The investors who would have bought anything no matter the price, sometimes even without knowing what they were buying, are gone and retail space deals only involve projects on life support.
Five or six years ago investors would fight over projects that were not even done yet believing some nicely packaged and presented stories about the “tremendous potential of the Romanian market” writes BUSINESS Magazin.
What has become of investors who bought malls in Romania?
They are probably back home in Austria, Germany, UK or any other developed country licking their wounds, considering the projects bought are now worth merely 20%, 30%, 40% or 50% at best of the price paid back in the day.
The investors’ appetite suddenly vanished when consumer spending in Romania declined because of the economic crisis and of the austerity measures; therefore mall acquisitions are no longer seen as a lucrative business, not even on long term.
There has not been any shopping center acquisition on the local market in the last four or five years as the investors, few as they are, have focused on office buildings. The only retail deals were closed for ailing shopping centers such as Liberty Center in Bucharest, recently purchased for EUR60 million by its creditor banks, some say, Oradea Shopping City bought by businessman Puiu Popoviciu and City Mall in Bucharest.
Why is not anybody buying the good projects?
“They are very expensive (…). And loans today are not only expensive but also hard to get. These projects we’re talking about were expensive to develop on high-value land, with high labor and construction costs,” says Radu Lucianu, managing partner of Capital Property Advisors.
Real estate consultants say that besides the financing trouble of the last four years, owners are not that willing to sell their property because they are aware they could not get a price to match their expectations regardless of how good it is.
Most owners are not in a position of having to sell. The banks offer limited funding for the retail sector and there are buyers willing to buy the right product. City Mall and Liberty Center were eventually sold at auction, which demonstrates the interest is there when the price is right, says James Heyworth Dunne, head of Capital Markets and Valuation Department of CBRE Romania.
Whereas retail investments used to make most of the real estate news in the past years, the number of such news has gone down lately.
The deals on the segment are now mainly closed for land to develop retail space, such as the former sites of Vulcan, Tricodava and Grant Metal plants in Bucharest and the Tractorul plant in Brasov (central Romania). Those who invest in retail are interested in developing their own projects rather than buying already existing ones, and some real estate consultants say this is because of the limited supply of such assets up for sale.
“The lack of transactions with shopping centers, except for the recent auction of the Liberty Center, is largely because of the lack of first rate projects offered for sale in Bucharest at an attractive price (8%-9%) or of ‘forced’ sales at very attractive prices, which would be real opportunities for those looking to buy,” explained Cristina Ustinescu, investments director of consultant DTZ Echinox.
On the other hand, real estate consultants say that negotiations are in progress for a number of retail projects, some of which are in real trouble and can be had for a very low price. There are also significant doubts about any transaction reaching completion considering Romania is still suffering a great deal in terms of credibility and stability.
Large portfolios of retail space are available on the market now but it is unclear whether they will be sold soon or not. Investors’ activity is influenced by the usual challenges: global economic factors, limited and expensive financing, the gap between sellers and potential buyers’ expectations, said Troy Javaher, managing director Jones Lang LaSalle Romania.
According to Javaher, the specificity of the local market is also an important factor limiting transactions. He says that in many shopping centers, the gap between the rent in the contract (signed in 2007 or 2008) and the rent collected (which includes the cuts offered to tenants in the last three years) is quite wide. There are only a few prime shopping centers where this gap is small and as a result the rest of such centers stand little chance of being sold any time soon.
What would persuade investors to buy and owners to sell?
“A good price. That is a 9 to 9.5% yield for owners. The problem is that those willing to buy won’t go beyond 8% to 8.5%,” said Radu Lucianu.
Yields before the crisis had gone down towards 6% to 7%, a time, which, although long gone, is not easy to forget for investors. The annual yield is a ratio of the revenue generated by the property in question and the amount paid to buy it; the higher the yield, the lower the price.
Therefore deals fall through with parties failing to agree on a price. Moreover, banks will grant funding only for good projects (those with a good occupancy rate) and not to the failed projects or those with high vacancy rate (over 30%).
Buyers prefer the fully rented assets doing well, but such assets are the most valuable for sellers, too, which is part of the problem, said CBRE Romania’s James Heyworth Dunne.
The attractiveness of such investments resides in the yield, the location, the tenant mix, the growth potential of the revenue generated by the property, the trend of the consumers’ buying power, existing and potential competition.
Only a small number of projects have drawn the investors’ attention with their quality and volume lately.
“The yields investors are looking for range from 20% to 30% IRR (internal rate of return), or at least 15% cash on cash, net of tax. Funding is extremely limited, even when acquiring such projects and on top of that I’d add the lack of trust or more precisely the high unpredictability of Romania’s economy and political scene,” Cristian Ustinescu explained.
All of which influence the purchasing power, the revenue and the plans of companies considered major tenants for the Romanian market. Under the circumstances, it is easy to see why no such deals are happening now.
(English version by Loredana Fratila-Cristescu)