Rules of the Game: Legislation Catching Up with Development

07 July 2021

by Tomasz Stasiak, Partner, Wolf Theiss Poland and Flaviu Nanu, Counsel, Wolf Theiss Romania

 

After three decades of democracy and multiple waves of rapid industrial development, Romania and Poland have developed stable, business friendly legal frameworks. As is often the case with complex bodies of legislative text - particularly in the face of such a rapidly evolving industry such as real estate - many are dated and both countries are working to modernize and simplify their systems. As demand is growing on all fronts, agricultural laws are putting more pressure on both states’ real estate new build potential, but construction & permitting regulations are becoming more lenient. 


Romania’s Legal Climate

Real estate investors continue to manifest an increased interest for Romania and new transactions are reported by the media on a weekly basis. One of the reasons is undoubtedly the nature of the legislative framework. Although it has acquired a reputation (not entirely undeserved) of a country that implements rather numerous legislative changes, Romania has maintained a constant pro-business focus not only at the level of central government, but that of local authorities.

Real estate benefits from few, but well-established, pieces of legislation. Law no. 350/2001 regulates the main principles of urbanism and land planning. In this respect, it is provided that each municipality must approve and update every ten years a general urban plan (GUP), which, together with the ancillary regulations, contains, among others, the identification of the buildable area of the municipality, its partition into various functional zones (administrative and business districts, residential areas, industrial zones, etc.), as well as the general construction requirements for each such zone. The GUP for Bucharest is overdue for an update as the most recent one dates from the year 2000.

At the intermediate level, zonal urban plans (ZUP) provide more detailed regulations for specific areas, such as city centers, historical protected zones, industrial parks, etc. At the lower level, the detailed urban plan (DUP) establishes additional construction requirements for particular real properties (access, architectural consistency, etc.). 

Zoning Plans in Bucharest Suspended Until the End of 2021

Romanian municipalities have been open towards the development of urban areas, particularly by allowing the conversion of former in-city industrial platforms inherited from the Communist regime into modern residential, retail and mixed-use areas and encouraging the expansion of real estate developments on the outskirts of urban conglomerates. In this respect, urbanism plans are naturally subject to evolution mirroring communities’ need to grow. However, sometimes this needs to be tempered by the necessity to preserve the city’s historical heritage or green areas. This is illustrated by the current situation in Bucharest, where zonal urbanism plans of the city districts seeking to amend the existing GUP were suspended by the municipality early in 2021 (for a declared one year time frame), in order to allow stakeholders to consider how they would pan out. This suspension however has not significantly impacted the market, as construction trends continued, with investors relying on existing urbanism parameters. 

Building Permits at a Glance

The authorization and performance of construction works are regulated mainly by Law no. 10/1995 regarding the quality in constructions and Law no. 50/1991. Building permits are issued by local authorities, depending on the location of the project and local capabilities, based on the following steps: (i) the applicant obtains an urbanism certificate, which mentions the current status of the property and lists the conditions required for the issuance of the building permit; (ii) the applicant may be required to perform a re-zoning via a ZUP, if the planning parameters of the area do not allow direct issuance of the building permit; (iii) preparing the technical documentation and obtaining any prior approvals and endorsements; (iv) application for and issuance of the building permit. 

Likewise, construction regulations have been amended recently in order to streamline the permitting process. Thus, local authorities at the level of counties and main cities are required to organize single point of contacts, allowing them to obtain the necessary prior approvals and permits, required as pre-conditions to the building permits, from various authorities at the request and on behalf of investors.   

Following the COVID-19 pandemic, there is a noticeable trend towards reconsidering the role and purpose of office buildings. Certain owners are contemplating the possibility of converting office buildings into residential units, considering that the demand from residential units is increasing and the legal formalities for such operations are not exceedingly cumbersome (it is necessary, as a rule, to obtain a building permit for the envisaged changes, subject to compliance with urbanism parameters). 

The National Plan for Recovery and Resilience Incentivizes the Construction Sector

As far as the construction sector is concerned, it has been given a boost by the implementation of tax facilities. Now it is expected that the sector will receive further incentives under the National Plan for Recovery and Resilience. In this respect, a significant portion of the funds, estimated at  EUR 29.2 billion in grants and loans starting with October 2021, is envisaged to support investments in social infrastructure, roads, railways, subway, as well as schools and hospitals, presumably part of these through public-private partnerships, rehabilitation of buildings and construction of green industrial facilities. 

New Restrictions on Converting Agricultural Land

Romania has extensive surfaces of land with high agricultural potential, but which could also be converted for development purposes. The year 2020 brought some question marks as the Romanian Parliament passed Law no. 175/2020, which significantly restricted the acquisition of and possibility to convert agricultural lands for other purposes. Amendments are currently being discussed by the Parliament aimed at bringing a just balance between the necessity to protect and preserve the agricultural potential and the requirements for development and modernization and it is expected that the matter will be solved soon. From this perspective, the demand for suitable land continues to rise, not only for residential, retail and logistics, but also for industrial facilities. The coming period will see a rise of manufacturing plants in Romania, especially in the automotive and renewable energy sectors.

Romania’s legislative framework has by and large proven flexible and resilient. Despite inevitable adjustments, it can constitute a reliable basis for foreign investments, which are expected to continue on a positive trend in 2021 and beyond.

 

Poland’s Legal Climate

As far as business is concerned, the rule of law in Poland is preserved and politics does not overstep any more than in other European countries.  While political debates over the status of Polish courts and general compliance with EU standards have taken place they have not constituted ground for investors to shy away. 

The legal framework for real estate investors in Poland has remained stable for over fifteen years,  with zoning conditions for a property being defined either in a master plan (voted by local councils) or, in the absence of a master plan, in a zoning decision issued based on the principle of continued development (also called “good neighborhood principle”) - in a nutshell, the parameters of new developments must follow those of existing buildings, accessible from the same public road. With zoning conditions defined and the environmental impact review passed, the investor can rest assured that the building permit will be issued assuming technical standards set by central law are preserved. The main unknown remains timing as all decisions can be challenged by neighbors and, in case of environmental decisions, by NGOs. 

Poland Simplifies the Situations that Require a Building Permit 

One noteworthy development in recent years has been the step by step limitation of cases in which a building permit is required. Institutional investors will be happy to hear for instance that, starting with 2021, properties can be repurposed without the need to obtain a building permit, hence without the risk of delayed administrative procedures, as long as their project is compliant with the master plan and doesn’t affect the building’s outer shape. 

One example of a simplified procedure can be found in Poland’s retail and logistics markets. Thanks to recent amendments, historical retail projects can now be converted with more ease into retail parks (that have been growing in popularity throughout the pandemic), or redeveloped into last mile logistics.

The dynamic expansion of the logistic sector is somewhat limited by restrictions related to trading agricultural land, which makes it difficult for the newcomers to build substantial land banks. As a consequence, a typical deal structure involves the developer entering into an “option agreement” with the landowner, which gives the developer time to work out the proper zoning plan. The transfer of title occurs only after the land’s status is changed  to non-agricultural. One positive development happened in 2019, when an amendment to the restrictions on purchasing agricultural land made it possible for companies to buy land not exceeding 1 hectare without consent of the Director of the National Support Centre for Agriculture.

The Polish Deal & Changes Affecting the Residential Market

As of 2018 major residential projects may also be implemented based on a resolution of local council accompanied by urban development agreement between the developer and the local authorities, which may derogate from the zoning conditions provided for in the master plan. The government supports the residential sector through various financial programs directed towards individual buyers.  As part of the recently announced "Polish Deal" for instance, the government plans to offer guarantees for mortgage loans taken by individual buyers and in this way make it easier for the young to buy property. The impact on the domestic demand is expected to become visible no earlier than mid-2022.

Residential development for individual buyers is subject to complex sector regulations intended to protect the interest of consumers. This includes an obligation to provide the buyer with comprehensive information on the entire project, prohibition of abusive contractual clauses and ensuring that the buyers’ payments for newly developed units are kept on a separate escrow account, administered by a bank and released to the developer in line with progress of the development works. However, the regulations are not perceived to be a major obstacle to development activity. On the other hand, the private rented sector (PRS) requires very careful planning from a tax perspective in order for investors to benefit from the VAT exemption applicable to long-term occupational leases.  

As the demand for living spaces keeps rising, one challenge that became apparent in the market is land scarcity for residential. But when there is a will, there is a way. An interesting reaction to this has been real estate development under hotels/services zoning designation, that are intended to be sold as individual units to be rented out by buyers, under the common management of the developer.



This article was originally published in Real Estate in Romania & Poland 2021 report, available in full here.

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