The trend in property acquisitions accelerated in the final months of the year in the context of proposed changes in tax legislation, in particular the increase in the minimum VAT rate on housing from 5% to 9% for properties up to around €120,000, as well as increases in notary fees, according to the annual report published by Colliers. As a result, many buyers rushed to complete transactions before the end of the year and, in Bucharest at least, December was a record month with the highest number of residential sales in 15 years.
“A notable transaction in 2023 was related to a capital source largely absent from the local investment market: domestic institutional investors. In 2023 the asset management arm of the largest local bank, BT Asset Management, bought the real estate properties of Amethyst Romania in a sale-and-leaseback deal of €12 million. It is important for the local real estate capital markets that this sector grows in the future”, explains Robert Miklo, Director, Investment Services at Colliers.
Over the past year and a half, the limited availability of financing, coupled with higher interest rates, has caused prices to fall and yields to rise across much of the world, including Romania. However, Colliers' consultants point out that Romania missed much of the downward yield movement over the past decade and is now seeing less of a correction than others. So, in the absence of major benchmark deals to really show where the market is, they are currently quoting yields in a range. As a result, prime office yields in Romania were between 7.25% and 7.75% at the end of last year (compared to 6.75% at the end of 2022), prime retail yields were between 7-7.50% (compared to 6.75% at the end of 2022) and prime industrial yields were between 7.25-7.75% (compared to 7.50% at the end of last year).
“Eurostat statistics show that about 95% of Romanians own their own home, and this percentage makes us the country with the most homeowners in Europe. However, many homes are actually rented, especially in the big cities. This is more evident in new buildings, especially in areas close to business centers, where the proportion of tenants is significantly higher. Many of those who, according to official statistics, are registered as owners, actually live in rented accommodation in other cities”, says Gabriel Blăniță, Associate Director Valuation & Advisory Services at Colliers Romania, explaining that in order to get a more realistic picture of the rental market in Romania, Colliers has, for the second consecutive year, launched a nationwide survey in urban areas, focusing on the 18-55 age group. The results give a more accurate picture of the situation than the official statistics, suggesting that 69% of urban residents aged 18-55 in Romania live in a privately owned home.
In general, most renters are young people aged 18-24 (25%) who have flexible jobs or are studying and cannot yet afford to invest in a home, so renting is practically their only option. Another 40% of these young people live together with family or friends. Bucharest, Cluj-Napoca, Iasi, Timisoara, and Brasov are the main beneficiaries of internal migration and have become the fastest-growing urban centers and metropolitan areas in Europe over the last 20 years.
At the same time, the number of foreigners choosing Romania in search of a better future has increased. As a result, 2022 marked two firsts: the resident population increased for the first time since 1989, and the number of newcomers to Romania outnumbered those who left (by 85,000). Foreigners tend to be employed in construction, hotels and other entry-level jobs that do not require experience. In terms of housing, those who are not provided with accommodation by their employer prefer to share the rent with more than one person in order to reduce costs.
A few years ago, the housing market was more favorable for buyers because, once they had managed to raise the amount needed for the deposit, the loan rate was significantly lower than the rent for a similar property. But this dynamic has now changed in Bucharest and other large cities, especially in central areas, where rents for new apartments are as much as 30% below loan rates. Although rents in Bucharest have risen by an average of 10% over the past year, renting remains a cheaper option than buying, according to Colliers. By comparison, rents in Warsaw and Prague have risen by between 25 and 40 per cent. In other words, in all major regional capitals except Sofia, rent is now cheaper than bank loan rates.
Currently, there are almost 1,000 residential units in pure rental projects in Bucharest, and more than 3,000 units are in different stages of construction, but Colliers specialists estimate that in the next 2-3 years the segment of pure residential rental projects has the potential to reach 5,000 units.
Even though Romanians are interested in renting, the desire to become homeowners is still strong. Compared to other Eastern European countries, Romania is still more affordable for buyers. Colliers' data shows that in Bucharest, a Romanian needs on average the equivalent of 8 net annual salaries to buy a 60-square-metre apartment, a situation that hasn't changed much in more than a decade, although it is slightly higher than before the pandemic, when it was around 7 years' salary. In 2008, at the height of Romania's property bubble, the same house would have cost roughly the equivalent of 25 years' average annual salary.
When analysing the performance of the property market and the future outlook for prices, Colliers consultants believe it is essential to monitor the interaction between supply and demand. Data from the National Statistics Institute on supply, together with transactions reported to the National Land Registry and Cadastre Agency, which cover a wide range of transactions from new home purchases to those on the secondary market and even those resulting from inheritance, show that the gap between supply and demand reached significant levels in the fourth quarter of last year, much higher than before the pandemic.
“Maintaining such a large gap for an extended period could lead to increased price pressures, but the start of the year could be smoother again as the exceptional factors that boosted the fourth quarter have faded. Elsewhere, house prices are difficult to estimate as they are highly segmented, both between different cities and between product types, location and more. On average, however, house prices are rising at single-digit rates, with top-of-the-range products rising slightly more (just over 10%) in less competitive areas. With average wage growth accelerating to 15% by the end of the year, this means that housing affordability will improve again in 2023, reversing the negative trend of previous years. It is also worth noting that mortgage purchases, which accounted for more than 60% of all transactions in some parts of the country, have fallen to around 50% in early 2023”, explains Gabriel Blăniță.
While 2022 saw a record number of residential deliveries, slightly exceeding the previous record set in the last three years, 2023 experienced a slight decline. In the first three quarters of the year, the volume of housing starts fell by more than 5%, and in the third quarter the year-on-year decline was more than 11%, according to the latest data from the National Institute of Statistics. However, even with a decline of around 5-10% for the year as a whole, last year's supply is still quite substantial compared with the annual average over the past decade. Another important factor noted by Colliers' consultants is the sharp fall in housing unit deliveries in rural areas, offset by a slight increase in urban areas. This trend could be linked to the end of the pandemic and the return of people to the big cities to continue their daily activities, including education and work.
“The conditions for long-term growth are still in place. Romania's cities are already overcrowded compared to those in the region, and the trend of migration from rural areas and smaller towns to large metropolitan areas continues. In addition, the short and medium-term outlook is also promising: wages are rising again sufficiently to outpace consumer price growth, and we expect interest rates to fall this year. If the labour market remains strong, the outlook for the housing market in 2024 is optimistic. However, we expect the first half of the year to be less active than at the end of last year, but this should not be interpreted as a long-term downward trend for the market. In terms of price growth, we are likely to see a continuation of the trend from 2023, with a slight single-digit increase, below the level of wage growth, while indicating an improvement in affordability. A major uncertainty in this scenario is whether supply will be able to keep up with demand or whether it will face administrative obstacles that will slow down this process”, concludes Gabriel Blăniță, Associate Director Valuation & Advisory Services at Colliers Romania.
