Romania Real Estate: A European Property Frontier

For most people, mention of Romania, particularly its region Transylvania, most immediately conjures up images of Dracula. Bran Castle, which is on the border between the Transylvania and …

For most people, mention of Romania, particularly its region Transylvania, most immediately conjures up images of Dracula. Bran Castle, which is on the border between the Transylvania and Wallachia regions, is commonly known as Dracula’s castle and attracts 450,000 tourists each year; it was recently listed for sale for $78 million, though the Romanian parliament barred the sale. Fictional characters aside, the country remains relatively unknown, prompting people to call it “the undiscovered Europe.”

Now that it has joined the European Union, there is no question that Romania has been discovered both by a growing number of tourists and property investors. Romania’s 2007 inclusion into the European Union has helped the economy expand. The flow of foreign direct investment continues to be strong, according to the Oxford Business Group. In 2007, the European Union began pouring in part of a seven-year, $30 billion aid package that is designed to help move along the country’s structural reform and ensure sustained economic growth. Multinational companies such as GE and Proctor & Gamble have already begun opening offices in Bucharest, the capital city.

A country snapshot

The capital of Bucharest is located in the Southeastern plains of Romania| alt=|Downtown Bucharest in Romania viewed from above|]Romania is located in Southeastern Europe and borders Hungary, Serbia, Moldova, Bulgaria and Ukraine and has an area of 91,725 square miles. Its short eastern coast lies along the Black Sea, upon which also lie coasts of Russia and Turkey. Romania has a population of 21.7 million people, about 55 percent of which lives in towns and cities, according to the Romanian Tourist Office website. Some 87 percent of the population belongs to the Eastern Orthodox Church. Approximately 2.6 million people live in Bucharest.

The tourism sector, which is of particular interest to property investors, is growing steadily, according to the World Travel and Tourism Council (WTTC). Out of 176 countries, WTTC ranks Romania’s tourism industry sixth in long-term growth potential, 58th in absolute size and 149th in relative contribution to the national economy. It is expected to grow from its current 5.8 percent of the GDP to 7 percent, increasing the income earned from the sector from $9.35 million to $21 million by 2018. The travel and tourism industry generates some 600,000 jobs today. This number is expected to rise by a little more than 100,000 over the next decade.

Romania’s climate is similar to that of the Northeastern United States, with four distinct seasons. Geographically, Bucharest has a similar latitudinal location as other international cities, such as Montreal and Venice.

The Carpathian Mountains, also affectionately known as the Transylvanian Alps, cross the middle of the country. Moldoveanu Mountain peaks at 8,349 feet. The country boasts 3,500 lakes, most of them small but 300 of which are bigger than 250 acres. The famed Danube River ends at the Romanian Black Sea, finishing up its eight-country journey and forming the Danube Delta wetlands.

The country has implemented a tourism master plan to encourage the expansion of the sector, according to Oxford Business Group. The National Tourism Organization has been established to promote the country as a desirable destination to both local and international travelers. An astonishing 87 percent of all hotel guests in the Bucharest were there for business. While year round hotel occupancy rate is about 70 percent, the occupancy rate jumps to about 94 percent during special business events and busy times of the year. As far as conference destinations go, the country falls short both in numbers and quality of facilities.

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The Black Sea coast suffers from high prices and poor service, limiting the number visitors that choose it as a destination. Some Romanians have even gone as far as taking their vacations at the cheaper Bulgarian Black Sea coast instead of their own. This should resolve itself as more hospitality businesses open in the area and the competition for customers stiffens up.

Romania has a representative democratic government system. However, this system suffers from high-level corruption, according to an article in last month’s Economist. Although the country made some improvements after its accession into the European Union, it seems to have fallen off the rehabilitation wagon. The Romanian judicial system particularly reflects the amount of corruption in the country. As it stands, the Romanian courts have yet to successfully prosecute individuals accused of high-level corruption. More often than not, such cases don’t even reach a verdict.

The Romanian real estate market

“Despite the continuous rise of the prices of real estate properties, the market in Romania offers still the most attractive investment opportunities among all other countries in the E.U.,” said Damien Thiery, managing director of Romanian Properties Ltd., a company that helps investors find properties with high return potential in the country. “Statistics for the last two years show that prices for both land and homes have doubled in some areas and specialists assume the market will follow the same course in the next five to 10 years.”

There are many real estate investment options, according to 2K Properties Ltd., a Romanian property and land investment company. Tourist areas around the 150-mile Black Sea coast offer abundant opportunities. The Transylvanian countryside is an alternative option for people who are looking to buy ramshackle properties for cheap prices and transform them into real estate gems. If the tourism market increases as planned, such properties could be used as vacation rentals or even bed and breakfasts.

Bucharest is another possible investment market. “2007 saw the highest foreign investment level ever and this trend continues,” said Thiery. Bucharest is gobbling up a good portion of the foreign direct investment that is pouring into the country. It has two international airports and public transportation infrastructure that includes buses and trains. Demand for quality housing is increasing in tandem with the rising income of the city’s residents. On the flip side, the income gap between the rich and the poor has continued to grow since the country opened up its economy.

Eighty-five percent of the 220,000 square meters leased in Bucharest last year were pre-leases, according to a 2008 real estate market overview report by CB Richard Ellis (CBRE). This is because there is a soaring demand for modern office buildings that is not yet met by what is already available both in quality and in numbers. The demand for office space is driven by the auto industry, financial institutions, retailers and IT and telecoms. Vacancy rates in the office sector remained below an overall rate of 3 percent, with only 1 percent for premises considered to be Class A. Demand in the office sector over the next few years will depend on the level of foreign investment in Romania.

In Bucharest, demand still outstrips supply because the population and the income of the city is growing faster than new housing developments are being built to accommodate them, according to 2K Properties.

“There are a lot of opportunities in the residential buy to let sector, mainly the development of new villas and apartments to be rented out to locals,” said Thiery.

The lease market in the residential luxury sector is still emerging. Roughly 95 percent of all homes built are for sale, according to a report by CB Richard Ellis. The most sought out rental properties in 2007 were three-bedroom homes, followed by two-bedroom homes. There is an oversupply of four- and five-bedroom properties.

Investors from many European countries and the United States helped make 2007 the year with the largest recorded volume of residential construction. The year also saw a trend of residential compounds with high number of units, sometimes numbering in the thousands, and buildings as high as 24 floors. A huge number of residential projects are expected to be completed in 2008, according to the CBRE’s report. This will inject a stiff competition in the residential property market, giving buyers an advantage they didn’t have in preceding years. Sale prices per square meter are expected to grow by 10 to 30 percent because of rising costs of construction. The danger for overbuilding exists, and investors would do well to heed the example set by Phoenix and Las Vegas, which saw their property markets crash in the wake of overbuilding.

Buying property in Romania

“Non-Romanians cannot buy land except through a company, which they can own,” said Michael Beckerman, owner of Romtrade Consult SRL in Romania. The process for purchasing property in Romania is rather complex at first glance, but creating a Romanian company through which investors can buy real estate “is a common and straightforward procedure,” Beckerman said.

“The properties are then owned freehold. A company can be set up for around $1,200 without traveling to Romania,” said Thiery.

It can be hard to determine the value of land or property in rural areas of the country, according to Beckerman. “Good local knowledge is essential. Land registry documents must be very carefully checked as about 70 percent of land in Romania is still not properly registered,” he said.

The next few years

“Capital appreciation of around 20 percent per annum over the next three years is expected on selected properties,” said Thiery. The Romanian real estate market is expected to continue its growth along with the economy for the coming years. It still has quiet “a long way to go before it reaches Western European prices, but it will eventually,” said Beckerman.

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