Analysis! Key points of Romania’s real estate market in 2018
Investment scene to steal the show
After 2017’s investment volumes of just over EUR 0.9 billion, the potential pipeline for the office segment alone could be larger than this level. Though some deals may get delayed for next year, we expect to see overall market turnover move well above EUR 1 billion, with both currently active players and new entrants to drive up demand. Among the arguments supporting the real estate investment scene are: attractive yield spreads versus neighboring CEE peers, good macro performance and a strong appetite from banks to back deals.
Migration becoming ever more relevant
Internal migration patterns are already suggesting a growing preference for Romania’s major “magnet cities” – Cluj-Napoca, Timisoara and Iasi – at Bucharest’s expense, with surveys further supporting this. With both labor and living costs lower outside the capital, companies might seek to expand/establish offices outside Bucharest; such patterns would also boost other segments, especially retail.
Industrial segment to continue delivering very strong results
Despite 2017’s record deliveries of storage spaces (around half a million sqm), the vacancy rate remained at an all-time low of close to 5 percent nationwide and 2 percent near Bucharest. We view the strong tenant demand as fundamentally sound given the boost in e-commerce and room to catch up to CEE peers. Vacancy could climb a bit amid potentially higher speculative developments and some larger tenants moving to self-developed facilities. Meanwhile, big land banks indicate that deliveries could continue to be elevated in 2018 (similar to 2017’s pace, if not higher).
Bucharest office market to focus on new hotspots
Deliveries look set to accelerate quite a bit in 2018, after disappointing in 2017. Amid an expected slight slowdown in terms of employment growth, vacancy is likely to increase slightly. The new hotspots (Center West, Piata Presei/Expozitiei) can likely be absorbed organically to a large extent. However developers are becoming much more cautious, with the pipeline for 2018 already one third lower than we would have thought 2-3 quarters ago.
Labor market becoming quite stretched
The extremely competitive labor market could limit companies’ abilities to expand, both in Bucharest and in other parts of the country (thereby limiting office market activity – leasing and new deliveries), though a potential buffer could come from external migrants returning to their native country.
Balanced Bucharest retail scene, ample room for smaller schemes nationwide
No new large projects have been announced for Bucharest in the upcoming years, just some extensions. That said, the consumption-driven growth has improved household spending appetite throughout the country, so investments will continue to focus on improving the nationwide coverage of modern retail, including via medium to smaller formats in the less populated cities.
Online retail, no immediate threat for brick and mortar
Shopping centers are still set to deliver solid results for tenants, as Romanians have a higher predisposition than regional peers to actually look at a certain product before purchasing it. Still, in order to improve footfall, malls will need to cement their status as actual destinations to spend one’s free time. This means more space for the food court and other services like cinemas or children’s playgrounds (meaning entertainment spaces of at least 20 percent of the total GLA). A smaller per capita retail stock than in neighboring CEE countries could also act as a buffer for brick and mortar versus online sales. There’s minimal risk in Romania for a “retail apocalypse.”
Residential segment to remain the all-star driver for land demand
Given the higher wages and elevated intentions to purchase homes, residential projects are still likely to remain the key drivers for land, though at the time of writing, it is still too early to judge the impact of the start of a new monetary policy tightening cycle. New office projects will likely draw demand for residential projects in neighboring areas. Since 2018 is likely to see a large number of housing units hit the market, players might become more cautious and new developments could deliver smaller projects, albeit in prime locations when possible.