Property Investment Case Study: Romania (TPI-RO-001)
Introduction:
Romania's total population is 21.7 million, making it the 9th largest in Europe. One of the most populated cities in Romania, the first is Bucharest (more than 2 million persons), followed by Iasi, Cluj-Napoca, Timisoara, Constanta and Craiova (each of them with more than 300,000 inhabitants). These 6 towns account for more than 30% of the Romanian urban population.
According to the requirements of the EU, Romania focused on economic reforms over the past few years. Romania's macroeconomic performance has been favourable with the economy showing a constant growth. Thus GDP growth has been strong (about 5% on average since 2001) and is one of the highest in Central and Eastern Europe.
At the same time, in 2004 the inflation was 9.3 % per annum, and lower than 10% for the first time for many years.
Last year, Standard and Poor's increased the sovereign debt rating of Romania: long-term foreign moved to BB1 (from BB) and long- and short-term local were raised to BBB-A-3 (up from BB+ and B respectively). With a "stable to positive" outlook, this reflects the long term benefits from structural improvements in the public sector, coupled with EU membership. Standard and Poor's was positive for upgrading the currency to investment grade in the medium term, if further reforms were implemented. This happened on the 06.09.05 when Romania was upgraded by Standard and Poor's to BBB-.
As a result of the significant progress towards macroeconomic performance, Romania registered an improvement of the business environment and thus the increasing of the foreign direct investment. According to the data provided by the Romanian Agency for Foreign Investments and the National Bank of Romania, the foreign direct investment in 2004 reached the record level of EUR 2 billion, compared to the level registered in 2003 which was EUR 1.39 million. The foreign investor's interest focused on those industries with a high growth rate, including automotive industry, IT & electronics industry, services, as well as the real estate market. Romania is proving to be a most interesting opportunity for investors, as the speculators are replaced by major players anxious to secure their place in a rapidly growing, increasingly stable and ever more Western environment.
The real estate sector continues to be one of the most dynamic and sought after sectors. The opening in 2004 of the National Agency of Real Estate Cadastre and Publicity will contribute to the simplification of the real estate properties registration and data administration. The new institution will gather under one entity the former cadastral system and land registry book. This measure represented the materialisation of one more UE standard, in order to obtain a greater information transparency in the real estate market, which will surely contribute to the fast growing evolution of this market
Location:
Southeastern Europe, bordering the Black Sea, between Bulgaria and Ukraine.
There is a certain symmetry in the physical structure of Romania.
The country forms a complex geographic unit centred on the Transylvanian Basin, around which the peaks of the Carpathian Mountains and their associated subranges and structural platforms form a series of crescents. Beyond this zone, the extensive plains of the south and east of the country, their potential increased by the Danube and its tributaries, form a fertile outer crescent extending to the frontiers.
There is great diversity in the topography, geology, climate, hydrology, flora, and fauna, and for millennia this natural environment has borne the imprint of a human population.
Economy:
Romania's total population is 21.7 million, making it the 9th largest in Europe. One of the most populated cities in Romania, the first is Bucharest (more than 2 million persons), followed by Iasi, Cluj-Napoca, Timisoara, Constanta and Craiova (each of them with more than 300,000 inhabitants). These 6 towns account for more than 30% of the Romanian urban population.
According to the requirements of the EU, Romania focused on economic reforms over the past few years. Romania's macroeconomic performance has been favourable with the economy showing a constant growth. Thus GDP growth has been strong (about 5% on average since 2001) and is one of the highest in Central and Eastern Europe.
At the same time, in 2004 the inflation was 9.3 % per annum, and lower than 10% for the first time for many years.
Last year, Standard and Poor's increased the sovereign debt rating of Romania: long-term foreign moved to BB1 (from BB) and long- and short-term local were raised to BBB-A-3 (up from BB+ and B respectively). With a "stable to positive" outlook, this reflects the long term benefits from structural improvements in the public sector, coupled with EU membership. Standard and Poor's was positive for upgrading the currency to investment grade in the medium term, if further reforms were implemented. This happened on the 06.09.05 when Romania was upgraded by Standard and Poor's to BBB-.
As a result of the significant progress towards macroeconomic performance, Romania registered an improvement of the business environment and thus the increasing of the foreign direct investment. According to the data provided by the Romanian Agency for Foreign Investments and the National Bank of Romania, the foreign direct investment in 2004 reached the record level of EUR 2 billion, compared to the level registered in 2003 which was EUR 1.39 million. The foreign investor's interest focused on those industries with a high growth rate, including automotive industry, IT & electronics industry, services, as well as the real estate market. Romania is proving to be a most interesting opportunity for investors, as the speculators are replaced by major players anxious to secure their place in a rapidly growing, increasingly stable and ever more Western environment.
The real estate sector continues to be one of the most dynamic and sought after sectors. The opening in 2004 of the National Agency of Real Estate Cadastre and Publicity will contribute to the simplification of the real estate properties registration and data administration. The new institution will gather under one entity the former cadastral system and land registry book. This measure represented the materialisation of one more UE standard, in order to obtain a greater information transparency in the real estate market, which will surely contribute to the fast growing evolution of this market
Property Market:
Several years ago, Romania and all other former communist countries, did not have a proper real estate market, as all the properties were practically state-owned. Things have changed since then, due to the passing of several property laws. Now we can say that opportunities abound. The real estate market shows spectacular dynamics by increasing the number of investors and by the number and value of transactions. This is due to the general improvement in the business environment and to the increasing of the investments’ attractiveness by changing the country's exchange rate and by the proximity of the entry date into the EU. Investors with experience in the real estate business in Eastern European Countries feel that there will be the same positive development in Romania as there was in the countries which have already joined the EU in 2004.
The institutional investors, private retirement funds and investment funds are evaluating the investment opportunities and consider that Romania is a market with major potential. The country is now officially on the map of most of the important real estate funds in the world. They are about to identify opportunities on a market that still lacks in investment grade products. Therefore we can still see the generous yields which can be obtained here, especially if we take into consideration the relative low level of risk.
The lack of institutional products influences all segments of the investment market. A focus on development and a compression of yields has been observed. For example in 2002 the office market showed only five significant transactions which brought a yield of 12.5%. In 2004 the yields decreased to 10.5%.
High street retail is one of the most sought after products for smaller investors. Again, the scarcity of good quality shops for sale pushed yields down, the best products on the market now yielding as low as 10%.
The lack of products is most acute in the industrial market, where most of the space is represented by refurbished old warehouses that will not be able to compete with Western standard products in a few years.
Because of the characteristics of the Romanian residential market (a strong propensity to own versus rent), the residential segment of the investment market is still focused on development. There are many small investments of one to several apartments or villas to be rented (usually to expatriates) but nothing on the scale of Western lease developments. On the residential side, the biggest profits are, and will continue to be, in development, especially as the long awaited middle income housing projects become a more and more concrete opportunity due to rising income and available mortgage schemes.
Examples:
Attractions:
Romania includes a rich tapestry of preserved artistic expression and vibrant cultures: Bucovina has the richest of cultures with elaborately painted churches and monasteries with exterior Biblical frescos. Transylvania's mountains have picturesque villages where the region's medieval Saxon heritage remains evident. In Maramures, ancient customs are a way of life where some residents dress in bright, hand-woven traditional fabrics. Many buildings, from exquisite churches to plain dwellings are made of wood, often carved with hundreds of symbolic motifs. Bucharest, with its detectable Parisian flavour, offers fascinating museums of art and Romanian culture. Here is a country of pristine villages and picturesque landscapes, vibrant towns and modern cities.
Appropriate activities apply to every area of Romania. Water-skiing, wind-surfing, hydro-biking, diving and swimming on the Black Sea coast; skiing, snowboarding, sleigh-riding, hiking and climbing in the mountains; walking and horse-riding in the hills; ice-skating and boating on the lakes. Sports centres and amusement parks are situated close to populated areas; restaurants, bars and night clubs in the cities and resorts. Your checklist of places to visit should include Bucharest for sight-seeing in a leading capital city; the Danube Delta, the largest area of its sort in Europe, for wildlife; Peles Castle which was started in 1873 during the reign of Prince Karol I and which displays the new Germanic Renaissance style; Bran Castle, famous for its beauty and legendary Count Dracula connections; Moldova's monasteries, which date from the 15th Century; St Ana Lake, the only volcanic lake in the country; and the Prahova Valley, for its renowned winter resorts.
During the latter half of the 20th Century, the Communist system promoted athletic, gymnastic and sporting activities, but much was focused on the high standards of its elite performers. Now the tendency is to appeal to the interests of ordinary people who want to enjoy, rather than excel at, leisure pursuits. Facilities, comparable to those of western countries, are to be found in the hotels and clubs with their swimming pools, saunas, sunbeds, fitness circuits, tennis centres and bowling rinks.
Transport Infrastructure:
No data available
Local Mortgage:
No data available
Inflation:
No data available
Economic Growth:
GDP 5.2%
Sunshine Days:
No data available
Annual Rainfall:
Average annual rainfall amounts to 26 inches (660 millimetres), but in the Carpathians it reaches about 55 inches, and in the Dobruja it is only about 16 inches.
Temperatures:
Winter: -7 Degrees C
Summer: + 30 Degrees C
Property Price Inflation:
Real Estate sales prices have increased with approximately 40-50% during the period of June 2003 - September 2004. 2005 showed a further increase in prices of about 30% till end of June.
Local Currency:
No data available
Cost of Living Index:
No data available
Income Tax:
No data available
Property Tax:
Transfer taxes: A stamp duty, including a fixed amount and percentage calculated on the value of the real property ranging from 0.5% to 3% (subject to 50% discount for transfers of undeveloped land), must be paid for notarisation of sale-purchase contracts involving real estate. Transfer of shares in a Romanian company owning property is exempt from VAT. Sale of property may also necessitate the payment of capital gains tax of 16%, or 10% if the property is owned for at least two years. The buyer as owner of property is subject to property tax (0.5% to 1% of the book value of the building).
Building tax - Owners of buildings and special constructions are subject to building tax, irrespective of their location or function. For individuals, 0.2% is applicable on the value of buildings located in urban areas, and 0.1% elsewhere. For companies, building tax ranges between 0.5% and 1% of the accounting value. This percentage is increased to between 5% and 10% if the building has not been revaluated in the last three years.
Land tax - Owners of land are subject to land tax which is established at a fixed amount per square metre, depending on location. Land located outside urban areas will be subject to a tax of ROL 10,000/ha (about 2.26 EUR), irrespective of its category of usage and area.
Source:
Richard Grotendorst / Cristina Clujescu
PricewaterhouseCoopers Romania provides a full range of business advisory services to a wide array of clients, including local state owned and private enterprises, central government bodies, and leading international corporations. It operates in Romania, Timisoara and Cluj-Napoca and in the Republic of Moldova.
(www.pwcglobal.com/ro) Under the Romanian VAT legislation, the rental or concession of real estate is VAT-exempt without deduction rights. However, taxable persons registered for VAT may choose to apply 19% VAT on fees charged for the rental or concessions of real estate. The sale or lease of real estate is subject
Capital Gains Tax:
On the sale of real estate by a local company 16% profit tax is due on the difference between the sale price and the fiscal book value. The capital gain from the sale of shares in a Romanian company is also subject to 16% profit tax. Please note that Double Tax Treaties do not always allocate the right to tax the capital gain derived from the sale of shares in a Romanian company to the country of residence of the shareholder if the assets of the company (in-)directly principally consists of real estate. For a direct investment, any profit (after deduction of expenses), including capital gains, related to Romanian real estate earned by a non-resident company is subject to 16% profit tax. Under most of the currently applicable Double Tax Treaties, income obtained by non-residents from real estate property located in Romania is taxable in Romania. Ownership of real estate does not necessarily constitute a permanent establishment in Romania.
The 10% profit tax rate may apply until 30 April 2005 to capital gains from the sale of Romanian real estate as well as from the sale of shares held in Romanian companies, provided the transaction does not involve related parties and the property or shares were held for more than two years.
Buying and Selling Costs:
Notaries and notarial fees: Mortgages, transfers of real property and granting of other in rem rights must be certified by a notary. The notarial fee is negotiable but normally ranges from 0.5% to 1%.
Rental Yields:
If the landlord is an individual, the net rental income for buildings (i.e. after a deemed expenses deduction of 25%) is subject to individual income tax at a flat rate of 16% (rate as of 1 January 2005).
If the landlord is a company, the next rental income is taxed at 16% profit tax (rate as of 1 January 2005). Expenses incurred for deriving rental income are tax deductible. In their Articles of Association companies should have "rental activity" listed as their object of business in order to be allowed to let real estate property.
Report Compiled By:
PricewaterhouseCoopers Romania & The Property Investor Magazine
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Report ref: TPI-RO-001
Date created: 15-01-2006
