requirement of the mandatory for workers and the lack of safety management provision of energy certificates and labels for each systems etc. property gives prospective buyers or tenants the

23 King Sturge: Romania Property Market Review Fall 2010

opportunity to foresee the energy performance Agency of the building and, therefore, to estimate the cost of running the facility. Furthermore, ‘Building The recent economic downturn has left its mark Performance Ratings’ will become a key factor on the local real estate market in many ways and influencing the value of the property, which already has seen a marked correction of market rents is the case, for example in Germany, where the and terms being agreed as a result. Indeed given energy rating of properties has a direct impact on the continuing turbulence globally market terms the value of the property. The legal requirement are continuing to move and the requirement for for the ‘Operational Rating’ to be disclosed when detailed and professional advice has never been buildings are sold or let will bring a new issue to the more important when planning strategy’s for table in the price negotiation process. occupational premises.

How can retro-fitting enhance the energy The section below summarizes some of the most performance of your building? Retro-fitting important issues that our team can assist with and buildings to secure lower carbon emissions is should be considered as part of the decision making the challenge we now face. Making better use of process. existing buildings (and saving the embodied energy) could save more than 20% of current energy Managing existing lease liabilities consumed. Making buildings more energy efficient Many tenants are currently faced with existing could save another 20%, a total saving of 40%, contracts that they consider to be onerous due depending on the age of the building. Analysis by to change in market circumstance. The landlords King Sturge suggests that the main cost and energy and tenants are often faced with the prospect of benefits from retro-fitting an office building may re-negotiating existing lease contracts which can come from better space planning. Furthermore, be the source of strain in the landlord and tenant there a number of other measures which can relationship as traditionally contracts have been help to decrease energy consumption and reduce considered overly favourable or onerous towards CO emissions, such as more efficient heating 2 one of the parties. and cooling equipments, improving the thermal insulation of the building envelope, energy efficient A common complaint from tenants is that they are windows and the use of renewable energy as an paying too much rent for the premises they currently alternative means for generating energy. occupy and they want to leave the space to benefit from cheaper rents in other buildings. The ability to walk away from existing lease agreements can be a legal ‘minefield’ which even assuming ability to do so is often costly, time consuming and can damage reputations so is ideally avoided.

Many landlords will appreciate that contractual terms may not be in line with market conditions but to consider a potential rent reduction they will similarly expect something back to help maintain asset value such as a new longer lease contract. At a time when retaining income and tenants is the key driver for many landlords a reasonable proposal for renegotiation will often be welcomed and can Matrix Office building create as close to a ‘win/win’ solution as is possible and acceptable for both parties.

24 It is important to have sound advice and a good utilized through using off site storage facilities for understanding of the current market conditions to archiving etc at considerably lower rates than office be able to negotiate new contracts on market terms space. and know what the parameters for negotiation are.

Relocation There are a number of issues that need to be covered when considering potentially relocating your office premises but to do this process thoroughly it is important to engage your representatives at as early a stage as possible. The process is time consuming and complex and delays limit the alternatives available to tenants and so it is important to establish a clear timetable for investigating options thoroughly. Valad light industrial A real estate plan should be implemented which deals with the operational requirements as well Our team has the knowledge and expertise covering as current property liabilities and should take into all aspects of Commercial Property including account immediate as well as long-term goals and Offices, Retail and Industrial/Logistics locally as objectives. Although the obvious choice may be well as regional support through our network of leasehold acquisition the recent market downturn offices for more specialist sectors to advice on the has opened up opportunities for potential freehold options available: purchases that may not have been considered • Relocation previously but are now more of a viable option. Freehold and development projects are not • Space planning generally marketed as openly as existing premises • Lease advice and it is therefore important to have the support of local advisors with an in depth knowledge of the • Existing lease renegotiation market who are aware and able to source such • Detailed cash flow analysis opportunities.

A decision to move and choice of relocation The direct benefits for the clients: destination is often made too crudely on a €/ • Important cost savings m² basis which can sometimes be a misleading indicator of the real cost of occupancy The quoted • Time cost savings rents and market rents do not reflect the total cost • Independent experts with unbiased opinions to a tenant of occupying the building. • RICS trained staff, multicultural team Key points to consider are costs of fit out works/ • Detailed knowledge of the market tenants improvements and most importantly how efficiently a space can work for a tenant. For this The team can offer independent expert advice reason it is important to seek independent advice following industry standards which can help from third party consultants as the accurate rental evaluate your existing property liabilities as well comparisons between buildings can be invalid as relocation advice that can prove save time also without a more detailed analysis of operational help to identify areas of reducing your operational cost. Important consideration should be given cost. to the efficiency of the space, for instance is the total surface required or could it be more efficiently

25 King Sturge: Romania Property Market Review Fall 2010

Property and asset management In current market conditions, pressure has been placed on renegotiating suppliers’ contracts. It The first reaction to the credit crisis and the remains essential to maintain regular maintenance resultant downward trend of the property market by check-ups, day to day cleaning of the property, landlords was to reduce costs as much as possible, security strategy, etc, as this will preserve the often sacrificing basic property management. By property’s general quality and the integrity of the reducing the property management input, many internal equipment, saving expensive potential landlords realised that the income the property repairs and replacement costs. However, expenses generated reduced disproportionately, especially can be reduced by renegotiating the maintenance where properties became tired and tenants vacated. contracts for an entire portfolio. By comparison, in the first semester of 2010, we have seen an increased interest for professional Similarly, preventative long term maintenance plans services and consultancy. Landlords want to (PPM) have been adopted. The primary goal of ensure a higher tenant retention rate and a higher preventative maintenance is to prevent the failure rent collection rate, by preventive and proactive of equipment before it actually occurs. It is designed tenant management. Owners of large portfolios, for to preserve and enhance equipment reliability by example BCR (part of Erste Bank) and Romtelecom, replacing worn components before they actually have sought advice on the management of their fail, creating large single expenses. assets in order to be more cost efficient. This trend is likely to continue with other large institutions out Improvements to a property’s energy efficiency sourcing their asset management. have also been investigated. The following are methods that have been used: • Retro-commissioning. A building needs regular maintenance, so making small changes to a building’s operational timing can make a huge difference in energy usage and savings. As buildings get older, energy efficient design efforts that were incorporated in the initial construction may have deterioriated. A retro-commissioning process can return the building to its intended operational efficiency. • Steam trap maintenance or replacement. Poorly maintained steam systems are a common issue A1 Business Park for many older commercial buildings that rely on large boilers for heat. Often these buildings With regard to asset management, the main focus have hundreds of small steam traps that control has been on renegotiating current leases, making the condensate within the steam system. If they more efficient use of space in order to reduce size are not maintained regularly, they can get stuck and costs, and modifying buildings to become more open and return steam back to the boiler system energy efficient through EU funding. resulting in excessive energy use. The result is wasted heat and wasted energy used to operate Property management has focused on creating a the boiler. greater efficiency through reducing costs without • HVAC systems optimization. Boilers and chillers compromising the function of the asset. This is are a major source of energy usage in buildings generally achieved through a regular maintenance and can account for around 20% of the total and service strategy, proactive tenant management, energy usage in a building. In cold season, older improving rent collection, and implementation of a boilers must be maintained properly in order to thorough but transparent service charge. run at peak efficiency during business hours. In

26 warm season, the same holds true for chillers. In many cases, replacing an aging chiller with a new energy efficient model can create energy cost savings. Other significant energy saving opportunities can exist with heat recovery options and thermal energy storage. • Energy management controls. Improperly programmed controls or outdated technology can lead a building owner to believe that a building is running efficiently when it is really performing far below its potential. It is important to take advantage of current technology as well as efficient building operations to maximise the efficiency of all of the operating components Polona 68 Office Building of the building. Replacing, upgrading, or reprogramming the energy management The Property Assessment provides property system and temperature controls will allow the owners and managers with general considerations equipment to operate at peak efficiency. and advice on a wide range of matters including: • Advanced technology. Super efficient windows, property location, visibility and accessibility; lighting fixtures, and sustainable construction property design considerations, including shop materials and design can make a major impact layout and the design of common areas; tenant mix, on energy performance. An extensive building leasing and speciality leasing analysis; servicing energy audit should be performed in order to and operations review, state or maintenance and determine the key areas where energy savings repair, branding, marketing and advertisement and can be achieved. The solutions may include financial performance review. changes to the building envelope, upgrading lighting systems, or the application of modern, renewable energy solutions to meet the needs of the building’s owners, today, and for the life of the building. In order to identify correctly all property related issues and opportunities, minimise losses and maximise income and savings, a new service has been developed: the Property Assessment.

A new property related service on the local market, most appropriate for retail properties, the Property Assessment is closely related to investment, leasing and project management.

Its purpose is to serve as an evaluation tool, to reveal a property’s strengths, weaknesses and potential, for example, for investment and purchase, for improving the project’s operations and marketing, and also for future development and redevelopment.

27 King Sturge: Romania Property Market Review Fall 2010

Contacts

Radu Boitan MSc MRICS Director [email protected]

Valuation & Research Project Management Oana Rucareanu Resul Kilic Dip Arch Dip Proj Man MRICS Senior Valuer Senior Associate, Head of Project Management [email protected] [email protected]

Vlad Cruceru Radu Vasilache Surveyor Junior Project Manager [email protected] [email protected]

Neal Ainscow MSc MRICS Property Management Senior Surveyor Doina Badea [email protected] Head of Property Management [email protected] Lorena Brehuescu Assistant Surveyor Mariana Stamate [email protected] Property Manager [email protected] Lavinia Schitea Research Assistant [email protected]

Agency Ben Binns BSc (Hons) MRICS Senior Associate [email protected]

Carmen Ravon Senior Negotiator [email protected] King Sturge SRL Irina Iliescu Victoria Business Center Senior Negotiator 145 Calea Victoriei, 10th floor [email protected] Sector 1 Bucharest 010072 Claudia Cetatoiu Tel +40 21.311.54.44 Senior Negotiator Fax +40 21.311.54.45 [email protected] www.kingsturge.ro

Neither the whole nor any part of this Market Report nor any reference thereto may be included in any published document, circular or statement, nor published in any way without our written approval of the form and context in which it may appear. All data contained in this document has been compiled by King Sturge SRL and is published for general information purposes only. Whilst every effort has been made to ensure the accuracy of the data and other material contained in this report, the information, opinions and forecasts set out should not be relied upon to replace professional advice on specific matters.

© King Sturge LLP November 2010

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