20 Soft landing path ahead
Colliers International Romania Research & Forecast Report
Accelerating success. 18 1 Content
TOP 10 Economic Industrial Retail Predictions 2018 Overview Market Market p. 04 p. 06 p. 10 p. 14
Office Green Investment Market Co-working Buildings Market p. 18 p. 22 p. 24 p. 26
Land Hotel New tax provisions New rules for commissioning Market Market in the Real Estate of construction works. Novelties Industry and practical difficulties. p. 28 p. 32 p. 34 p. 36
2 Colliers International Romania Research & Forecast Report | 2018 Dear friends and partners,
Ilinca Paun Those who don’t change their mind, never change Your real estate project must be multilocation, virtual Member of the Board anything. It is Sir Winston Churchill who made this accessible, multifunction and highly accessorized by Colliers International phrase famous in his impossible situation as the comfortable services offering memorable experiences. [email protected] Kingdom’s Prime Minister of deciding between peace talks with Hitler or going ahead risking many hundreds And we are here to help you. of thousands of lives of the British army. Luckily, we are We will invest more in the professional and personal in a safer place and our market situation is not as bad as education of our people and we will continue to work Europe’s war zone in 1940. on our promise to be the most loved and respected The lesson to learn from is that of flexibility and leaving consultancy company on the market. Some of the best room for doubt. We get wise because we have doubts. senior experts joined our core teams in 2017, and new Don’t make assumptions and instead have a good services were launched or scaled up. We now have a Colliers International is a leader in command of deep and broad information. Learn before great balance in terms of business lines and resources thinking you know. Because the mind that produces a spread and our top priority is to consolidate our global real estate services, defined achievement. by our spirit of enterprise. Through problem cannot be the mind that solves that problem, too. a culture of service excellence and Today you wonder what soft landing means, how hard Colliers International Romania has had its best year since collaboration, we integrate the is ‘soft’, and how you can make your investments strong 2009, with a business revenue growth of 50% in 2017, compared with the previous year. The Office leasing, resources of real estate specialists enough to resist the wind of change. While many say you should follow your heart and do what you do best Industrial leasing and Investment Sales services brought worldwide to accelerate the success of and things will be all right, I say this is exactly what you a sustainable revenue growth aligned with our focus. our partners. We represent property should be doubtful about. I do hope our research papers will make your lives as investors, developers and occupiers in investors and developers in real estate easier and our local and global markets. Our expertise It is best to follow your reasoning systems and have a strict reality check process. Be your worse critic and advice will make your returns higher, while keeping a spans all property sectors–office, let others appreciate you, if. Don’t build what you build focus on creating a better and happier way of living and industrial, retail, residential, rural & best, the same product, but create diversified, multi-use working for people. spaces instead and enhance technology like never before. agribusiness, healthcare & retirement I wish you a successful 2018, living, hotels & leisure. A project takes 2.5 to 3 years to build and digitalization and artificial intelligence might evolve exponentially and Ilinca Paun – Member of the Board surprise you. Just as an example, is your project equipped for self-driving cars? Real estate is an old school type of business and it needs a real revolution. Online retail and ‘work from home’ policies are demonstrating that the old criteria “location, location, location” does not work anymore. It is much more complex now.
3 Romanian economy to Migration (internal and slow down, still outperform external) becoming ever most EU countries more relevant After 2017’s stellar1 GDP expansion of over 7%, Romania Internal migration3 patterns are already suggesting a was the fastest growing country in the European growing preference for Romania’s major “magnet cities” Union. It was mostly a private consumption story, though – Cluj-Napoca, Timisoara and Iasi – at the expense of TOP 10 exports held up quite well amid an unexpectedly robust Bucharest, with surveys further supporting this. With both Eurozone economy. Barring “black swan”-type risks, GDP labour and living costs lower outside the capital, companies growth is set to slow down to a more sustainable level might be rather inclined to expand/establish offices outside Predictions in 2018 (around 5%), given the limited room for fresh Bucharest; such patterns would also boost other segments fiscal stimulus and expected monetary policy tightening. (especially retail). A key development we will be watching Romania will remain among the top performing European out for is if Romanians working in other countries are 2018 economies. Consequently, the outlook for office, retail starting to return home in larger numbers. and industrial spaces remains quite rosy.
Investment scene to steal Industrial segment to the show continue delivering very strong results After 2017’s investment2 volumes of just under EUR 1bn, Despite 2017’s record4 deliveries of storage spaces the potential pipeline for the office segment alone could be (around half a million sqm), the vacancy rate remained larger than this level. Though some deals could be delayed at an all-time low of close to 5% nationwide and 2% for next year (as we have seen in 2017 as well), we expect near Bucharest. We view the strong tenant demand as to see overall market turnover move well north of EUR fundamentally sound given the boost in e-commerce 1bn, with both currently active players and new entrants and room to catch up CEE peers. Vacancy could climb a to drive up demand. Among the arguments supporting the bit amid potentially more speculative developments and real estate investment scene are: attractive yield spreads some larger tenants moving in self-developed facilities. versus neighbouring CEE peers, good macro performance Meanwhile, big land banks ensure that deliveries could and strong appetite from banks to back deals (other continue to be elevated in 2018 (likely higher than funding alternatives also available). 2017’s pace).
4 Colliers International Romania Research & Forecast Report | 2018 Infrastructure constraints Labour market becoming Online retail, still no to remain in place quite stretched immediate threat for brick and mortar schemes After 2017 saw the5 delivery of 24km of highways The rate of unfilled7 job openings has been hovering around Shopping centres 9are still set to deliver solid results for nationwide, nearly four times below the year-start estimate post-crisis highs, while unemployment is at record lows. tenants as Romanians have a higher predisposition than from the government, pundits are warning 2018 could be Furthermore, central bank data suggest that the supply- regional peers to actually look at a certain product before similar. For this year, the minister is promising at least demand mismatch on the labour market has been on purchasing it. Still, in order to improve footfall, malls will 156 km. Given the limited fiscal room in the state budget the rise, while new bachelor graduates with a technical need to cement their status as actual destinations to and poor track record of EU funds absorption, we do not background are proving too few in comparison with spend one’s free time. This means more space for the expect to see a material acceleration in infrastructure employers’ requirements. This extremely competitive food court and other services like cinemas or children’s developments. That said, any positive surprises could labour market could limit the companies’ ability to playgrounds (so entertainment spaces of at least 20-25% bring a flurry of deals/interest. expand both in Bucharest and in other parts of the country of total GLA). A smaller per capita retail stock than in (thereby impairing office market activity – leasing and neighbouring CEE countries could also act as a buffer for new deliveries), though a potential buffer could come from brick and mortar schemes versus online sales. All in all, a external migrants returning to their native country. “retail apocalypse” looks like a minimal risk for Romania.
Bucharest office market to Balanced Bucharest retail Residential segment to focus on new hotspots scene, ample room for remain the all-star driver smaller schemes nationwide for land demand Deliveries look set6 to accelerate quite a bit in 2018 after For now, no new large8 projects have been announced for Given the higher wages10 and elevated intentions to disappointing in 2017. Amid an expected slowdown in Bucharest in the upcoming years, just some extensions. purchase homes, residential projects are still likely to terms of employment growth, vacancy is likely to move That said, the consumption-driven growth has improved remain the key drivers for land, though at the time of slightly higher. The new/developing hotspots (Centre West, household spending appetite throughout the country, so writing, it is still too early to judge the impact of the start Piata Presei/Expozitiei) can likely be digested organically investments will continue to focus on improving the of a new monetary policy tightening cycle. As we have to a large extent, though developers are becoming much nation-wide coverage of modern retail, including via seen in the past, new office projects will likely draw more cautious, with the pipeline for 2018 already one third medium to smaller schemes in the less populated cities demand for residential projects in neighbouring areas. lower than we would have thought 2-3 quarters ago. (below 100,000-150,000 inhabitants). Otherwise, the retail Since 2018 is likely to see a large number of housing units market remains highly competitive, as the very low vacancy reach the market, players might turn more cautious and suggests (in single digits for big shopping centres). new developments could focus on smaller projects, albeit in prime locations when possible.
5 Economic overview
This suggests that Romania might manage to grow its way Overheating fears Landing path ahead, out of trouble to a certain extent. The external backdrop remains largely supportive, with German business morale exaggerated, higher inflation gearing for a soft landing close to all-time highs early 2018 after Eurozone GDP growth hit a 10 year high of 2.5% in 2017, with 2018 also to help out for now seen above 2%. Overall, we expect the good export demand, With Romania seeing such robust activity data, it is GDP growth over 7% - solid rise in disposable income (both past and expected only normal to question whether or not the economy is for 2018) and potential loan growth to keep economic overheating. One way to look at things is to keep in mind the CEE tiger is back activity expanding at a nice pace. The material risks to our that current consumption looks much more sustainable, Defying cooldown expectations and surpassing even the bullish growth forecast for 2018 (5.2% versus 4.1% market as it is based more on wages and less on consumer loans most optimistic forecasts from the start of last year, the consensus as per Bloomberg surveys) derive from a erosion compared to 2007. The monthly average of consumer Romanian economy likely expanded by over 7% in 2017. of companies’ morale or consumer spending due to elevated loans (adjusted to inflation changes) for 2017 was little This was by far the best growth rate in the EU. It was political noise and uncertainties related to fiscal policy. over half of the level seen in 2007/2008. Furthermore, mostly a consumption story, while supply side numbers 2012 2013 2014 2015 2016 2017E 2018F showed a balanced picture, as a vibrant services segment was enhanced by quite good results from manufacturing GDP growth (%) 0.6 3.5 3.1 4.0 4.8 7.2 5.2 and agriculture; the latter was especially robust and GDP per capita (EUR) 6,700 7,200 7,500 8,100 8,600 9,500 10,300 suggests Romania might shake off previous historic patterns with regards to agricultural results (a good year Private consumption (%) 2.1 0.7 4.7 5.9 7.4 9.1 6.6 followed by a bad one). Right off the bat, there are a couple Industrial output (%) 0.1 3.6 7.4 7.0 -3.2 8.0 7.1 of aspects worth noting: the exceptional performance was achieved in spite of an unchanged budget deficit compared Unemployment rate (%, year end) 6.8 7.0 6.6 6.6 5.5 4.6 4.3 to 2016 – no new stimulus via lower taxes, though the Current account balance (%/GDP) -4.8 -1.1 -0.7 -1.2 -2.1 -3.4 -4.0 fiscal profile was different. Secondly, despite the economy Net FDI (%/GDP) 1.6 1.9 1.6 2.2 2.7 2.9 3.2 expanding well above its so-called sustainable growth rate (the potential GDP growth rate is estimated at around 4%), Budget balance (%/GDP) -3.7 -2.1 -1.4 -0.8 -3.0 -3.0 -3.0 the external imbalances have not ballooned to dangerous Inflation rate (%, year end) 5.0 1.6 0.8 -0.9 -0.5 3.3 3.6 levels indicative of an overheated economy; yes, the current account deficit (net hard currency outflows from ROBOR 3M (%, year end) 6.1 2.4 1.7 1.0 0.9 2.1 2.8 the economy) likely swelled past -3% of GDP, but this is a EUR/RON (average) 4.46 4.42 4.44 4.45 4.49 4.57 4.65 far-cry from the nearly -14% of GDP level seen in 2007. Data Source: INSSE, Eurostat, Colliers International
6 Colliers International Romania Research & Forecast Report | 2018 macro fundamentals are also looking well better than a in state wages) alongside a tightening labour market (tilting Productivity and labour costs as decade ago. As things stand now, we believe the economy the balance in favour of employees) have underpinned the % of Germany’s is poised for a soft landing, with several factors set to strong wage growth. The key question here is whether depress household disposable income towards more or not wages turn out to be sustainable in the longer run. 45 40 “normal” levels: i) accelerating inflation (headline rate While the current situation is not ideal – it would have been 35 could move towards 5% in the first semester, with state better to see wage growth driven more by job creation 30 policy changes weighing a lot); ii) expected monetary policy rather than state policies – we believe that companies can 25 20 tightening; iii) weaker RON to pressure import goods’ digest the increase. This is due to the fact that Romania 15 prices and those of goods/services denominated in hard has a higher gap between productivity and labour costs 10 currency; iv) slowdown in nominal wage expansion as state than most neighbouring peers. We also want to point out 5 0 policies turn less generous (towards 10% from 14% last a chart we feature in our retail section, which shows that Bulgaria Czech Hungary Poland Romania Slovakia year). Furthermore, empirical evidence like surveys that today’s average wage can purchase over 70% more goods Republic suggest a higher appetence for saving make us believe that and services than 2007’s average, so people are buying Labour costs (business economy) GDP/capita consumers may have acquired some improved measure much more with their own money, as they can afford it. of foresight this time around and may have not been as A glass half-empty approach would focus on the swelling Data Source: Eurostat, Colliers International reckless in their spending as a decade earlier. In the long imports weighing much more on GDP growth and on the run, there are some reasons to maintain a cautiously fact that capex has been quite subdued, expanding by 3.4% optimistic approach to Romania relative to CEE peers. in 1Q-3Q 2017. IT&C, BPO/SSC While the economic cycle does seem in a mid-to-late-ish phase, there might still be some room to run if, for example, growth rate to cool down investments start picking up (including absorption of EU As expected, private services were the main driver on funds, which started accelerating end-2017) or if structural the supply side, though 2017 saw a much more balanced reforms are adopted, thereby unlocking untapped potential. Unemployment rate by education level picture. Overall, in the first three quarters of 2017, IT For Romania, even fairly simple structural changes like (%, 4Q rolling average) and BPO/SSC added around 1.3ppt to Romania’s 7% building highways would go a very long way and probably GDP growth rate (the full year figures will be available in lead to a sharp and sustainable pick-up in activity. 9 March). In the last decade, Romania has been one of the 8 7 top beneficiaries of relocations from other EU countries Private consumption 6 in IT&C, for instance. Still, employment growth for higher 5 value-added services is likely to be constrained in the 4 underpinned by robust wages 3 upcoming quarters by the lack of employees. For instance, 2 the ratio of unfilled job openings for IT&C is considerably At the time of writing, we lacked the numbers for 4Q 1 higher now than it was a decade ago, highlighting that 2017, but in 1Q-3Q 2017 period, private consumption 0 employers are finding it increasingly difficult to find the was up by 9.5% while the overall level is, in real terms, 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 right qualifications. Moreover, the jobless rate for people some 21% higher than the pre-crisis peak, reached in 3Q Primary Secondary Tertiary with tertiary education stands close to all-time lows, 2008. The double-digit wage growth (around 14%) was around 2%, while the majority of jobseekers are those the main reason behind the spike in household spending. Data Source: Eurostat with low to medium qualifications. This mismatch between Government policies (minimum wage hikes and increases supply and demand on the labour market is bound to yield a few of unfavourable effects:
7 • slow down the job creation pace, a negative for the Favourable outlook for 2% by early 2018 and might close in on 3% by year-end). office segment; Of course, a sharper economic slowdown than we pencil • pressure employers to be more generous with wage manufacturing in might mean lower inflationary pressures and limit the hikes in order to keep attrition rates at tolerable levels; need for key rate hikes, but this is not our main scenario. External demand has helped Romanian factories increase Meanwhile, the consumers’ solid spending appetite has • a consequence of the previous point: erode one of their output significantly last year (c.9%), overperforming Romania’s major competitive advantages: its labour cost swelled imports and dented Romania’s external balances, greatly compared to initial estimates. The auto segment competitiveness. but it is important to note from the start that the country remained a major driver, with exports growing by close is in much better shape than a decade ago. Still, the RON Thankfully, besides the generous “competitiveness to 8% compared to 2016’s record level. As over 20% of might continue to underperform regional peers this year due reserve” we mentioned earlier, Romania also boasts a size Romania’s total exports head to Germany, a closer look at to several factors: advantage relative to most peers and has seen the second Europe’s largest economy could shed some light about the fastest labour productivity rise in the EU in the last decade, domestic manufacturing segment. The good news is that • the current account gap looks set to widen further towards -4% of GDP in 2018; after Ireland. The caveat here is that we cannot discount optimism regarding Germany’s economy will continue to for a factor that could materially change the status quo: spill over as the widely followed Ifo Business Climate Index • higher central bank flexibility towards RON weakness – the potential return of Romanian migrants to their native is hovering around a record high. Still, we cannot be overly also helping out in keeping inflation in check; country. Fast rising wages have improved domestic living confident regarding manufacturing as, on an aggregate • the political backdrop is expected to remain noisy; standards quite significantly over the last years, especially level, Romania still has a lot of slack, as industrial capacity • elevated policy uncertainty with potential negative for those with higher qualifications, so people with utilization is around 78%, some 5 percentage points below surprises if the fiscal gap cannot be kept within the -3% university degrees might start thinking about returning the 2007-2008 average; as such, an investment boom is not of GDP level. to their native country provided that the political situation around the corner. Another negative news, in our view, is returns to normal. the fact that infrastructure developments nationwide might Changing fortunes for still continue to disappoint in 2018, as history has shown Romania’s regional cities A balanced picture: manufacturing, that governments in Romania tend to sacrifice capex when confronted with a tight budget. And indeed, this year’s state agriculture and tertiary sector all expanding With just over a quarter of the country’s GDP generated by budget has quite limited space and the Fiscal Council has Bucharest, the distribution of Romania’s economic results warned risks for fiscal slippages. places it in the middle-ground between Hungary (whose GDP breakdown by sector, 2017 estimate capital makes up almost half of the country’s output) and Financial markets gearing Poland (with Warsaw’s GDP share at below 20% of total). 0.5 We believe that over the medium term, Romania will move 2.2 up for the higher inflation towards the Polish model rather than Hungary’s, meaning 1.2 Now that the tax cuts that depressed consumer prices we expect a material overperformance of the major regional Retail Sales, Logistics are behind us and private consumption has had a banner cities (Cluj-Napoca, Timisoara, Iasi, Brasov). We believe this to Agriculture be the case as Bucharest has become overcrowded by many Manufacturing year, inflation has returned with a vengeance, ending 2017 standards and this is starting to weigh on quality of life: for IT&C, BPO/SSC at 3.3%. As such, the central bank has started last year a Other Sectors new tightening cycle, at first by closing the gap between instance, it has one of the most congested traffic in Europe, money market rates and the key rate, then by hiking the according to TomTom, while, at the same time, it is in the top 1.6 1.7 policy rate at the start of 2018 for the first time in a decade. 10 most polluted major cities in the EU. And as some studies Given the inflation outlook, this is just the start and relevant have shown, millennials – probably the most important age Data Source: INSSE, Colliers International money market rates are likely to climb further (relevant 3M group for employers – tend to be less materialistic, prioritizing ROBOR moved from a low of 0.7% in September 2017 to experiences over “stuff”. This thesis is validated by changes in both migration patterns and intentions.
8 Colliers International Romania Research & Forecast Report | 2018 We would normally expect this shift towards a more has nearly halved versus pre-crisis highs, to just over What is even more impressive is that when asked “which balanced regional growth pattern to happen both gradually 11,000 persons in 2016, whereas the number of people city, different than the one you live in now, would you and without negative economic consequences for moving to Timis, Cluj and Iasi counties has accelerated most like to live in”, Cluj-Napoca actually came first in the Bucharest – we do not see a contraction of economic steadily, to over 19,000 persons in 2016. While empirical answers, with a share of 15.3%, followed by Bucharest activity due to the new reality, rather a much faster growth evidence might suggest that migration numbers are actually with 14.5%. Timisoara (11.9%) and Brasov (11.5%) were rate for Romania’s “magnetic cities”. Since we expect the a bit higher, we would emphasize the change in dynamics. fairly close in migration intentions, while Sibiu (5.2%) and Iasi (4.3%) were behind by a wider margin. That said, Iasi majority of people looking to change their home to be of A World Bank report published last year found that among is a special case as it already benefits from a big pool of prime working age and with good job prospects (as they Romanians, a vast majority chose “quality of life” as a main external migrants from neighbouring Republic of Moldova. expect to afford the moving costs), this will mean mostly point when looking at a potential new home, with the “job To put things into perspective, the five regional cities with an acceleration of the services segment, offering a good situation” the second on the list. Gone are the days when the best chances to attract migrants have a much smaller outlook for almost all real estate segments. Looking at hard the capital would draw in scores of Romanians from other population in total than Bucharest, but they might manage data, the net positive flow of people settling in Bucharest parts of the country solely on higher wages. to attract over three times more migrants as Bucharest over Internal migration survey (%) the medium term. Furthermore, the people placing these towns on their number one spot for a potential home change National survey: which city, is nearly five times larger than their current population. different than the one you live in With the World Bank expecting some 1.7 million persons to now, would you like to live in? move from one city to another within the next five years, 15.32%/2.34% Current residents living in 4.3%/2.06% a validation of these internal migration patterns would functional urban area, definitely spice things up for these major regional hubs share in national population (especially Cluj-Napoca, Timisoara, Iasi and Brasov). To Iasi summarize, out of 100 people due to move in a different city in the next years, 48 will chose Cluj-Napoca, Iasi, Timisoara, 11.88%/2.52% Cluj-Napoca Brasov, Sibiu and just 14 Bucharest. 11.53%/2.27% Besides the migration patterns, there are other arguments 5.16%/1.34% supporting our view. For instance, given that labour costs and other operational costs (such as office rents or local taxes) can be materially lower outside Bucharest, Timisoara Sibiu we believe companies will want to embrace the change Brasov 14.46%/13.43% wholeheartedly. On the other hand, out of Romania’s over 10,000 IT&C graduates per year, Bucharest generates almost 2,700, whereas Timisoara, Cluj-Napoca, Iasi and Brasov stand at 5,900 together; another aspect worth highlighting here is that only a minority of these are BUCHAREST willing to relocate for a job, according to local recruitment company Brainspotting. As talent seems less willing to move nowadays than, say, a decade ago, companies will surely have to adapt to this new reality. Data Source: World Bank, Colliers International
9 Industrial Market
Supply Turning to the nationwide developments, we note that A notable investment event last year was the purchase Timisoara, Cluj-Napoca, Pitesti, Oradea, Sibiu, Brasov, of Logicor by CIC, China’s sovereign investment fund, for The Romanian industrial market has had a banner year Turda, Bacau are also acting as current areas of interest over EUR 12bn in a transnational deal. This also means the and it is only about to get better. Around half a million for developers and companies seeking warehouse spaces. Chinese company now owns Logicor’s several properties sqm in new modern warehouse spaces were delivered Bucharest and its surrounding areas account for close to in Romania. last year, an acceleration of over 40% versus 2016, taking half of the total stock (1.7 million sqm). Fresh developments continue to be constrained by a poor the grand total to 3.5 million sqm nationwide. Despite Due to a lack of readily available information, our estimates infrastructure and, in certain areas (especially in the the record-pace of deliveries, vacancy remained quite of modern stock cannot fully take into account logistic/ western part of the country and near Bucharest), by an subdued (below 5% nationwide and under 2% in the warehouse centres developed by companies for their own ever lower workforce supply. Turning to the first factor, Bucharest area). Overall, this is very much a landlord use, though these make up for a significant part of the market, though as developers have acquired good land market. FMCG companies used around 700,000 sqm in Vacancy rate and industrial stock banks, things could start changing as soon as end-2018, storage spaces, owning around 400,000 sqm and leasing in Bucharest in our opinion. the rest. A small part of the spaces that they own are sub- 15.4% 15.3% The goldilocks market for developers/landlords is caused leased, but these might grow in the future, making them 14.5% 13.7% by several factors, in our view: i) increased nation-wide even more a direct competitor of “traditional” operators. 2,100,000 coverage of brick-and-mortar retail schemes requiring It is also important to note that some large tenants might 1,700,000* improved logistics spaces; ii) e-commerce growing seek to build their own warehouse spaces in 2018 due 10.2% sharply; iii) companies seeking a better regional coverage to an attractive cost/benefits ratio (for instance, Dante in CEE; iv) ongoing favourable momentum for the International, the company operating the largest online 1,150,000 manufacturing segment. store in Romania - eMAG.ro - is developing near Bucharest 910,000 920,000 940,000 940,000940,000 940,000 5.0% 5.0% Almost two thirds of last year’s deliveries were in the a 120,000 sqm facility to be opened around mid-2018). Bucharest outskirts; CTP and WDP were the most The trend in Romania among big companies is to buy/ 2.0% 2.0% active developers, each adding around 200,000 sqm to develop and hold, with CTP and WDP being the most their portfolio. These developers are also the biggest in significant examples of this. Other large players have indeed Romania, with CTP heading last year towards 800,000 changed owners over the last years, but these were part of 2010 2011 2012 2013 2014 2015 2016 2017* 2018F sqm in storage spaces, WDP – around 400,000 sqm, transnational deals. while the third place belonged to P3 – with around Stock (sqm) Vacancy rate (%) 370,000 sqm concentrated in a single park. * 2017 stock figure updated to include around 200,000 sqm in storage spaces previously unnacounted for in Bucharest
Data Source: Colliers International
10 Colliers International Romania Research & Forecast Report | 2018 just 45 km of highways were delivered between 2015 leasing deals between landlords and tenants, of which we sqm and 35,000 sqm respectively) in different locations and 2017 (compared to 250 km promised by authorities) believe there are quite a few. in the western part of Bucharest. The third place belongs and given the strained public-sector budget, no material Underpinning the very robust market is net take-up to a 31,000 sqm deal by NOD (a distributor of electro-IT changes should be expected in 2018 at least. Besides the corresponding to over 85% of all leasing deals, to which products), also in the outskirts of Bucharest. substandard highway network, the low labour force mobility we would need to add direct deals between landlords and for blue collar workers (Romanians have one of the highest tenants. home ownership ratios in the EU) also suggests that areas Rents with a higher potential number of employees, like the north- From a sectorial perspective, logistics remains the largest Despite the ultra-low vacancy rates, headline rents for eastern part of the country, remain untapped. A highway source of demand, having a share of 47% of all leasing class A warehouses have remained roughly unchanged bridging either the southern or eastern part of the country transactions; it is followed by the retail segment, which for most of last year, around 4 euro/sqm nationwide. to Transylvania is still not being built, though completing it amounted to nearly 17% of all deals, and automotive Still, it is noteworthy that while the headline for modern would unlock huge potential. – 9%. It is important to note that the importance of warehouse spaces in prime locations (north, western e-commerce is likely much higher that the c.6% of leasing Bucharest) previously started from 3.8 euro/sqm, this has transactions, as some operators likely turn to third party ticked up to 4.1 euro/sqm in 4Q 2017. As the supply had Demand logistics/distributors. Plus a lot of retailers pursue a mixed good land banks and could quickly adapt, price swings are approach to “traditional” and online sales. unlikely to be material if current conditions hold. Besides Out of the nearly half a million sqm in industrial leasing In this context, with vacancies at ultra-low levels (below the developer market that could push for higher rents, transactions recorded last year (almost 40% above 2016’s 5% nationally), a large part of the demand is covered via larger operational costs (labour and, potentially, taxation) level), just over half were in the Bucharest area (around built-to-suit schemes, with some companies even resorting alongside increases in land prices could also exert some 52%), followed at a significant distance by Timisoara to building warehouses themselves. upward pressures on rents. In fact, the 5 to 10% increase (14.6%) and Pitesti (12.4%). We want to underscore that in construction costs over the last year has yet to make its due to the opaque nature of the market and given the The biggest leasing deals were two transactions by the way into the rents, so this could change this year. current low vacancy, we cannot fully account for all direct Danish transport and logistics company DSV (55,000 Take-up by location in 2017 (%) Take-up by sector in 2017 (%) Forecast We expect the leasing market to accelerate in 2018, but an 6.5% 52.0% 4% 4% 3.8% 5% 47% increasing part of this could be the result of relocations. 4.1% Bucharest 6% Logistics As such, we forecast vacancy to move a bit higher in 2018, 6.6% Timisoara Retail especially as the developers’ plans point to a potential Pitesti Automotive acceleration of new deliveries compared to 2017’s record- Roman 8% Manufacturing Oradea (without auto) setting pace. In this context, it is worth pointing out that Cluj-Napoca major players also have adequate land banks to cover such 12.4% 9% E-commerce Other Distribution plans and more might seek to develop speculative logistic FMCG 14.6% spaces amid current market conditions. 17% Other Looking at the major players, CTP wants to build close to 250,000 sqm near Bucharest alone. WDP wants to more than double its portfolio by 2020, after just having acquired Data Source: Colliers International Data Source: Colliers International
11 Modern storage spaces in Romania (sqm, 2017) 3,500,000 UKRAINE Bucharest 1,700,000
Timisoara 370,000 Satu Mare Botosani Ploiesti 280,000 Baia Mare Suceava
Cluj-Napoca 213,000 Bors HUNGARY Salaj Brasov 170,000 Bistrita MOLDOVA Oradea Piatra Neamt Iasi Arad 90,000 2017 Cluj-Napoca A8 Targu Mures M43 Vaslui A11 Miercurea Bacau 2017, 2018 A10 2017 Ciuc in 2017 a 44 hectare plot north-west of Bucharest. Arad Nadlac P3 wants to add more than 100,000 sqm to its park Alba Iulia A3 2017 Sfantu near Bucharest in the next two years while also Gheorghe UKRAINE looking at other new parks in the central and western Timisoara Deva Sibiu Brasov areas of the country. Focsani Galati A6 Consequently, we believe we will witness an A1 Resita Buzau Tulcea acceleration in terms of new deliveries, with our call Targu Jiu Braila of 700,000 sqm nationwide (risks seem skewed Ramnicu Ploiesti Drobeta Valcea towards a higher number). Turnu Severin Targoviste Pitesti Slobozia 2017 Demand is likely to come mostly from 3PL, though A2 A4 a closer look at the economy would suggest Calarasi BLACK SEA Slatina BUCURESTI e-commerce and FMCG will be at the heart of this. Craiova SERBIA Constanta Alexandria Giurgiu Port While no major infrastructure developments are anticipated, Bucharest is likely to remain at the forefront of deliveries in 2018, though we note Legend BULGARIA an increased appetite for the central and western Low stock parts of the country that can ensure swift access to Medium stock neighbouring Hungary’s highways. If our outlook is High stock proven wrong, the prospect of material improvements in the rail/road infrastructure networks on the north- Existing highway Under construction highway south or east-west axes could unlock significant Planned highway untapped economic potential in certain parts of the country, which would also generate a boom in A6 (Bucharest-Alexandria-Craiova-Calafat), A11 (Arad-Oradea) - storage/production facilities. routes to be determined
12 Colliers International Romania Research & Forecast Report | 2018 13 Retail Market
Supply Pascani Commercial Centre and B1 Retail Park in Bistrita It is also notable that developers have been increasingly – Mitiska REIM, each with a total GLA of 10,000 sqm looking at regional cities and even smaller towns, including Little over 100,000 sqm in new modern retail spaces were or a little below this level). Extensions for two of the those with a population below 100,000 (like Bistrita or delivered in 2017 (versus around 240,000 sqm in the Bucharest’s most representative schemes – AFI Cotroceni Pascani, as mentioned above) amid elevated spending previous year), making this one of the poorest years in the and Sun Plaza – were completed in 2017. appetite in all parts of the country. This is a trend we see post-crisis period. Nevertheless, this was in line with our extending over the medium term. expectations. No big new projects were delivered. Deliveries of new retail spaces by Bucharest saw just a couple of extensions, which amounted to less than 20% of the total new GLA (versus city population (sqm) Demand more than 40% in 2016’s total deliveries of 240,000 sqm). The cocktail of loose fiscal policy, stimulative monetary As such, Bucharest has been seeing a period of relative 800,000 policy (for most of 2017) and various state measures equilibrium between supply and demand, a favourable 700,000 aimed at boosting wages have led to very robust private moment for the large schemes delivered in 2016 to gain 600,000 consumption, pushing GDP growth in excess of 7% in 2017. traction and settle in the domestic retail scene. That 500,000 In fact, consumer sentiment (as measured by European said, Bucharest still features a considerably smaller per 400,000 Commission surveys) reached an all-time high early 2017, capita retail stock than Warsaw and Prague (though it is 300,000 while purchase intentions for bigger ticket items also comparable to Budapest’s), so we believe there might be 200,000 moved north by quite a significant margin. In fact, looking room for Bucharest to absorb some new large schemes 100,000 at consumer price adjusted wages, we found out that the over the medium term. 0 average net wage from a decade ago would purchase just 2 0 1 2 0 1 2 0 1 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 With the exception of the larger shopping centre in 2 0 7 2 0 8 2 0 9 around 1,400 RON of goods and services versus 2,500 Ramnicu Valcea Mall (28,000 sqm) and a significant <100,000 100,000-250,000 RON presently; in effect, this means a growth of over three extension of Shopping City Galati (21,000 sqm in new quarters of actual purchasing power, highlighting a much >250,000 (except Bucharest) Bucharest GLA) – both owned by NEPI Rockcastle, last year saw more sustainable consumption than before the crisis, as mostly the delivery of smaller schemes and retail parks lending also plays a greatly diminished role. Overall, barring (Prima Shops Oradea – developed by Oasis Development, Data Source: Colliers International
14 Colliers International Romania Research & Forecast Report | 2018 the year-end jitters in financial markets, with money In this respect, the food and beverage segment is New entries in 2017 were from a fairly wide variety, as market rates increasing sharply, it was a frantic year with benefitting quite a lot from the strong consumer appetite, well as different price ranges. From fashion (Armani exceptional results following a strong 2016. Another detail with turnover up by close to 14% in the first 10 months of Exchange, Superdry, Ninewest, INCI, Funky Buddha, AC underscoring this is the fact that the inflation indexed 2017 after increasing by 15% in 2016. McDonald’s remains & CO) to sportswear (Sport Loft, Under Armour) to F&B turnover volume index in the non-food retail trade was the largest player on the restaurant market, though (Pizza Sbarro, Taco Bell). It is worth pointing out that Taco one third above its pre-crisis peak, reached in 2008, while the other players (KFC, Pizza Hut, Starbucks, Subway, Bell made its first step in the CEE region in Romania. printing a growth of over 13% compared to 2016. Spartan, Mesopotamia) have been quite active. Companies are also exploring new formats – like Starbucks opening The fashion segment was a great beneficiary of the solid its first drive-through unit in Romania; another trend demand. Since the supply consisted to a wide degree Rents worth underscoring on the F&B segment is an increased of retail parks in smaller towns, we noticed that the Rents have been more or less unchanged through 2017, appetite for larger surfaces (500 sqm or even larger). most active tenants were still those from the budget to despite the low vacancy rates (mostly in single digit Food anchors have also had a terrific 2017, with double- medium range (Pepco, Deichmann, CCC, Jysk, TXM). It is territory for bigger schemes). That said, the rents which digit growth in revenues for some in a like-for-like basis, noteworthy that H&M, one of the strongest fashion anchors include a variable component saw quite an increase amid something quite rare for them. on the domestic market, has taken its first steps into the vibrant consumer spending – retail sales for non-food smaller retail schemes outside Bucharest; other brands goods jumped by close to 13% last year. We also want normally seen in malls are moving to retail parks as well. Wages versus retail sales to point out that differences in rents between Bucharest Higher-end tenants remained focused mostly on Bucharest and the major regional cities are not as big as they used with a limited presence in the large regional cities, at most. 2500 180 to be, highlighting the fact that spending frenzy has been Otherwise, vacancy is likely at cyclical lows (virtually non- (3 month rolling averages) quite widespread throughout the country. Last, but not 160 existent for a lot of the successful shopping centres). 2200 least, retailers which pay a rent with a variable component seem content to pay higher rents now to compensate for a An important aspect to note is that shopping centres are 140 still delivering solid results for brick and mortar stores as 1900 potential future slowdown. Romanians have a higher predisposition than regional peers 120 Romania Shopping Centres Average Rents to actually look at a certain product before purchasing 1600 100 it. Still, in order to improve footfall, malls will need to City Asking Rent (€ / sqm /month) cement their status as actual destinations to spend one’s 1300 80 free time. This means more space for the food court and Bucharest 55-65 - 1 7 - 1 6 - 1 5 - 1 4 - 1 3 - 1 2 - 1 - 1 0 - 0 9 - 0 8 - 0 7 a n a n a n a n a n a n a n a n a n a n a n J J J J J J J J J J other entertainment services like cinemas or children’s J Cities with more than 30-40 playgrounds. Aiming to allocate close to a quarter of the 250,000 inhabitants total GLA could be important to improve catchment. We Net wage (RON/month, constant 2017 prices, left scale) Cities with less than also expect this trend to help out malls in their battle against Non-food retail sales (2007=100, right scale) 15-20 online retail, though given the current state of the Romanian 250,000 inhabitants market, we expect both segments (online and offline sales) Data Source: INSSE, Colliers International *Average rents obtainable for prime spaces in good performing centres to thrive alongside over the medium term. for 100 sqm occupied by good brands;
**This represents the market average; there are big differences between the cities depending on the level of competition;
15 Projects to be delivered in 2018
Project Baia Mare Value Centre Project Bistrita Retail Park Project Roman Value Centre Developer Prime Kapital/MAS REI Developer Element Development Developer Prime Kapital/MAS REI GLA sqm 22,500 GLA sqm 15,000 GLA sqm 15,000
Forecast Project Shopping City Satu Mare Vaslui Strip Mall Project The pipeline for 2018 has some 175,000 sqm in new Developer NEPI Rockcastle (extension) retail spaces pencilled in (we do not take into account GLA sqm 28,700 Developer NEPI Rockcastle Satu Mare GLA sqm 2,800 standalone schemes smaller than 5,000 sqm), with Baia Mare Bucharest accounting for less than 20% of this, with a Bistrita Roman single project in the outskirts. No new big schemes are Shopping City Sibiu Project Focsani Value Centre Project currently in the pipeline for Bucharest or throughout the (extension) Vaslui Developer Prime Kapital/MAS REI country for that matter, though we would not exclude Developer NEPI Rockcastle GLA sqm 6,400 such an announcement sooner or later. GLA sqm 16,900 Sibiu Focsani It is noteworthy that developers are turning their attention more and more to smaller towns (population below MIOVENI Project Slobozia Value Centre Project Mioveni Comercial Centre Developer Prime Kapital/MAS REI 100,000 inhabitants), with some small- to medium- Slobozia Mitiska REIM Ilfov sized schemes. In the same vein, some FMCG chains Developer Craiova GLA sqm 10,200 GLA sqm 8,800 are moving into even smaller towns, with just a couple of tens of thousands of inhabitants. As such, it is worth pointing out that while deliveries for the market overall Electroputere Craiova Project DN1 Balotesti Project remain a far cry from pre-crisis levels, the ones in (extension) Developer Prime Kapital/MAS REI towns smaller than 100,000 inhabitants are set to be Developer Catinvest GLA sqm 28,000 comparable to 2007. GLA sqm 21,200 Data Source: Colliers International The partnership of Prime Kapital / MAS REI, the most active developer in 2018 based on current plans – with new GLA close to 100,000 sqm – wants to add retail its Electroputere mall in Craiova by adding new 21,200 parks and extensions in cities like Slobozia, Roman, Baia established positions might try to woo clients with improved sqm in new retail spaces, as well as an office component. Mare. It will deliver one of this year’s large new additions: shopping experiences. In fact, as the retail market matures A new retail park in Bistrita, by Element Development, and a retail park just north of Bucharest, near Balotesti, with and expansion is no longer the primary focus, we should one in Mioveni (Mitiska) round up what looks like a busier 28,000 sqm in new retail GLA. Satu Mare will also attract expect to see both malls and tenants seeking refurbishments year in terms of deliveries than 2017. a new mall by NEPI Rockcastle (28,700 sqm), with the and adding a higher emphasis on client experience, also developer also seeking to extend its current schemes in On the demand side we expect to see new players trying to by incorporating more tech elements. For the moment, this Sibiu and Vaslui. French developer Catinvest will expand enter the market (Polish, Turkish brands), while tenants with trend mostly applies to Bucharest.
16 Colliers International Romania Research & Forecast Report | 2018 17 relocations from non-competitive stock, an increase of close to 10% and possibly the best post-crisis result. Office Market The IT&C segment was again the single biggest driver, generating over 40% of total leasing activity: 140,000 sqm, an impressive growth of over 80% compared to 2016. The outsourcing segment was also robust, so it is still safe to assume that IT&C plus BPO/SSC operations for companies in other sectors account for at least half of the activity in the office market.
Demand Looking at a geographic distribution, the established prime Bucharest locations, namely Floreasca/Barbu Vacarescu and the office market Leasing activity cooled a bit in 2017, with total take-up for CBD, took centre stage, each accounting for over 19% class A office buildings at just over 320,000 sqm, down by of total deals. Another impressive dynamic was that of Supply some 10% versus a year earlier, though this was still the Piata Presei/Expozitiei, set to become a new hub in the second best post-crisis result, after 2016 of course. This is Last year saw the delivery of 123,000 sqm of new Bucharest office market amid a hefty pipeline for the next also some ways below our initial estimate, but it is still quite modern office spaces, taking the total stock to nearly 2.3 couple of years. The decrease in activity for Centre-West a feat in itself if we take into account the increased labour mil. sqm. This is lower than we had anticipated and also region is bound to be temporary, considering the large force availability constraints that emerged during last year, below 2016’s 230,000 sqm deliveries, though the latter projects planned in this area. limiting employers’ ability to expand. The better news is that coincided with the best post-crisis pace and was double Overall, market conditions in Bucharest are fairly neutral, net take-up for class A buildings actually accelerated last the average seen in the post-crisis period. Some delays with vacancy at just under 10% at the end of last year. year, amounting to over 150,000 sqm in new demand or were recorded due to both an overstretched construction segment and some developers seemingly pushing back Bucharest leasing activity peaking Gross take-up by area (% of total) their projects as they seek to improve the pre-lease percentage before the actual delivery. This coincides with 400,000 25 (sqm) 350,000 2016 2017 the tight overall labour market, an issue we have touched 20 upon in the macro section. The trend we highlighted 300,000 last year continues to hold water, with half of the total 15 250,000 expected deliveries coming from just two projects (the first 10 phases for Globalworth’s Campus and Forte Partner’s The 200,000 Bridge); Vastint also delivered over 30,000 sqm in two 150,000 5 new buildings in its Timpuri Noi Square. 100,000 0 i t t r a u e s D s i r i e o e e e r e B Underpinning the newer hotspot in Centre-West, the two 50,000 h t N t /
i p p C i W i a r O m m c P i u projects delivered here in 2017 accounted for over one s re- W o p a 0 t D P e n m r i e third of total, while Timpuri Noi and Dimitrie Pompeiu each Expozitiei 2011 2012 2013 2014 2015 2016 2017 2018F o u Vacarescu l T C Piata Presei / b F r had a share of just under a quarter of total. Gross take-up Net take-up a B
Data Source: Colliers International Data Source: Colliers International
18 Colliers International Romania Research & Forecast Report | 2018 Total take-up by sector in 2017 Bucharest Rents & Vacancy Rates (% of total)
9% 44% 10% IT&C Consumer goods Baneasa Professional Services 11-13 8-10 Finance / Banking / 10% 11% Insurance 33% Energy / industrial Pipera Other 15-16 12% 5% D. Pompeiu 11-13 Piata Presei/Expozitiei 8% 14% 16-18 2% 14-16 Floreasca 3% Barbu Vacarescu Data Source: Colliers International Aviatorilor 16-18 11% Still, developers have acquired a good land bank for future Victoriei P.Poenaru projects by 2020, that are set to yield well over half a million 14-15 Romana 13-14 9%M sqm if constructed. Otherwise, the same mantras are still 10 10% Grozavesti Eroilor true: good access to the public transport infrastructure, Pacii 4% Universitate Piata Muncii higher quality buildings, an interesting mix of amenities. With Politehnica Izvor Unirii 12-14 companies having ever more difficulties in maintaining good 14-15 14% 15% attrition rates and in attracting new talent, the workplace Vitan Timpuri Noi itself has become a differentiating factor. As such, given the heavier delivery calendar announced for the next couple of Eroii Revolutiei years, we consider that higher tier properties might see less 11-12 downward pressures on rents than lower tier ones, as some 21% companies might be willing to shell out a bit more money to Piata Sudului keep their employees happy. Rents Rents were broadly stable throughout 2017 and we expect this trend to continue in 2018. Still, as vacancies start climbing a bit and planned deliveries remain significant, we could start seeing some downward pressures on rents towards the end of the year (it could also mean showing n Average headline rent (€/sqm) similar headline rents and more flexibility regarding n Vacancy rate incentives for tenants).
19 Forecast migrated in previous years, offering a boost to the office of mixed-use projects with an office component). Overall, market. Due to labour market constraints, we would expect currently announced projects (most with construction We expect to see some 185,000 sqm in new class A office the Bucharest leasing market to cool down a bit this year: works yet to commence) add up to half a million sqm, spaces this year. It is worth highlighting that developers we forecast total take-up at around 300,000 sqm, with net mostly in Centre-West and Piata Presei/Expozitiei. are turning a bit more prudent, as the figure is over one take-up at 135,000. This would take overall market vacancy third smaller than the figure we would have estimated towards 12% by end-2018. for 2018’s pipeline some 2-3 quarters ago. Currently, Regional cities in focus New large-scale projects offer opportunities for companies companies would love to hire more people, but their demand We have been arguing that it is high time for regional cities with a large domestic footprint to consolidate their offices cannot be matched by the current workforce supply, as to steal the limelight from Bucharest, supported by internal in Romania and developers might be pressed to offer the unemployment for people with tertiary education is close migration patterns (see pages 8-9), and developers seem new tenants options for both expansions or downsizing in to all-time lows. We also cannot take into account potential to be gearing up for this. Though the current modern office the future. disruptions stemming from unforseen fiscal changes as stock in the major regional cities altogether (Cluj-Napoca, the government’s limited budget room might yield some With the public transport infrastructure stretched to its Timisoara, Iasi and Brasov) is currently some 3.5 times unpopular measures. The tight labour market suggests that limits in the northern part of Bucharest, developers are lower than in Bucharest, the pipeline in these cities for activity may have peaked in 2016-2017 on the Bucharest expanding the Centre-West’s stock and exploring new 2018 stands at almost 150,000 sqm versus Bucharest’s office market, but there are a couple of footnotes here. For hotspots in Timpuri Noi or Piata Presei/Expozitiei. The 185,000 sqm. example, we cannot say precisely what will happen with latter still offers material untapped alternatives given the Taking a closer look at these cities, Cluj-Napoca has been external migration patterns, as higher domestic wages might plans for a metro line extension in that area, as well as still rivalling Bucharest in terms of complexity of the services it actually start drawing back some of the Romanians that holding large swaths of unused land (potential for a couple can cover, based on workforce competence. The north- 2017 deliveries and pipeline by area (sqm) western region of Romania, led by Cluj-Napoca, has been recently crowned by the Milken Institute as the fastest growing in the EU in terms of hi-tech services expansion 75,000 in recent years. The city’s university is ranked as the best in Romania by several institutions, while start-up
2017 rates among youths are comparable to Bucharest’s, even 50,000 2018 though its population is well smaller. Innovation, growing entrepreneurship culture and skilled graduates make Cluj-Napoca highly attractive for IT rather than lower-tier BPO/SSC services. Cluj’s very low vacancy on the office 25,000 segment (below 5% end-2017) makes this very much a developer market and land availability constraints mean a limited pipeline over the medium term, even though the town would be the most interesting proposition in Romania 0 other than Bucharest. Still, a solid pipeline for 2018 (47,000 i t t u e s D s i i o e e e r B sqm – mostly from UBC Riviera and Hexagon’s project) t N /
i p C i W a r m m c i u s should alleviate these pressures a bit. re- W o p a t D P e n m r i e Expozitiei o u Vacarescu l T C Piata Presei / Timisoara remains an interesting alternative due to its b F r a
B mix of opportunities. Firstly, its proximity to neighbouring Data Source: Colliers International Hungary’s infrastructure means it has attracted quite a lot
20 Colliers International Romania Research & Forecast Report | 2018 of attention on the industrial segment (unemployment Romania’s main office markets among low-skilled labour-intensive jobs at cyclical lows). Modern office stock 160,800 sqm On the other hand, in the Ministry of Education’s ranking Pipeline, 2018 12,000 sqm of domestic universities, Timisoara had 3 universities Vacancy 7.75% Modern office stock 204,200 sqm in the top 20, the same as Cluj-Napoca and Iasi and a Average rent 10.5 Pipeline, 2018 47,000 sqm whisker behind Bucharest, which had 4 universities. Average wage 432 Timisoara’s engineering university ranks second in Vacancy 4.75% (county level, EUR) Average rent 12.0 IT&C graduates the country behind the one in the capital, highlighting 1,500 Average wage per year 521 again quite good skills for employers. Its office vacancy (county level, EUR) stood at just 3% by end-2017, though it should increase IT&C graduates Modern office stock 126,800 sqm 1,900 per year Iasi steadily as it has the biggest pipeline among the major Pipeline, 2018 74,000 sqm regional cities (mostly due to the Openville project, one Vacancy 3.00% of the biggest mixed-use schemes in Romania, but also Average rent 12.0 Cluj-Napoca other large projects like ISHO Offices, Bega Business Average wage 522 Park or VOX Technology Park). (county level, EUR) IT&C graduates 2,000 The town of Iasi, in the north-eastern part of Romania, per year Modern office stock 117,500 sqm offers some advantages over the longer run. Internal Pipeline, 2018 15,000 sqm migration patterns and the youngest population among Timisoara Vacancy 13.00% the major economic hubs suggest it should continue to do Brasov Average rent 10.0 Average wage well for years to come. Though it does not rank as highly 450 (county level, EUR) as Bucharest, Cluj-Napoca or even Timisoara in terms IT&C graduates 500 of service output complexity, it could certainly climb up per year in the next years thanks to its high-quality universities and – still – better labour force availability. Taking these arguments into account, the city has been drawing increasing attention from BPO/SSC companies and it won BUCHAREST Emerging City of the Year at 2018’s CEE Shared Services Modern office stock 2,3 mil. sqm and Outsourcing Awards Gala in Poland. Pipeline, 2018 185,000 sqm Vacancy 9.75% Brasov, though the smallest office market of the major Average rent 14.5 hubs in Romania, is quite an attractive opportunity over Average wage 651 the medium term, provided it will have an airport soon. (county level, EUR) IT&C graduates It is also interesting that Brasov outranks Timisoara and 2,700 Iasi in terms of the percentage of population with tertiary per year education. This means a large pool of talent waiting to be tapped as operating costs (both rents and labour costs) are considerably smaller than for the other cities. Data Source: INSSE, Colliers International, Brainspotting
21 towards the so-called gig economy, Romanians are seeming keener than ever to start flying solo, with the very Co-working strong GDP growth numbers to act as catalysts. The most recent surveys from the European Commission do highlight the fact that Romanians have a higher appetence towards opening companies, with around one in four actively looking into this, double the average share in the EU.
20-29 30-39 years old years old Number of people Global number of coworking members holding shares in 123,618 348,679 Co-working: mixing the (millions) companies (end-2017) 6.0 new and newer Increase in number of 5.1 28,296 81,809 5.0 shareholders since 2015 4.5
4.0 3.8 Source: ONRC 3.1 Entrepreneurs, freelancers and companies are starting 3.0 We are already seeing an interesting pattern emerging, to come to terms with a new type of deal, whereby, for a 2.3 with around 28,000 people under the age of 30 years premium price, they can occupy a workspace for exactly 2.0 1.7 old becoming shareholders in companies in the last two the period of time they need, with everything included, 1.0 years, taking the grand total for this age group to almost 1.0 0.5 from wi-fi to security to espressos and even craft beer. 124,000 people. For the 30-39 years old category, the 0.0 The antiquated “serviced office” is starting to make way 2015 2016 2017 2018 2019 2020 2021 2022 number of shareholders expanded by around 82,000, to for the trendy “co-working” space. Though this might not nearly 349,000 persons. It is impossible to say how many seem obvious at first, even large companies are joining Source: Emergent Research of these were opened companies for tax optimization in, with WeWork, one of the largest players in the shared of operators (Impact Hub, Regus) generated over 2% purposes, but it is still an impressive growth rate. These office market globally, saying that over one fifth of its in gross take-up activity for class A office in Bucharest young companies with generation Y shareholders ought spaces is occupied by companies with more than 1,000 compared to much more modest numbers in previous to greatly boost demand on the co-working scene in the employees. As such, this trend is proving far more than years. Peering into the future, we believe that in about five medium term. years, shared work spaces will come to have a material a transitory fad and we expect this revolution to come As work becomes less dependent on one’s physical share in total take-up, of at least 10% per year nationwide. quite fast to Eastern Europe as well. To paraphrase Ernest presence somewhere, flexibility will be something sought The potential supply for shared service spaces in Romania Hemingway on this, change tends to happen nowadays after by both employees and companies. For instance, need not come just from high rises, as quite a lot of “gradually, then suddenly”. we can imagine that among company-offered benefits, unconventional buildings (like former factories or other Today’s co-working facilities in Romania can barely like gym/private healthcare subscriptions, a similar industrial assets in urban settings) can be refitted into accommodate a couple of thousands of members arrangement with a co-working network/space would not posh destinations. nationwide, while in Bucharest, such spaces (including be an uncommon sight; this need not be with a single large hubs) represent just around 1% of the total modern office There are several reasons why we believe this change will operator, as we can imagine that smaller players/hubs stock. Still, there has been a pick-up in activity, as a couple take place. Even when looking past the global migration can form alliances, for instance. Since there are probably
22 Colliers International Romania Research & Forecast Report | 2018 hundreds of thousands of people working in Bucharest, but born in other cities, we think they might welcome being able to work close to their relatives a couple of months a year. This could also work wonders in a town as crowded as Bucharest as working closer to home in a shared work space might save people the hassle of commuting in one of the most crowded towns in Europe. Other advantages for employees might include a better sense of empowerment and control, increasing job satisfaction. We would normally expect Bucharest to spearhead the development of co-working in Romania and this is something which we are currently seeing, as the shared service operators are renting considerably more space in the capital. Still, regional cities not lag too much in our view, particularly as we argue in the macro section of this report that these are favoured demographically thanks to both recent migration patterns and intentions. For companies, the advantages of co-working can also be quite significant. Besides the increased flexibility (for instance, temporarily bringing in freelancers to handle a sharp rise in the workload), various studies have shown that such spaces can improve overall productivity. Shared workspaces can also expose the business to new clients, while, at the same time offering “traditional” companies a closer look at the so-called disruptors or other creative individuals; this would be even more the case for niche hubs (shared biolabs, women oriented spaces, writers’ spaces, industry specific spaces). Such locations can also provide “swing spaces” for multinationals in case of relocations, for instance. Since some large banks like HSBC or tech-giants like Microsoft have moved part of their employees into co-working spaces, we think that arguments like potential security issues are certainly not insurmountable.
23 The most certifications (24 or 61% of total) were for office buildings, though the overall share has decreased Green Buildings compared to previous year as developers from other categories of developers are seeking to have a green stamp on their building. The number of retail-certified buildings grew (12 or a share of 31%). A hotel and two mixed-use projects rounded up the grand total. Another change relative to 2016 is the predominance of certifications for in-use buildings, which accounted for over three quarters of the market last year. Introduction buildings (around the 50,000 sqm GLA) were certified during last year, taking the grand total towards 1.7 million Incorporating new technologies is also becoming As the office market continues to mature in Bucharest and sqm of projects – built or in various stages of execution – important, with more and more buildings seeking to offers an enticing growth outlook for the major regional with green certifications. This would suggest that the total provide tenants with charging stations for electric vehicles. cities, the standards also continue to improve. What surface of green certified office buildings is around half of A mid-2017 Colliers analysis showed that some 20% of we noted a year ago still stands true today: developers the nationwide total. Around 200,000 people currently work class A office buildings in Bucharest offered facilities for are increasingly focused on the efficiency and long- in office buildings that have been deemed to have sufficient electric vehicles, while another 21% were incorporating term sustainability of their buildings, while tenants are energy efficiency and to be sustainable in the long run. such technologies. also becoming pickier when choosing a location. CSR Basically, every new office building will seek a green The current pipeline remains quite solid, as there are requirements for domestic foreign-owned companies certification as this is almost a mandatory requirement for currently 47 buildings seeking LEED certifications, mean an increased attention to environment friendliness a good positioning on the market. Meanwhile, older office whereas this time a year ago, there were 40 certifications and resource efficiency throughout a building’s whole schemes, say, from a decade ago or even older, are also in progress. That said, we would expect the market to life cycle, from planning to construction to operation. As seeking to obtain green certifications for existing/in-use slowly taper in several years, as most of the older projects such, green certifications have become almost mandatory projects in order to remain attractive for tenants. will have received their green certifications by then. for a successful high tier real estate project. We continue to collaborate with developers/landlords to obtain green Green certifications in 2017 by sector Total number of green certifications certifications, both for BREEAM (Building Research Establishment’s Environmental Assessment Method) and 35 LEED (Leadership in Energy and Environmental Design) 8% BREEAM LEED 29 standards. This study is based on official data derived from 30 31% 61% 25 the certification bodies for LEED and BREEAM standards. O ce 25 Retail 20 Green certifications Other 15 10 10 9 8 6 6 6 market in a nutshell 5 4 5 2 0 1 1 Last year saw 39 green certifications obtained by 0 Romanian buildings, both buildings yet to be delivered and 2011 2012 2013 2014 2015 2016 2017 those already in use. This an increase over 2016’s already record-setting result of 29. Meanwhile, several large office Data Source: Colliers International Data Source: Colliers International
24 Colliers International Romania Research & Forecast Report | 2018 Either way, the market has had a phenomenal period BREEAM / LEED - regional distribution of certifications (sqm) recently, coming from a total of buildings with green certifications of below 100,000 sqm before 2011 to over 535000 BREEAM LEED 3 million sqm last year.
Regional split As real estate projects outside Bucharest have increased greatly in the last years, so too has interest in green certifications in 2017. While Bucharest has nearly 1.7 1149000 million sqm in LEED or BREEAM certified buildings, the 161000 other regional cities put together neared this level and 129000 we would expect that by the end of this year or 2019, 340000 216000 53000 46000 these could surpass the capital. 111000 55000 103000 93000 20000 25000 21000 21000 14000 11000 l i i i t s v a a a a u u n t t s s i t r i u e c a o v s s a r e r a b s n n o I z e e e r i e u i r t a a o p u a i S t D r v s o u a l i s e h P B M B
T c P n
S N m u u - a i o j g t B r T C e u l a b C T o r
D Data Source: Colliers International
Quality of certifications Existing BREEAM/ LEED - Tax incentives Quality of certifications We are noting an improvement in the overall quality, Offering tax incentives could provide a further boost with fewer and fewer buildings achieving a low level of to the green certifications market, as well as raise the certifications; this highlights improvement in building overall building standards. Cluj-Napoca and Timisoara BREEAM Certi cation LEED Certi cation standards and a growing internal competitiveness for remain the only significant office hotspots to offer a lower the real estate space. 2017 brought two of the highest property tax (a reduction of as much as 50% if they Outstanding Platinum ratings on the LEED scale, namely “Platinum”: one for 3 achieve one of the higher levels of certifications). There Globalworth Tower in Bucharest (the first one for a new Excellent 1 Gold is talk that other cities, notably Iasi, are thinking about construction) and a pre-certification for the AFI Tech Park 31 offering similar fiscal incentives, but no decisive steps Very Good Silver 21 project on former Inox platform. The rest were “Gold”, have been made in this direction. 56 with no lower LEED ratings assigned during last year. Good Certi ed Turning to BREEAM, while no building achieved Pass 5 12 2 the „Outstanding” rating, last year still marked an 1 improvement, with nearly 45% of ratings being „Excellent” and 52% achieving „Very Good”. Just one project was assigned a „Good” level of certification. Data Source: Colliers International
25 Transactions and Investors Investment Market The year’s biggest deal was the partnership between Iulius Group (owner of several malls outside Bucharest) and Atterbury Europe, with the latter acquiring 50% of the Romanian company’s shares for an estimated EUR 200mn. Another large ticket was the purchase of Radisson Blu Hotel Bucharest for EUR 169mn by the US company Cerberus Capital Management and the regionally-focused Revetas Capital. These two deals accounted for 38% of 2017’s total, Prime yields 2017 Romania but overall, last year saw a more balanced mix of the turnover. The retail segment was the major driver this year, accounting Investment market for just under 40% of the total turnover; besides the Iulius- Overview Atterbury deal, another notable transaction was Mitiska Bucharest Warsaw Budapest Prague purchasing almost a dozen smaller schemes in various parts Investor interest in Romania has strengthened thanks of the country for almost EUR 80mn. There was also some Office 7.25% 5.15% 6.00% 4.85% to the robust economic growth (the fastest in the EU appetite for distressed assets, as evidenced by the sale of Era by far), increased appetite from domestic banks to fund Retail 7.00% 5.25% 6.20% 5.00% Shopping Park Iasi, purchased by Prime Kapital/MAS REI for transactions, high-growth potential for various segments EUR 45mn. Industrial 8.50% 6.50% 7.75% 6.25% of the real estate market (especially office and industrial) The Immochan purchase of Coresi Business Park in Brasov for and a fairly generous yield differential compared to most around EUR 50mn was the biggest deal on the office segment, Data Source: Colliers International CEE countries and to western EU states. marking a notable push towards regional cities by office Liquidity neared the EUR 1bn mark in 2017, despite some investors. Another noteworthy deal involved the third building large office deals have been postponed towards 2018 due of Skanska Green Court by Globalworth for EUR 38mn. to a lengthier negotiation phase. As such, actual turnover The highlight on the industrial side was the China Investment CEE Investment market stood at around EUR 960mn, some 5% above 2016. Corporation transnational Logicor deal, with the value of 2017 was an exceptional year in eastern Europe. Last Looking beyond administrative hurdles and delays, 2017 the four parks in Romania estimated at close to EUR 80mn. year, investment volumes in CEE-6 (Visegrad countries saw a qualitative improvement of the market compared to Globalworth’s purchase of the Dacia-leased warehouse near plus Romania and Bulgaria) stood at just below EUR 13bn, 2016 as investor interest broadened and the number of Pitesti for EUR 42.5mn was another important transaction. some 6% higher than 2016 and 47% above 2015. It is also deals increased. CTP consolidated its position as the largest industrial space the best result since 2007. We saw some notable entries via transactions: Atterbury owner by concluding four investment deals amounting to Amid stronger consumption-driven growth, the retail Europe, Cerberus Capital Management and China approximately EUR 40mn. segment stole the show with 39% of total and office Investment Corporation, with the latter part of a large Pricing trailing with a 27% share; industrial deals also slowed a transnational deal (the biggest private equity real estate bit. Yields continued to move largely south, with Prague deal in Europe). Still, we highlight that both recently active The increased interest for domestic assets has been placing and Warsaw still seeing the closest yields to developed investors and those that remained passive in recent years ever more upward pressures on prices, with some prime western markets, while Bucharest is still regarded as have shown interest in snatching up new assets (CTP, office properties receiving offers at 7.25% (down from 7.50% riskier, but a high-growth potential alternative. Smartown Investments, Globalworth, GTC, Mitiska). a year earlier). Prime retail yields were flat in the last year,
26 Colliers International Romania Research & Forecast Report | 2018 Investment turnover (EURmn) reflect more closely the favourable macro trends. For Similarly, liquidity on the industrial market is set to improve as instance, sovereign default swaps/CDS or 10 year Eurobonds players vie for market share against the backdrop of increasing 1000 show smaller differences with regional peers, with the latter demand for production and warehousing spaces. Activity 900 showing Romania c.1.25ppt higher at most than Poland, on the retail segment will be more subdued, but there is a 800 Czech Republic or Hungary. This trust deficit has constrained consistent pipeline of projects coming to the market. Overall, 700 demand in the real estate space, particularly on the office we expect the volume on the investment market to surpass the 600 segment. However, 2018 is set to be a turning point as EUR 1bn mark, a post-2008 maximum; we would expect any 500 the type of assets that will come to the market will change surprises to be rather to the upside. 400 significantly. Whereas the average size of transacted office 300 A materialization of the expected increased competition for buildings from 2015-2017 was approximately 20,000 sqm, 200 Romanian assets should lead to lower yields across the board. the current pipeline of office projects to be traded between 100 As such, we could see a 25-50bp yield compression for 2018-2019 has an average size well above 50,000 sqm. This 0 office, industrial and retail segments over the next year and a 2010 2011 2012 2013 2014 2015 2016 2017 change on the supply side coupled with renewed interest half, provided the macro backdrop remains fairly constructive from investors should result in a sharp increase of liquidity Hotel Industrial O ce Retail and domestic political noise remains at acceptable levels. in the market. Our estimates indicate that the total volume Source: Colliers International of office investment transactions could increase from EUR at 7.00%. Prime industrial assets, with the best positioning 160mn in 2017 to well above EUR 500mn during 2018. and long duration of leases, saw their yields drop towards 8.50%. However, as the market is becoming increasingly Prime yields: current versus pre-crisis lows (%) more nuanced, projects with attractive commercial terms and Prague 5.75 features are looking to receive better pricing. 4.85 Budapest 6.25 Meanwhile, the banks’ interest for funding real estate deals 6 Warsaw 5.75 has been on the rise, with central bank surveys among the 5.15 Oce top lenders suggesting a low risk perception is predominant. Bucharest 5.5 Margins remain lower than they were in previous years 7.25 4% 5% 6% 7% 8% 9% (250 basis points for prime properties), while stable and low 2007-2008 minimum Euribor rates offer further comfort, though strong Eurozone Prague 5.5 5 growth suggests the low rate environment might be slowly End-2017 level Budapest 6 drawing to a close. Other funding options, like bonds, offer 6.2 Warsaw 6.5 alternatives for investors to choose the most appropriate Retail 5.25 solution for a specific deal. Bucharest 7 7 4% 5% 6% 7% 8% 9%
Forecast Prague 6.5 6.25 While investor sentiment towards Romania has improved Budapest 6.75 markedly during 2017, transactions have lagged behind. We 7.75 Warsaw 6.5 believe there is a perception issue regarding Romania for the Industrial 6.5 Bucharest 8 real estate market’s participants, as other financial markets 8.5 4% 5% 6% 7% 8% 9% Source: Colliers International
27 residential component as well. This transaction and others are also emblematic of another trend: the appetite for Land Market large surfaces, as developers achieved confidence that the market can digest ever bigger projects (for instance, residential developments with over 1,000 units). Still, internal challenges and an increased number of residential deliveries in 2018 might lead to a more cautious approach in the future for big projects. The newly-found strength in the real estate space has led to the „re-activation” of some large investors that had been greatly in the past few years (please look at the retail Demand dormant until now on the land market; this increasingly section of this report for a chart showing the dynamic of competitive market has supported both asset prices and The land market just ended its best year in the last decade, the CPI-adjusted net wage in the last decade). made it easier to close deals. 2017 also saw the entry of with the overall value of transactions for real estate The office cycle led to a significant boost in interest for quite a few new players, which acquired land plots mostly projects (office, retail, residential or mixed-use, without land acquisitions, as developers wanted to establish a for residential developments. industrial segment) increasing by an estimated 25-30% good land bank for the next couple of years. This was the relative to 2016, reaching around EUR 350mn. Some two result of a fairly robust office leasing market, especially thirds of the grand total came from deals in Bucharest. in Bucharest and, to a lesser degree, in the four major Supply With the residential segment accounting for close to half of regional cities: Cluj-Napoca, Timisoara, Iasi and Brasov. the transactions in the capital, the rest was almost equally The land deals likely lead the office development/leasing The market has absorbed the excess supply in recent years, split between retail and office. markets. In Bucharest, the Expozitiei area saw the biggest influenced by distressed owners who wanted to liquidate Keeping up with the pattern seen in recent years, total turnover, followed by central areas (Calea Victoriei). their assets in a limited timeframe. Given the favourable demand for land plots aimed at residential projects was backdrop, several large owners (Immofinanz, Telekom, Plaza Looking at demand-side forces nationwide, it would seem focused on areas near office hubs. As such, the most Centers, Trigranit) continued to sell their portfolios – either that the crown passed to the retail segment last year. This active areas were the Centre and North of Bucharest: individually or in bulk. Some are exiting the market, but for has been seeing strong interest throughout the country, Bulevardul Expozitiei, Bucurestii Noi and the Baneasa-DN1 the most part, companies are seeking to dispose of non-core maybe a bit less for Bucharest. Demand is coming both - Jandarmeriei area - due to the future office hub in the assets and focus on their main activity/real estate segment. from retailers and developers of retail parks, aiming for Expozitiei area, but also the Floreasca-Barbu Vacarescu, both smaller or larger schemes. Currently, retailers are The supply is still influenced by former factories within city Aviatiei and Pipera areas. The improved interest in the still having to fill gaps in poor coverage of modern retail boundaries. Fabrica Industria Iutei, Policolor, Tricodava in residential segment is also helping deals close in other schemes throughout the country, including in smaller cities Bucharest and part of Roman Brasov are some notable cities. The vibrant economy, good disposable income with population below 100,000. We note interest from examples of sales seen during 2017. A solid pipeline for growth and low interest rates (for most of the year) have food retailers (discounters, hypermarkets), DIY, furniture, future projects will continue to come from such former pushed home purchase intentions towards post-crisis cash&carry and others. industrial assets in urban settings. highs, as European Commission surveys show. For now, it is still too early to say how the start of a new monetary The highlight of the year was the sale of Policolor-owned We also note an increasing number of partnerships policy tightening cycle and renewed political noise will land in the eastern part of Bucharest (nearly 14 hectares between land owners and developers (mostly for impact the morale of consumers, but we would believe that bought for around EUR 22m by Raul Ciurtin, ERES); residential), with the former putting forward the actual land the residential segment will continue to do fairly well as this deal strengthens an already existing retail hotspot, and the latter dealing with the project in all its intricacies, the average consumer’s purchasing power has increased though it is likely to become a mixed-use project, with a including funding.
28 Colliers International Romania Research & Forecast Report | 2018 Prices 2017 Bucharest Land prices in major transactions While price hikes in 2015 and 2016 were seen rather on a case-by-case basis, 2017 marked a more generalized increase in asset valuations. We estimate that land prices Pipera moved north by some 10-15% nationwide. Dynamics were ¤ 75-275 /sqm quite varied, with some cities and even parts of Bucharest seeing little to no price changes. That said, there was increased interest for central areas of Bucharest, as well as Aviatiei - Dimitrie Pompeiu areas that are strategic for the office submarket, including ¤ 500-1,500 /sqm Bucurestii Noi in Romania’s emerging regional powerhouses on this ¤ 270-450 /sqm segment (Timisoara, Cluj-Napoca, Iasi). For some smaller Expozitiei land plots in Bucharest’s central areas, last year also saw Barbu Vacarescu ¤ 350-1,000 /sqm prices in excess of 2,000 EUR/sqm, a level reminiscent of ¤ 600-800 /sqm Lacul Morii Regie Orhideelor Stefan cel Mare the pre-crisis period, not of recent years. Smaller cities, ¤ 200-250 /sqm meanwhile, have barely started to close deals, which is, ¤ 400-550 /sqm ¤ 700-750 /sqm Calea Victoriei nevertheless, a progress if we consider that there was Iuliu Maniu - Preciziei ¤ 120-150 /sqm ¤ 1,000-2,200 /sqm little interest from buyers in previous years; this means these markets saw no meaningful upward pressures on Unirii Razoare Progresului prices, though on a case-by-case basis, it is possible that ¤ 600-850 /sqm ¤ 250-600 /sqm Marasesti - Carol Park some transactions (in prime/unique locations, for instance) ¤ 600-650 /sqm closed at higher prices than in previous years. eodor Pallady ¤ 100-160 /sqm Forecast 2018 is shaping up to be just as dynamic as 2017, with several large deals currently in various stages. Still, as Berceni the active developers have acquired a good land bank ¤ 120-250 /sqm (especially for office and residential), they might focus more on bringing their real estate projects to the market rather than looking at new locations. This means that new demand might be a bit poorer than last year’s. Appetite for larger surfaces might also suffer a bit for residential projects as the market is set to receive an increased number of units this year. Moreover, developers might The information is based on the deals closed or secured in 2017 and not turn a bit more cautious due to internal challenges related, average asking prices for the specified areas. They highlight the most for instance, to the higher RON interest rates constraining targeted type of land plots. As usual, the prices were influenced by size, disposable income or uncertainties about state policies. destination, building parameters, status of the permitting process.
29 Bucharest is likely to retain its top spot in terms of The home ownership ratio in Romania stands at over The price-to-income ratio for Bucharest also looks better attractiveness, but the major regional hubs (Cluj-Napoca, 90%, the highest rate in the EU and some 20% above the than most CEE capitals in the region (like Warsaw, Prague Timisoara, Iasi) are increasingly popping up on the radar, member states’ average. The figure might be swelled a bit or Budapest). as office and residential projects still see good interest by under-reporting of tenants amid tax evasion, but such In order to analyse market risks periodically, the European from tenants/buyers. In addition, we expect investors numbers suggest it would be more appropriate to judge Central Bank came forward with several econometric to still show interest with regards to retail schemes in the market from somebody actually using the apartment models to look at over/undervaluation of residential towns with low coverage of modern retail. Otherwise, as rather than somebody seeking potential returns from an properties in the EU. The ECB’s main model shows that land plots without adequate permits still carry significant investment in a housing unit. while Romania had some of the most overinflated asset risks, we believe transactions will continue to focus on This leads us to the central and most relevant aspect, in prices in 2007-2008, it now has the most undervalued those with zoning/construction documents. our view: disposable income has risen sharply in the last residential property prices in the EU. Of course, such Given the adequate supply, we would not anticipate any decade, whereas housing prices are still well below their an approach does not lend any attention to regional significant land price swings. Another aspect worth levels in 2007-2008. To put things into perspective, today’s differences, but it nevertheless offers a precious insight. pointing out is that strategic/central locations should still average wage can buy two thirds more goods and services On the other hand, in a sign of strong demand keeping do better as current asset valuations are less „bubbly” than the 2008’s average, while, on the other hand, the up increased deliveries, the share of units sold/booked than they were a decade ago and projects in prime asking price per square meter in Bucharest, for example, off-plan has increased. While some years ago, the locations are more appealing for developers. is nearly half its level recorded a decade ago. A useful percentage stood at around 20-30% for a lot of projects, indicator to look at is the ratio between an apartment’s We do not expect any major infrastructure developments nowadays, residential schemes are reporting that they price and the average annual net revenue. For Bucharest, to positively and materially influence the market (the metro manage to sell in excess of 50% of their units before the this ratio has dropped some nearly three times in the extensions in Bucharest continue to progress slowly). project is finished. Despite this, the average price growth last decade. This means a great improvement in both for apartments has been more or less in line with that of affordability and sustainability of the market. Residential segment disposable income. still not “bubbly” Price-to-income ratio (years to purchase a 60sqm apartment in Bucharest with the average wage) As the residential projects are a major driver of the demand for land, we feel there might be some merit 25.0 to look at the emerging concerns regarding the market overheating. Talk of a new residential bubble surfaced 20.0 in 2017 as housing prices were shown to be rising in double-digits in certain parts of the country/in certain 15.0 neighbourhoods, while the central bank repeatedly expressed its concerns related to the expansion pace 10.0 of mortgages. To start off, we think that such fears are overdone as things stand currently and we see the 5.0 market to be in much better shape fundamentally than it was a decade ago. 0.0 7 6 5 4 3 2 1 0 9 8 1 1 1 1 1 1 1 1 0 0 Q Q Q Q Q Q Q Q Q Purchasing a house is definitely one of the lifelong Q 1 1 1 1 1 1 1 1 1 1 priorities many Romanians share and seems to be deeply embedded from a cultural standpoint. Data Source: Colliers International
30 Colliers International Romania Research & Forecast Report | 2018 31 Hotel Market
Market Overview the EU, among the ones in the 10-25 million passengers The Bucharest hotel market remains the most competitive per year category, Bucharest’s Henri Coanda airport was in the country, with several international chains consisting In tune with the macro trends, the hotel market in Bucharest 5th in terms of growth last year, expanding by 16.7%, to the biggest players: Radisson Blu Hotel (over 760 rooms continued to improve in 2017. It is still mostly geared 12.7 million passengers. Meanwhile, Cluj-Napoca’s number with 3 brands), Hilton (around 560 rooms with three towards business, with the leisure and MICE (meetings, of passengers grew by close to 50%, to 1.9 million. The brands), JW Marriott (just over 400 rooms), followed by incentives, conferences and events) still quite subdued. constant increase in new destinations (both national and Sheraton and InterContinental Bucharest (both with under All segments are likely expanding, with a robust outlook as international) remains a key aspect to look out for. 300 rooms). Overall, there are close to 150 hotels with well, including for the leisure segment. It is noteworthy that The duration of stay in Romania remains fairly low, at more than 12,800 rooms, with the premium segment (4 Bucharest made its way into Booking.com’s top 10 up-and- 2 nights on average for foreign visitors, highlighting the and 5 stars) accounting for close to half. coming destinations tourists should visit in 2018, calling it a fact that the country benefits mostly from business trips The Garden Inn by Hilton in Bucharest’s old town, with „new to the alternative city break scene and a great option (likely over 70% of total hotel business for Bucharest) and, 201 rooms, was last year’s notable addition, though a because of its museums, parks, trendy cafés and mix of art to a lesser extent, city break status. The capital city also Courtyard hotel (Marriott brand) has been announced in nouveau and modern architecture.” became a more sought-after leisure destination, which the north. The French company Accor has also secured The number of foreign visitor arrivals in Romania’s hotels materialized in a higher share of the demand generated by a development land and might announce a new project and other accommodation options grew by over 10% last the leisure segment, moving towards 20%. The average fairly soon, while it likely retains additional interest. In this year, towards 2.8 million persons, with almost half of these expenditure per trip stands at around 470 euro per person respect, it is important to note that Accor-owned Orbis in Bucharest. This remains well lower than CEE peers (who per trip, with the bulk – little over half – represented by Hotel Group announced previously that it plans to become receive at least 2-3 times more foreign tourists per year). accommodation expenses. the largest player in Romania. Romania is host to nearly 1,600 hotels, with the number increasing slightly from year to year. The average occupancy rate throughout the year improved marginally, Supply Demand to 37.4% from 37% in 2016, which is one of the best levels Romania seems to be one of the attractive emerging Businesses travellers continue to be the prime clients of in the post-crisis period. Besides the steady rise in foreign markets for new players in the hospitality industry: high-tier establishments (4 and 5 stars), while the leisure visitors, we note that the robust increase in disposable Bucharest has little over 8 room beds in hotels per 1,000 tourism usually heads for hotels lower down the cost range. income for Romanians has led to an increased spending inhabitants compared to over 14 for Budapest and nearly 27 The average daily rate (ADR) increased in 2017 by close appetite, with the transition towards services only natural. for Prague. Also, close to 45% of the hotels in the capital to 10% in local currency terms for 5-star hotels, to reach Highlighting the favourable outlook, we note that quite a city are branded, compared to an average of around 60% 96 euro in the second part of the year. This remains 10% lot of airports in Romania reported very positive results. In for the major CEE cities like Budapest, Warsaw or Prague. to 40% lower than that of the major regional capital cities.
32 Colliers International Romania Research & Forecast Report | 2018 Highlighting the preference for higher-tier establishments, develop on this segment without adequate multi-purpose on the Bucharest market is the refurbishment of Lido the ADR for 4-star hotels saw a growth rate around half venue centres, which it currently lacks. Hotel, expected to be finalized sometime in 2018. that seen by the 5-star ones, reaching around 66 €. The office hotspots (like the northern or central-western As far as trends go, the hospitality segment is starting to The average occupancy for the 12 months ending parts of Bucharest) hold potential for fresh hotel diversify: we are noting an increase in interest for brands September 2017 stood at around 75-76% for both 4-star developments. So does the Old Town, which is likely to geared towards leisure tourism, as well as mixed concepts and 5-star establishments, an improvement of some 2-3 see some new brands (no necessarily new companies) (like flexible rooms, with rental of beds rather than rooms). percentage points over the previous year. As such, thanks opening hotels via refurbishments of old/historic buildings; We might also start seeing projects geared at certain to both the higher ADR and improved occupancy, the this area has a potential for some 500 new rooms to come niches, like students or blue-collar workers. average revenue per room saw in excess of 15% growth in to market in the upcoming years. Another event expected the second part of the year, even in months that were not marked by exceptional events like the Enescu Festival. Passengers on board, arrivals to Bucharest airport (million, 2016)
Forecast As the outlook for the market remains quite optimistic, companies are seeking solutions to expand their network. While the traditional and potentially cumbersome management contract is not viewed as an attractive solution currently, new solutions are emerging. Some Great Britain higher-tier brands might be seeking to buy or invest Netherlands Germany alongside developers, offering the latter an exit option if need-be. Another solution that could help the domestic Belgium 0.5 1.2 market growth might be a “rental contract”, with a hotel 1.3 built by a local company then handed over to a hotel brand 0.4 for a fixed instalment. France Austria 0.4 With Bucharest’s office stock expanding constantly over the Romania last decade and foreign investments continue to pour in, we 0.6 (other towns) continue to see room for the hotel market to grow on the business segment. Underpinning this aspect is the renewed 0.9 investor interest for this segment, with last year seeing a couple of smaller hotel deals and the largest transaction on 2.0 this segment so far in Romania: Radisson Blu, bought for 0.9 Italy EUR 169m by a Revetas / Cerberus partnership. 0.4 The leisure segment retains a bright outlook as well, as Spain highlighted by Bucharest’s growing appeal on specialty Greece websites like Booking.com. Still, Bucharest cannot fully
33 is applied, is not taken into account nor can be used to offset future profits. In other words, newly set-up companies New tax provisions in during the investment phase (when usually the turnover is below EUR 1 million) or operating companies with a small turnover, will not benefit from the tax loss generated by the the Real Estate Industry expenses incurred. N.B: As of January 2018, there is a draft law re-introducing the option to apply the regular corporate income tax regime if the companies have a minimum subscribed share capital of RON 45,000 and at least 2 employees. Until it is adopted, deduction of any expenses will be a The investors should analyze the impact of this new concern for all companies with turnover less than EUR 1 million. measure from two perspectives: Investors should also consider the following tax aspects that • 10% EBITDA: Even if the Directive gives the possibility did not change in 2018: Alex Milcev | Head of Tax & Legal to the EU Member States to choose a limit up to 30%, Romania opted for only 10%. Clearly, the real estate Rental income EY Romania companies recording a small EBITDA or in the investment Rental income is included in the taxable profits of the phase will be affected by this limit as they might not be companies and subject to a flat 16% corporate income tax. able to deduct the entire exceeding borrowing costs during Corporate income the period they are incurred. Dividend income tax aspects • Bank loans: Unlike under the interest deductibility Distribution of net profits is taxed with a 5% dividend tax. restrictions until 31 December 2017, the interest related to Deductibility of financing costs However, there are situations when the tax can be reduced to bank loans is now included and subject to the same rules nil (e.g. via tax treaties, EU Parent-Subsidiary Directive). As of 2018, a corporate income taxpayer’s exceeding mentioned above. As the bank loans represent one of the Capital gains borrowing costs (i.e. the amount by which deductible main source of financing for real estate industry, this new measure will have a significant impact for the Romanian borrowing costs exceed taxable interest revenues) in Capital gains obtained by Romanian companies from disposal real estate companies. relation to various types of financing (including e.g. bank of Romanian real estate properties are subject to a 16% loans, inter-company loans, finance leasing, etc.) may be N.B: As of January 2018, there is a draft amendment law replacing the profits. The taxable gain is determined as the difference deducted for corporate income tax purposes only up to EUR 200,000 threshold with EUR 3,000,000 and 10%-limit with 30%. between the selling price and the fiscal value of the fixed 10% of the company’s EBITDA, adjusted for tax purposes. Micro-enterprise tax regime assets sold. In the case of depreciable fixed assets (buildings), This EBITDA limitation will be applied to those exceeding the deductible fiscal value is defined as the entry value/ Any company with a turnover below EUR 1 million / year increased revaluated accounting value less fiscal depreciation. borrowing costs which are above an annual threshold of (compared to EUR 0.5 million applicable in 2017) has the EUR 200,000 (i.e. the first EUR 200,000 would not be obligation to declare and pay micro-enterprise tax instead As an alternative, the shareholders of a Romanian company subject to the limitation). of corporate income tax. The micro-enterprise tax is 1% can opt to sell the shares of the company rather than selling The above measures are transposed from Council Directive or 3% depending on whether the respective company has the company’s property. In this case, they are liable to the 16% (EU) 2016/1164 of 12 July 2016 laying down rules against tax employees, applied to the turnover. income tax applied to the capital gain obtained through the company sale. In certain situations, based on the provisions avoidance practices that directly affect the functioning of the Investors should be aware that the tax loss incurred by a internal market, known also as Anti-Tax Avoidance Directive. of the tax treaties, sale of shares held in Romanian companies company, during the period in which this mandatory regime may be exempt from tax in Romania.
34 Colliers International Romania Research & Forecast Report | 2018 Individual tax aspects Capital gains from disposal of shares A tax rebate of 5% of the profit tax / income of micro- enterprises is available to taxpayers that elect to apply the Starting 2018, 10% flat tax rate is payable on the net Rental income VAT split payment mechanism. capital gain from sale of shares (reduced from 16% as Although the income tax drops to 10% (from 16% applicable in 2017). Health fund contribution is due as for Other VAT related aspects resulting in certain applicable in 2017), there is an increase of the health fund the dividend income. cash-flow benefits: contribution from 5.5% (as applicable in 2017) to 10%. • The supplies between two VAT registered taxable However, the health fund contribution is due only if the persons of real estate (land and building) subject to taxpayer obtained in the previous year rental income (and VAT aspects Romanian VAT by option or by law are subject to VAT other types of income, except for salary) above 12 national simplification measures under certain conditions. minimum wages. Starting with 2018, the health fund Rental of real estate property is normally VAT exempt. • The VAT adjustments can be performed for every year contribution if due is capped at RON 2,280 annually. However, any taxable person performing rental activities during which the real estate is used for VAT exemption may opt to charge a 19% VAT on such transactions (such The taxable income is determined either (i) by deducting a without deduction right transactions instead of one-off. option allows deduction of VAT on related costs). 40% deemed expense quota from the gross income or (ii) • Mergers and spin offs are by default out of scope of VAT. by the single entry bookkeeping. As a rule, the sale of old buildings/parts of buildings and • Romania implemented the VAT Group rules under Taxation of real estate transactions the underlying land, as well as of any other type of land certain conditions which allow the consolidation of the VAT is VAT exempt without deduction right unless the taxable position (payable/refundable) of the VAT Group members. The real estate tax, due by the taxpayer on the transfer of person performing such transactions opts to tax the sale the property right or its divisions either buildings or their with 19% VAT. This exemption is not applicable to sale by a related land, or land without constructions, is maintained taxable person of a new building or building land. Special Local tax aspects at the level established in February 2017, as follows: rules are applicable for buildings and land registered under The local tax for non-residential buildings due by • tax exemption for a sale amount up to RON 450,000 one single cadastral number. companies continue to range from 0.2% to 1.3% applicable (approx. EUR 100,000); and A 5% VAT tax rate is applicable for the sale of social to the taxable value (for building tax purposes) of the • 3% income tax applicable on a sale amount exceeding housing (including related land) under certain conditions building as at 31 December 2017. The local council may RON 450,000. (i.e., houses of maximum 120 square meters and not increase this tax with up to 50% of the normal rate. Dividend income exceeding RON 450,000 in value - net of VAT). Individuals Moreover, a higher building tax rate of 5% is applicable for trading in real estate as a business are to be treated buildings which are not revalued for more than 3 years. The tax rate on dividends distributed to individual as taxable persons. Thus, when performing taxable shareholders is 5%. The land tax is established by taking into account the operations (e.g. sale of new buildings) the individuals are number of square meters of land, the rank of the locality The withholding tax for non-resident individual liable to register for VAT purposes if the volume of their where the respective land is situated, as well as the area shareholders could result in a more favorable rate, if a transactions exceeds RON 220,000. and/or the category of use of the respective land, as double tax treaty is applicable. VAT split payment mechanism established by the local council. The main taxation impact results from the increase of Romania introduced the VAT split payment mechanism Additionally, there are certain cases when judicial stamp the health fund contribution rate to 10% (as compared to in 2018. The mechanism involves special accounts for duties apply (e.g., in court, etc.). In the case of real estate 5.5% applicable in 2017). Similar conditions in respect transfer of VAT funds and a system of restrictions and transactions, notary and Real Estate Register fees apply of the contribution due should be observed as in case of sanctions related to such funds. (in total approximately 1%, depending on transaction value). rental income.
35 New rules for contracting construction. Novelties and practical difficulties.
Oana Bădărău | Partner | Pelifilip • the existence of reasonable suspicions on the quality Significant changes of the construction works performed and the need for Alexandra Ioniţă | Associate | Pelifilip Suspension of commissioning of technical survey, trials and additional tests to clarify such construction works suspicions; or • the developer does not provide the commissioning Perhaps the most important amendment included in the committee the documents required under the law. One of the changes of 2017 with significant new regulation refers to the range of decisions available to legal impact in real estate was the enactment the commissioning committee. As novelty, the committee In case the committee suspends the process, the minutes of a new regulation on commissioning may recommend to either suspend, approve or reject the will also include a remedy term for the flaws, which must of construction and installation works commissioning of the works. However, it appears that not exceed 90 days. Should the contractor not perform applicable since July 2017. the committee may no longer propose the approval with the remedy works within the set term and still fail to The new regulation reiterates part of objections. comply with this obligation despite being notified, the developer may perform the remedy works by itself, on the the previously applicable principles on The committee decides to suspend the commissioning contractor’s cost and risk. commissioning of construction works and in the following cases (substantially, the previous includes provisions designed to align the “postponement” grounds): However, the new regulation does not lay out the steps to follow the suspension and completion of the remedy new regulation with other normative deeds, • non-compliance, inconsistencies, defects or works. Under a reasonable interpretation, the entire including ones on fire safety and energy deficiencies which affect the use of the construction works process will resume from the contractor’s notice aiming at for their intended purpose; performance matters. convening the committee. However, in case the developer • construction works which are inadequately performed, Moreover, the new regulation includes several performs the remedy works, the contractor would incomplete or not performed, which may affect the basic material changes which are likely to impact presumably not be in the position to dispatch the notice. applicable requirements; both process and timing in commissioning of • defects for which the remediation is lengthy and Decision-taking process real estate projects. strictly necessary to ensure the use of the construction As a rule, the committee takes decisions with the majority works in accordance with their intended purpose; of its members’ votes.
36 Colliers International Romania Research & Forecast Report | 2018 However, the new regulation provides two exceptions: Additional matters It would appear that an employee of a legal entity contracted by the developer as advisor on construction a) deadlocks are handled by giving a casting vote to the matters would not qualify as member of the commissioning representative of the local authority which issued the to be considered committee, which seems more of an oversight than the building permit; and Energy certificate intention of the legislator. b) in certain significant projects (e.g. high importance The developer, owner or administrator of a building Delays of the authorities class buildings, tall constructions, historical monuments, undergoing commissioning must present to the publicly funded works etc.), the recommendation of commissioning committee the original version of the While scheduling the commissioning process, developers certain special participants to reject commissioning takes energy performance certificate. A copy of the certificate should also consider potential delays of authorities in precedence; these are (a) the issuer of the building permit, will be annexed to the commissioning minutes, in lack of issuing various documents. For example, before convening (b) the State Inspectorate for Construction Works (in which the minutes are deemed null and void. the committee, the developer must obtain a confirmation Romanian: “Inspectoratul de Stat in Constructii”), (c) the of receipt of payments by the State Inspectorate for Following the enactment of the new regulation, the county directorates for culture/Bucharest Directorate for Construction Works. We are aware of several recent cases provisions on commissioning were partly correlated with Culture, (d) the county/Bucharest-Ilfov inspectorates for in which the State Inspectorate delayed the issuance of the ones regarding the energy certificate, by including emergency situations. However, it is not clear whether the this document, and such delay reverberated on the overall the obligation of the committee to check that the energy issuer of the building permit enjoys such veto right under calendar of projects. certificate is available. normal circumstances. Summoning within the validity term of the However, the new regulation does not go as far as Way forward building permit specifically stating the obligation to attach the energy certificate to the commissioning minutes (as set forth While commissioning is a critical milestone on the way to a The contractor initiates the commissioning process by a under the specific legislation on energy performance of completed and functional building, the construction may be notice to the developer, setting forth the date of completion buildings). In practice, the members of the committee are used only once the relevant permits have been obtained (e.g. of all works related to the parts/elements/sectors of the often unaware of such obligation, leading to a critical title fire permit, civil protection permit, operating permit etc.). building and including the contractor’s request to proceed document being opened to potential validity challenges. All in all, the new regulation comes with certain with the commissioning. Furthermore, developers should also be aware that some clarifications/novelties welcomed in a field compelled by As novelty, the contractor must send the notice during authorities require that the energy certificate is registered public interest grounds to be highly regulated. the validity term of the building permit. This addition is with the relevant local council as a prerequisite to welcomed as it undermines a well-established practice commissioning. requirement (which was yet to be backed by an explicit Members of the committee legal provision) that the commissioning of the construction works must be carried out while the validity term of the The commissioning committee will include one to three building permit has not elapsed. construction specialists with expertise in the relevant works; these cannot be individuals involved in the design/ However, the legislative gap on the manner in which the performance of the construction. The new regulation process will be resumed after commissioning is suspended requires that the construction specialists must either be leaves a question mark of whether the new/second notice employees of the developer or authorized persons, acting of the contractor must also be dispatched before the expiry based on services agreements. of the validity term of the permit.
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38 39 About Colliers International Group Inc. 554 offices in Colliers International Group Inc. (NASDAQ and TSX: CIGI) is an industry leading global real estate services company with 15,000 skilled professionals operating in 68 countries. With an enterprising culture and significant employee ownership, Colliers 68 countries on professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include strategic advice and execution for property sales, leasing and finance; global corporate solutions; property, facility and project 6 continents management; workplace solutions; appraisal, valuation and tax consulting; customized research; and thought leadership consulting. United States: 153 Colliers professionals think differently, share great ideas and offer thoughtful and Canada: 34 innovative advice that helps clients accelerate their success. Colliers has been ranked among the top 100 global outsourcing firms by the International Association of Latin America: 24 Outsourcing Professionals for 12 consecutive years, more than any other real estate Asia Pacific:231 services firm. Colliers also has been ranked the top property manager in the world by Commercial Property Executive for two years in a row. EMEA: 112 For the latest news from Colliers, visit Colliers.com or follow us on Twitter (@Colliers) and LinkedIn.
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Copyright © 2018 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. 40 Colliers International Romania Research & Forecast Report | 2018