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Real Estate: Real estate market ending a tough 2023
The housing market contracted in 2023 on both the supply and demand sides. The number of residential project completions in the first half of this year, compared to the same period of last year, decreased nationally by 2%, and the volume of construction works in the first 9 months of 2023 decreased by 7.2%, but with significant regional disparities, according to the latest Financial Stability Report from the National Bank of Romania (BNR).
The trend is expected to continue in the coming period, given on the one hand the significant decrease in building permits for residential buildings, with -24% in January-September 2023 compared to the same period of 2022, and on the other hand the maintenance of the sustained pace of increase in construction costs for residential buildings, with +15% in the first 9 months of the year.
Real estate transactions recorded a decline in the first three quarters of the year compared to January-September 2022, both nationally, by -18%, as well as in the main regional centres, with -21% in Bucharest and Iasi, -16% in Constanta, -14% in Cluj, and -10% in Brasov. Territorial discrepancies were also evident in terms of trading activity, with the largest decrease in Olt County (-68%), followed by Teleorman (-55%). At the opposite end of the spectrum were Calarasi county with +23% and Alba County with +21%. At the EU level, property prices showed divergent developments, with 9 of the 27 Member States recording declines in the second quarter of the year. The largest drop was in Germany (-10%), while Croatia recorded the fastest house price growth, with +14%. In Romania, residential property prices in Q2 2023 remained relatively constant compared to those in the previous year, at +0.1%, but regional disparities remain significant even from this perspective, following asymmetries in economic development.
“Cluj county ranks among the regions with the highest housing prices at EUR 2,329/sqm in apartment blocks in Q2 2023,” the BNR Stability Report shows.
High construction costs have continued to put pressure on new housing prices, intensifying their increase compared to the prices of existing housing, by 4.4% versus -2% respectively in Q2 2023, year-on-year. As for the residential real estate market’s accessibility, the “price per income” indicator (the number of years of income needed to cover the price of a home) highlights important heterogeneities at the regional level, recording values ranging from over 11 years in Cluj or Constanta to 7 years in Bucharest.
COMMERCIAL MARKET
Concerns about dynamics in commercial real estate markets are growing at the European and global levels. In Europe, according to the latest European Central Bank (ECB) assessments, the commercial property market remains on a downward trajectory amid tighter financial conditions and macroeconomic uncertainties, which have led to a fall in demand, particularly in the office and retail segments.
“The vulnerabilities faced by the commercial real estate market are amplified by a number of structural changes that have taken place in recent years, such as the extent to which online trade has taken off, the need for more flexibility in terms of leased office space, and the impact of climate-related policies. Against the backdrop of the low interest rates of the past decade, the commercial real estate market went through a period of expansion, followed by sharp corrections at the onset of the covid-19 pandemic,” the report states.
As economic activity picked up, prices also resumed their rise, surpassing pre-pandemic levels. But starting in the second half of 2022, as interest rates rose, commercial real estate prices saw a decline. As a result, commercial property prices in the euro area fell by 10% year-on-year in the second quarter of 2023. Steep falls in commercial property prices may have a negative impact on commercial property revenues and on the liquidity and solvency of firms in the construction and real estate sectors.
In Central and Eastern Europe, the volume of commercial real estate investments in the first three quarters of 2023 declined by 46% year-on-year, amid investor concerns about rising interest rates and uncertainty about macroeconomic developments, with the largest declines of around 60% in Romania and Poland.
Compared to capitals in the region, Bucharest has higher capitalisation rates for prime properties than Budapest and Sofia do for commercial space, and higher than just the Bulgarian capital for office space. In Romania, activity on the commercial property market slowed down in the first part of the year, in line with regional developments. Investment volume fell significantly, by about 63% in the first 9 months of 2023 compared to the same period of last year, to EUR 243 million.
At the regional level, the biggest drop in investment was recorded in Bucharest (-73%), while major regional centres such as Cluj, Brasov or Timisoara saw average declines of 47%. By destination, investments were mainly oriented towards commercial premises, followed by offices, with a share of 23%, and industrial premises, with 16%. The most important investors on the Romanian market in Q3 2022 by origin of capital were domestic investors, with a share of 38%, followed by Greek investors, with 32%, Belgians with 16%, and Germans with 14%.
Construction costs continued to put pressure on operations on the commercial property market, with the average cost index for non-residential construction rising by 9% in the January-September 2023 period in annual terms, but the pace of cost growth moderated from the previous corresponding period, when it had stood at +20%. At the same time, the volume of construction work for non-residential buildings increased marginally by 1.6%, significantly lower compared to January-September 2022 versus January- September 2021 when it was up 18%.
“The outlook is for activity to remain at the same levels, given that even though the number of building permits issued for nonresidential buildings in the first 9 months of 2023 decreased by 4% year-on-year, the average usable floor area authorised for construction remained relatively stable. From a regional point of view, the decline in building permits by usable floor area occurred mainly in the Bucharest-Ilfov region (-43%) and the South-West region (-32%), while the remaining regions saw increases in the authorised usable floor areas,” the report reads.
Rental prices continued to increase across all segments in Q3 2023 compared to the same period of last year. The largest rises were in the office segment, +16%, followed by industrial spaces, +8%, and commercial space, +5%. Capitalisation rates for prime premises increased substantially in the office and commercial segments, by 15% and 7% respectively, while they increased moderately in the industrial segment, by 3%. The vacancy rate for industrial premises rose by 0.6% but remains at a low level of 4.2% compared to that of office premises, where the vacancy rate is around 13%.