Overview of the Romanian real estate market during the pandemic

Authors

Raul Andriuc, Senior Associate

The evolution of the real estate market in Romania has been quite unexpected in 2020 and at the beginning of 2021, also taking into consideration the connections between this sector and other industries. Although 2020 raised a lot of question marks, the construction sector fared well. After giving some consideration to closing the sector down, the Romanian Government decided to keep the construction sites open so most of the pending projects have continued. Another relevant aspect was the fact that the closing of borders triggered a number of Romanian workers to return to their country, this being a positive aspect for the construction sector in Romania with respect to the demand for qualified workers.

According to statistics, the Romanian 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, which was the main factor for last year’s growth, is expected to recover from the second half of 2021, investments also being expected to grow over the next years, supported by the construction sector.

As far as the tax authorities are concerned, it is expected that the construction sector will receive further incentives under the National Plan for Recovery and Resilience. In this respect, a significant portion of the funds is envisaged to support investments in social infrastructure, roads, railways, subway, as well as schools and hospitals.

On the other hand, the price of construction materials has increased. Romania has been particularly affected because most materials are imported. In addition, the increase in the minimum wage has led to a 25-30% increase in labour costs. All of this, together with the volatility between RON/EUR and RON/USD, is likely to trigger an increase in construction prices.

From a transactional perspective, it seems that 2020 was one of the best years of the last decade, although most of the deals closed in 2020 started before March 2020, and the total volume was influenced by one or two large transactions.

Since the pandemic began, the real estate sector has faced various risks, forcing both property developers and owners to find solutions for a wide range of challenges, such as the restrictions imposed by the authorities to prevent the spread of the virus, the measures adopted to protect employees and customers, and, at the same time, to ensure business continuity. It was clear that the pandemic would have an impact on certain types of real estate asset, such as office buildings and commercial centres. 

The beginning of 2021 showed an increase in investor confidence in the real estate market, although they have certainly been prudent. The prices for attractive projects seem not to have dropped and deals that were put on hold at the beginning of the pandemic are now being resumed. In addition, it seems that investors with successful businesses in other industries are looking to invest their profits in real estate projects (office, residential and logistic), while the traditional real estate developers seem interested in capitalizing on their operating assets (via sale/purchase or joint venture) and use the proceeds to finance pending projects. The participants on the real estate market have shown flexibility in structuring transactions to complete them, rather than put them on hold, including by negotiating price adjustment mechanisms over several years, depending on certain key performance indicators.

With respect to the residential sector, although it was characterized by insecurity at the beginning of the pandemic, it recovered after the lockdown. What is more, as remote working appears to have become a permanent option for companies and employees, it is expected that the market will undergo some changes. Consequently, the residential sector should have an increased role in the future in the entire real estate market.

Investors in the commercial real estate market faced various risks, with some differences between the segments of the market. It seems that 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 at the end of the crisis generated by the pandemic. Accordingly, in the coming years, more attention will be paid to the needs of tenants and end users. Also, following the pandemic, there is a market trend towards reconsidering the role and purpose of office buildings. In this respect, there are owners contemplating the possibility of converting office buildings into residential units, considering the increasing demand for residential units and the fact that the costs for the legal formalities for such operations would not be too excessive.

In relation to the agricultural sector, the recent period has brought significant legislative changes, such as the change of the legislation governing the sale/purchase of agricultural lands located outside a built-up area (in Romanian: extravilan), or of the legislation governing the certificate relating to the quality of the soil, which raised certain difficulties. Thus, the details for the calculation and implementation of the 80% tax on the sale of agricultural lands located outside a built-up area are still unregulated. There is also currently no procedure for obtaining soil quality certificates, as it is impossible in such a context to obtain a soil quality certificate and comply with the legal provisions in case of the transfer of land or change of owner.

Although Romania has extensive land with high agricultural potential, which could also be rededicated for development purposes, in 2020 the Romanian Parliament passed Law no. 175/2020 amending and completing the law on the sale and purchase of agricultural land in Romania located outside a built-up area, 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 achieving a balance between the necessity to protect and preserve the agricultural potential and the requirements for development and modernization. From this perspective, the demand for suitable land continues to rise, for all segments of the market.