by Alexandra Smedoiu, Tax Partner and Real Estate Industry Leader, Deloitte Romania, and Irina Dimitriu, Partner, Reff & Associates | Deloitte Legal
Romania’s real estate market has evolved beyond expectations in 2020 and the prospects for 2021 are moderately optimistic, given the strong connections between this sector and the industries it serves.
The economy rebounded by 5.8% in Q3 and by 4.8% in Q4, after a 12.2% contraction in the second quarter of 2020. Private consumption, the main driver of last year’s growth, is expected to recover strongly from the second half of 2021 as the rollout of vaccinations should allow for a gradual lifting of restrictions and investment is set to remain strong over the next years, supported by the construction sector.
As a general remark, 2020 was not a bad year for the Romanian real estate market. In fact, strictly from the transactions’ perspective, it was one of the best years of the last decade, with a volume rising close to the benchmark of EUR 1 billion. Even though most of the deals closed last year were started before March 2020, and the total volume was significantly influenced by one or two large transactions, the signals received earlier this year show an increase in investor confidence in the Romanian real estate market.
Real Estate Transactions Near the €1 billion Mark
Since the beginning of the pandemic, like all other industries, the real estate sector faced various strategic and operational risks, forcing both property developers and owners to find solutions and respond quickly to an array of challenges, starting with the restrictions imposed by the authorities to prevent the spread of the virus, continuing with the need to protect employees and customers’ health and, last but not least, ensuring business continuity. While it is clear that the pandemic will make its mark on certain types of assets (such as office and residential), the long-time strategic thinking of the major players in Bucharest and other major cities has demonstrated that high-quality projects tend to be shielded from these less fortunate periods.
Mature investors are certainly prudent in these turbulent times, but are, at the same time, looking at the big picture before taking any major business decisions. This is the reason why prices for attractive projects have not dropped, COVID-19 related issues have very cautiously and wisely been brought to the negotiation table and deals that were frozen during the first months of the national lockdown are now being revived.
It may appear as a surprise that the re-shaping of investment plans performed last year has attracted more focus on real estate, in the sense that players with successful businesses in other fields are looking to invest their profits in quality projects (office, residential and logistic), while traditional real estate developers became more inclined to capitalize on their operating assets (via sale-purchase or joint venture) and use the proceeds for financing their on-going projects.
All the above have generated new (and somehow unexpected) opportunities. On the one hand, players have become more creative and showed flexibility in conceiving deal structures meant to accommodate silent partners and generally joint ventures. On the other hand, once the lockdown was over, it was generally accepted that the pandemic challenge cannot and should not stop the transactions. Where parties put their trust in resilient projects, price adjustment mechanisms were negotiated (i.e. additional amounts received by the seller in several years, to the extent to which the project met certain key performance indicators).
The Residential Sector, the Surprise of the Year 2020
The residential sector was the undisputed winner of the pandemic. The overall feeling about this sector was of uncertainty in the spring of 2020, but it recovered sharply after the lockdown. Needless to say, if remote work becomes a permanent option for office employees, the entire market will undergo structural changes in the attempt to adapt to the clients’ needs. Hence, the area and configuration of residential units will play an increased role in any acquisition decision.
Since this market sector has so far managed to win the battle with the pandemic challenges and contribute to the overall economy, its clients (mostly young working families looking to enhance their living standards) need a well deserved boost of confidence by the increase, without further delay, of the 5% VAT threshold. This would support the quality of the projects and give the medium-income class individuals access to decent dwellings in the major Romanian cities.
Agricultural Land Transactions Governed by Uncertain Legislation
The recent period has brought significant transformations in the agricultural sector as a result of the major legislation changes governing the sale-purchase of arable lands. Since early autumn last year, the agribusiness – a sector that attracted major well-established investors in Romania - had to battle not only the pandemic, but also the legislative uncertainty.
More precisely, after more than nine months, the details surrounding the calculation and implementation of the 80% tax on sale of arable extra-muros land are still unregulated. Given that this matter could alone (in some cases) become a deal-breaker, hopefully clarifications will be brought in the nearby future - ideally via implementation norms to the respective legislation - so that not only big transactions, but also daily business in this sector could continue at a normal pace.
Mixed Feelings on Commercial Real Estate
Since the beginning of the COVID-19 pandemic, commercial real estate players in Romania faced various strategic and operational risks, with notable differences between market segments.
In the following years, they need to pay attention to tenants’ and final users’ needs and respond accordingly. Most of the owners, developers and investors in this field consider contractual adjustments and flexibility to be the main attributes that will count for tenants and end-users when the health crisis ends.
In conclusion, the real estate market can still yield surprises, but it looks like, with both ups and downs, it managed to navigate the pandemic year and come out in relatively good shape.
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