Real Estate Investments Valuation in Romania Through International & European Consulting Methodologies

REAL ESTATE INVESTMENTS VALUATION IN ROMANIA THROUGH INTERNATIONAL & EUROPEAN CONSULTING METHODOLOGIES

University Professor PhD Cristian Silviu BANACU

Abstract: The purpose of the paper titled REAL ESTATE INVESTMENTS VALUATION IN ROMANIA THROUGH INTERNATIONAL & EUROPEAN CONSULTING METHODOLOGIES is to underline the importance of the using of international consulting and appraisal methodologies into the practice of real estate and investment consultants from Romania. Case studies are presented.

Introduction

The investments in real estate market from Romania has decreased first smoothly and then sharply in the period 2008-2012 due to the influence of economic crise that affected Romania as well as the other countries from Europe or the world.

The land market was significant different from town to town, county to county, region to region in what it concerns the transaction values for investments.

In some cases as the lands in small cities or the lands in the close neibourhoud from metropolitan areas, the lost of land value was between 50-60 % comparing with 2008 land values. For example the land values for real estate investments. In other cases as the lands for commercial constructions investments has smaller decrease. If we look at the land marke from a Romanian big city as it is Bucharest, we could notice that the most wanted lands for residential developments were the plots with small as surfaces 500-700 sqm because of the low power of investments due to the low power of consumption.

The values of such lands has reached the miminum for areas as Baneasa Sisesti (70-200 euros/sqm), Rahova, Oltenitei, Iuliu Maniu , Pantelimon, Colentina (150-250 euros/sqm), Titan, Drumul Taberei, Basarabia Boulevard (200-350 euros/sqm), Iancului, Mosilor, Bucur Obor (300-500 euros/sqm) and has higher values for areas as Piata Unirii, Piata Dorobanti, Piata Aviatorilor, (700-2000 euros/sqm).

In what it concerns the residential market, the values of flats and housing has the similar evollution as the land values reaching to a 45 % fall down in prices comparing the values from 2012 comparing with 2009. The average price was 1050 euros/sqm. The Colliers Report from 2011 show this evollution.

The evollution of the commercial investments was less affected by the economic crise. For this reason, the number of new investments were higher than in other fields in Romania.

The study case: The valuation of a large surface land for investment in Bucharest, Romania

In order to estimate the open market value of the plot of land with a total area of 13000 square meters located on a semicentral area from, Bucharest, the valuator analyst used the following three methods:

1. THE COMPARISON APPROACH  Comparison method 2. THE INCOME APPROACH  Capitalization method 3. THE COST APPROACH  Residual method

VALUATION USING THE COMPARISON APPROACH

The estimate of the value of land using this method is made by analyzing, comparing and correcting similar plots of land for which information about prices are available. The following plots of land have been used as comparable properties:

A. Land on Militari area, with a total area of 2900 s qm and a frontage of 120 meters, with all services, presently offered at 140 Euro/sqm. B. Land on Militari area, with a total area of 2800 s qm and a frontage of 43 meters, with all services, presently offered at 250 Euro/sq m. C. Land on Basarabia Street with a total area of 2750 sq m and a frontage of 30 meters, with all services, sold in 2011 at 300 Euro/sqm; D. Land on Titan Area. with a total area of 3,500 s qm and a frontage of 45 metres, all services included, presently offered at 350 Euro/sqm.

41 Forecasts shows1 an increasing value estimated at 160 euros/sqm (696 LEI/sqm at a rate of 1 euro = 4,35 LEI) of the land because of its near proximity to the Militari Shopping Centre and the center of Bucharest, and its access to Iuliu Maniu Blvd and Lujerului Bvld. Taking into account the actual costs of necessary demolishing works and site preparation works we could estimate about 160-600 euros/sqm.

The land for which the total adjustments are the lowest is the one located on Militari area, position B and we consider that the land price for the subject plot of land is of 160 Euro/sqm. For the entire area of 13000 sqm we have a value of 2080000 Euro. The value for the land obtained by comparison approach is of 2080000 Euro.

Land Value By Comparison Method = 2080000 Euro

Comparision Valuated Basarabia elements property Militari Blv Militari Blv Blvd Titan Price (euro/sqm) 140 250 300 350 Area (sqm) 13000 2900 2800 2750 3500 Offers/ offers offer offer transaction Transactions Adjustments 0 0 0 20% Adjusted Price 140 250 300 420 Location semicentral semicentral semicentral semicentral semicentral Adjustments 0 0 0 0 Adjusted Price 140 250 300 420 Frontage (m) 288 120 43 30 45 Adjustments 20% 30% 40% 30% Adjusted Price 144 325 420 546 Planning PUZ POT 70 % POT 75% POT 40% POT 40% constraints approved CUT 3,5 CUT 3,5 CUT 4 CUT 4 Adjustments 10% 10% 10% 10% Adjusted Price 158.4 357.5 462 600.6 water, gas, water, gas, water, gas, water, gas, water, gas, Utilities electric electric electric electric electric Adjustments 0 0 0 0 Adjusted Price 158.4 357.5 462 600.6 total Adjustments 30% 40% 50% 60% Final value 160 euro/sqm

42 VALUATION USING THE INCOME CAPITALIZATION APPROACH

The capitalization rate applied to the earnings has been calculated after a review of the capitalization rates for several investment properties as hotels, office buildings, residential and malls. We use de formula: Value= Expected Income/ Capitalization rate We determine the capitalization rate for projected investment on land offices comparative offers north zone floreasca baneasa surface sqm 20000 4370 4500 rent offer/month/sqm 18 22,61 20 rent offer/year/sqm 216 271,32 240 total rent/year 4320000 1185668,4 1080000 selling value 40000000 8740000 9000000 capitalization rate 0,108 0,13566 0,12 avarage capitalization rate 0,12122 source ziarul financiar Table Determining the capitalization rate for offices: 12.21 % malls comparative offers craiova mall cluj napoca bacau surface sqm 54000 31500 40000 rent offer/month/sqm 10 14 13,5 rent offer/year/sqm 120 168 162 total rent/year 6480000 5292000 6480000 selling value 108000000 63000000 80000000 capitalization rate 0,06 0,084 0,081 avarage capitalization rate 0,075 source ziarul financiar Table Determining the capitalization rate for malls: 7.5 % residential comparative offers nordului-herastrau primaverii aviatiei surface sqm 135 185 120 rent offer/month 1500 2700 2300 rent offer/year 18000 32400 27600 total rent/year 18000 32400 27600 selling value 350000 67000 450000 capitalization rate 0,051428571 0,053114754 0,061333333 avarage capitalization rate 0,05529222 source ziarul financiar Table determining the capitalization rate for residential housing (apartment flats): 5.5 %

43 hotel comparative offers bucuresti hilton central surface sqm/ room 58 75 48 rent offer/month 31,3 43 29 rent offer/year 375,6 516 348 total rent/year 375,6 516 348 selling value 350000 67000 450000 capitalization rate 0,001073143 0,000845902 0,000773333 avarage capitalization rate 0,000897459 source ziarul financiar Table determining the capitalization rate for hotels (at an occupancy rate of 70 %)

euro hotel room sqm fee/ room/night nr nights occupation fee/ month rent/sqm/n 100 150 30 0,7 3150 31,5 residential apart sqm rent/ month occupation rent/sqm 170 1500 0,7 6,176471 Table Data used for the capitalization rate for hotels (at an occupancy rate of 70 %) based on comparisons hotel and residential in order to find the price per sqm for hotels for a better equivalance with other construction investments If we suppose the following scenario in which the destination for the land best using will be: scenario 1 surface euro Total selling Total rent Land for: 130000 sqm price/sqm rents/sqm value value office 30% 39.000 560 20 37440000 780000 mall/ commercial 30% 39.000 560 12 37440000 468000 Residential appartaments 30% 39.000 560 6,17 37440000 240630 hotel 10% 13.000560 31,5 12480000 402500 total 100% 130.000560 17,4175 124800000 6968130 Simulating the land renting (scenario1) If the land will be sell or rent that will be used for the building of offices, mall, apartments flats and hotel in equal proportions (30%, offices, 30 % mall, 30% residential apartaments and 10 % hotel): the total selling value of the land will be 124800000 euro and total rent value per year will be 6968130 euro.

Building nr total total total amortiz price/sqm rents/sqm total selling on land levels surface rent/month rent/year (years) office 12 468000 1500 20 702000000 9360000 112320000 6,25 mall 5 125000 3500 12 682500000 2340000 28080000 24,30555556 resid 12 468000 1900 6,17 889200000 2887560 34650720 25,66180443 hotel 12 156000 2800 31,5 436800000 4914000 58968000 7,407407407 1287000 2425 17,4175 2710500000 12501560 234018720 11,58240674 Table 5.2.7 Simulating using of the land in the case that constructions will be erected

44 Building on land total rent/month total rent/year capitalization rate capitalized value office 9360000 112320000 0,12122 926579772,3 mall 2340000 28080000 0,075 374400000 resid 2887560 34650720 0,05529222 626683464,7 hotel 4914000 58968000 0,000897459 65705508552 12501560 234018720 0,06310242 703361451 Simulating using of the land in the case that constructions will be erected using the capitalization rates of the market with the average rate of capitalization of 6.31 % scenario 2 euro Total selling Land for: 130000 sqm price/sqm rents/sqm value Total rent value office 30% 39.000 560 20 37440000 780000 mall/ commercial 40% 52.000 560 12 49920000 624000 hotel 20% 26.000 560 31,5 24560000 819000 resid 10% 13.000 560 6,17 12480000 80210 total 100% 130.000 560 69,67 124800000 2303210 scenario 3 euro Total selling Land for: 130000 sqm price/sqm rents/sqm value Total rent value office 20% 26000 560 20 24560000 520000 hotel 40% 52000 560 31,5 49920000 1638000 mall/ commercial 20% 26000 560 12 24560000 312000 residential 20% 26000 560 6,17 24560000 160420 total 100% 130000 560 69,67 124800000 2630420 Simulating the land renting (scenario2 and 3)

Building nr total total amortiz price/sqm rents/sqm total selling total rent on land levels surface rent/year (years) office 12 468000 1500 20 702000000 9360000 112320000 6,25 mall 5 260000 3500 12 97000000 3120000 37440000 24,30 residential 12 312000 1900 31,5 592800000 9828000 117936000 5,02 hotel 12 156000 2800 6,17 436800000 962520 11550240 37,81 2425 17,4175 2641600000 23270520 279246240 9,45

nr total total amortiz Building price/sqm rents/sqm total selling total rent levels surface rent/year (years) on land office 12 312000 1500 20 468000000 6240000 74880000 6,25 mall 5 260000 2800 31,5 728000000 8190000 98280000 7,4 residential 12 312000 3500 12 1092000000 3744000 44928000 24,3 hotel 12 312000 1900 6,17 592800000 1925040 23100480 25,66 2425 17,4175 2880800000 20099040 241188480 11,94 Table 5.2.7 Simulating the land using for constructions (scenario2 and 3)

Var 1 Var 2 Var 3 land rent value/year/variant 125015,60 232705,20 200990,40 capitalization rate 0,0631024 0,06310242 0,06310242 capitalized value (euro) 3090461 3687738 3185145 The land value through the capitalization method is 3090000 euro if is developed according to scenarios 1, 2, 3.

COST APPROACH-RESIDUAL METHOD Method description a) By this method we are estimating what part from the prospective future incomes can be attributed to the land taking into account the investment costs: b) The formula used for Residual Method is as follows:

Project Value  Building Costs  Developer’s Profit = Land Value c) The Project Value it is obtained by annual income capitalization, with a market capitalization rate. d) To find the land value by Residual Method we have to establish the Land Best Use and then to estimate the incomes generated by the premises. Considering the location and the town planning parameters we have considered the best use for the subject plot of land the development of a multifunctional complex comprising residential and retail facilities. Considering the fact that the area is an old industrial area we have considered the footprint of the constructions will be up to 50% from the total area of the plot. For the residential development we have considered 3 towers of 33,000 s qm each, with a total area of 1,000 sq m per floor. The number of underground parking places is of 700 and another 100 places are available outside. The shopping mall has a total area of 200,000 sq m gross area, excluding underground parking of 61,513 sq m. The total Gross Letable Area of the mall is of 68,268 sq m, divided on four floors. The total number of car parking places for the shopping mall is of 4,000 units, located underground. For the office building we have considered 1 tower of 80.000 sq m, with a total lettable area of 1,600 sq m per floor. The number of underground parking places is of 2,500 and another 200 places available outside. The hotel sector will be represented by one tower of 30.000 sq m, with a lettable area of 1,000 sq m per floor. The number of underground parking places is of 300 and another 100 outside. To determine the land value the following steps are necessary: a) To determine the construction costs for the development considered as the best use, including the cost for landscaping. b) Income estimates for the project.

46 c) Estimating the Project Value by income capitalization with a market capitalization rate. d) Finally, finding the land value as difference between the project value and the costs of development. From the discussions with architects, contractors and other sources, the average construction costs where considered as following:  325 Euro/sqm for the underground parking;  150 Euro/sqm for the landscaping and outside parking, access ways, green areas, etc.;  The cost for residential buildings, considering also the height of the buildings is of 750 Euro/sqm;  The cost for the shopping mall was considered at 850 Euro/sqm;  The cost for hotel was considered at 1000 euro/sqm Note: excluding VAT and design costs

The costs for professional services were considered as follows: 2% architects fees, 1.5 % legal fees and surveyor’s fees, 1% fees for technical experts and 3% the Project Management fees. The financing cost was considered at 5.75 % per year. The developer’s profit was considered at 18 % from the total investment. The estimated rental incomes from the shopping mall are of 17,62900 Euro per year, excluding VAT. The Project Value has been obtained dividing the annual incomes from rents to the capitalization rate. Considering the existing market capitalization rates, we have used a capitalization rate of 7.50 %. For the residential part of the project we have estimated an average price of 1,300 Euro/sq m of gross area and a price of 12,500 for underground car parking place and 7,500 for outside car parking place. The calculations are presented bellow. By Residual Method we have obtained a land value of 1629812,49 Euro, which means 125,3 Euro/sq m for the plot of land of 13000 sq m. The rounded value for land by Residual Method is 1630000 Euro.

Land Value By Residual Method = 1630000 Euro

RESULTS OF THE LAND VALUATION

The three market values obtaines for the plot of land of 130000 sqm located on Land located in Bucharest on 355-357, Militari area, sector 1, are:

VcM = 2080000 Euro rounded 2080000 Euro

Vcap= 3090000 Euro

VRM = 162,981,249 Euro rounded 1630000 Euro

47 The Comparison Method used transactions with plots of land free of buildings located in areas which are not very close to the subject plot of land and which are worst located. The Residual Method determines the open market value considering the development for the best use of the land. Because by Residual Method we have considered the best use for the development as a mixed use development of a residential and shopping mall project, two of the most dynamic sectors of real estate market in Romania, with increasing demand, we consider the Residual Method value as being the value for the subject plot of land.

The land value 13000 sqm on Militari area, Sector 5 = 2080000 EUR

REFERENCES

 Cicea C.  Consideraţii privind eficienţa investiţiilor internaţionale în condiţii de risc valutar, Revista de Management Comparat nr 6, 2006, ISSN 1582-3458  Cicea C.  Concurenţa proiectelor de investiţii în economia de piaţă. Articol în Proceedings of 19th scientific conference NAVMAREDU, Academia navală Mircea cel Bătrân, pag. 155-160, ISBN 973-8303-54-0 2005  Vasilescu I., Românu I.  Cicea C., Investitii, 2000, Isbn 73-590-368-7, Ed. Economică  www.coliers.ro  Coliers Report 2011, mid term, ANEVAR Standardele Internationale de evaluare 2011