There were less than 10 office buildings in Bucharest (all class B or C), only a couple of modern supermarkets opened by an international retailer, no shopping centres and no sign of modern logistics space. The development potential was enormous and demand was growing in all real estate sectors, as foreign investments picked up.
Since then, this demand has not wavered, continuing to fuel market growth, despite economic ups and downs, social and political gyrations, and legislative changes. And so, in the past couple of years, the stock of modern office space in Bucharest alone has passed the three million square metre mark (compared to some 50,000 back in 1996), while Romania's retail stock is set to reach four million square metres, and industrial and logistics to exceed five million square metres.
How will the unprecedented challenges in 2020 impact the future evolution of the real estate market in Romania?
To answer this question and others, we invited Horațiu Florescu, a prominent Romanian real estate consultant, to talk about the resilience of the local real estate market in the face of change. Florescu has over 23 years of property experience in the regional market and is currently the Chairman & CEO of Knight Frank Hungary & Romania.
Stability and predictability are the least likely words one would associate with Romania. The country continues to attract criticism for the imperfections of its legislation, caused by frequent and sometimes uncorrelated legislative changes, as well as the excessive use of emergency Government ordinances.
The legislation governing real estate acquisition, development and construction is no exception. Today, the country has a comprehensive legislation package in this respect, but not a stable one. The laws regulating real estate and construction have been amended no less than 320 times, not to mention the structural changes introduced to the Civil Code a decade ago, which also had a material impact on the sector.
Flexibility comes in handy
In this context, staying flexible has always been vital for all market players, from real estate developers and investors, to landlords or tenants. The economic crisis of 2008 further strengthened the need for adaptability, while also introducing a more cautious approach from investors. And then 2020 came, bringing new challenges which have put the market resilience to a test.
"In my entire career in the real estate industry, 2020 is the year in which I most often heard 'we'll wait to see what happens next,' 'we're postponing decisions for three, six, twelve months,' 'let's put it on hold for a while' and so on," Florescu says, looking back at how landlords and tenants addressed the new realities generated by the COVID-19 pandemic in the Romanian market.
At a first glance, as the economic effects of the COVID-19 pandemic were beginning to unfold, a demarcation seemed to take shape between the "winners" (logistics) and "losers" (office) created by the healthcare crisis in the real estate market, while in retail the faith of stand-alone stores seemed incomparably better than that of the spaces located in shopping centres, which were closed down for a couple of months.
And indeed, logistics appears to have been the less affected sector in the real estate market, also given the shortening of supply chains across the globe, generated by the pandemic. With one of the most dynamic developments in the European market, Romania’s stock of modern industrial and logistics space grew threefold between 2015 and 2020. Amid last year's challenges, the vacancy rates have continued to be low (7-8 %, according to public estimates) and rents for prime spaces remained unaltered.
At the opposite pole, the hit to the office sector was clear and continued to be felt even after the lifting of the lockdown introduced by the Romanian government in the early phases of the pandemic, as social distancing measures made working from home a widely-used solution.
Lawyers faced waves of questions regarding the immediate and long-term impact on lease agreements from landlords and tenants in the office sector, as well as from those owning or operating retail space in shopping centres. Force majeure or hardship were the words of the day for our real estate team during those times, while a close eye was kept on spotting the legislative measures the state would take to remove some of the pressure, such as a long-debated draft law for the postponement of rent payments.
Gradually, things started to cool down for all sectors in the second part of the year. The market figures for Q1-Q3 2020 show that prime yields in Romania remained stable and continued to be the highest in Europe (office: 7 %; retail: 6.75 – 7 %; industrial: 8 %). Knight Frank even saw an increase in demand for office space compared to the previous year. Overall, the market showed its resilience.
It is exactly on this resilience that Romanian real estate market players are placing their bets.
While sectors such as logistics can trust that past years' momentum will continue to drive growth, others still need to adjust to the effects of the pandemic. It remains to be seen if and how the future work from home vs. work from the office structures will impact office investments and leases in the medium and long run. Horațiu Florescu stays optimistic: "the foundations of the office market in Bucharest are strong, because both rents and prices are considered sustainable and will most probably remain this way post-COVID too. Also, it is very important to mention that the market is not over-indebted (neither at the level of developers, nor at the level of buyers) as it was in the previous crisis. Therefore, we are unlikely to see significant corrections in the market."
All eyes are now on the need to adapt to the new realities that are shaping up as the economic impact of the healthcare crisis continues to unfold. We are yet to see what the coming period has in store regarding the investments and leasing activities in the Romanian real estate market, regardless the sector. This is also true of the legal concepts that we will have to creatively employ in the future to protect clients involved in real estate transactions from the unpredictable.
What is clear is that the Romanian real estate market is sending positive signals that it is mature enough and has been tested enough times to deserve the title of "adaptable in the face of change".