COLLIERS n Romania Research Report

8/11/2019 COLLIERS n Romania Research Report

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CONTENTS

ECONOMIC OVERVIEW4

OFFICE6

RETAIL8

INDUSTRIAL10

LAND12

INVESTMENT14

CONSULTING16

VALUATION18

BUILDING SURVEYING20

HOTEL22TAX ASPECTS24

LAW26


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Colliers International, Real Estate Review Romania3

Dear friends,

After 14 years of intense activity on the Romanian real

estate market, I can say we have been fortunate to live

through a major boom and a major crisis, experiencingall the ups and downs that come with these.

We have quickly grown from a team of 5 in 1996

working to service our first clients from a one

room office: Microsoft, Coca Cola, Unilever and

MobiFon to over 100 people and hundreds of clients

serviced in 2008 across all major industries.

And then came 2009 and everything changed.

The global crisis hit Romania much harder than anyone

imagined and brought us back to reality, working hard for

every client and rethinking the way we run our business.

It became imperative to change the attitude towardsclients, to understand them better and address their needs

with innovative services we had to make a change.

And we did.

We restructured the firm, closed a division (the

residential sales), added a new business line (focused

on servicing banks) and changed the whole mentality

of the team by going back to our values. It was not

easy but, looking back at 2009, I think we made the

right decisions given the situation the market was in

and we allowed the company to fight and survive.

I can say with confidence that after the crisis, Colliers

Romania will emerge as a new company, with stronger

values, better services and most importantly, as a more

human company. Our young and energetic team is

putting all their efforts this year to offer a personalized

touch for each client, with more attention paid to

details and a fresh air in the solutions they provide.

There is not much to say about the Romanian market in 20

The overall lack of confidence affected demand for spaceof any type, most companies choosing to wait and

see the effects of the crisis and so the market activity

dropped by 70 80% compared to the boom years.

Nobody knows when the market will pick up again.

Optimists say that 2010 is going to bring more

activity and growth in the economy while pessimists

say that 2010 will bring another major crash in the

over-leveraged financial markets pushing the global

economy into the deepest recession ever.

While watching closely the macro-economic changes

and learning about crisis management and newcustomer strategies, I believe the answer may be

less technical and more linked to the consumers

confidence and the psychology of the masses.

Are we a generation/nation of optimists or pessimists?

Are we strong enough to take the faith into our

hands and change the legacy of the history?

Like Winston Churchill, I am an optimist, there

is no much use of being anything else.

Yours sincerely,

Bogdan Georgescu

Managing Partner, Colliers International

When will the market recove

The answer may be less

technical and more linked tothe consumers confidence a

the psychology of the masse


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4

After Romanias economy recorded an average growth of 6%

per year between 2001 and 2008, the global developments of

last year reversed this trend with a series of negative effects.

A contraction of 7% was announced for the economy, while

Foreign Direct Investments halved to EUR 4.9 billion in 2009.

Unemployment has grown throughout the year and was

estimated to reach around 8% by year-end. Unemployment is

expected to grow further in 2010 as bankruptcies loom andthe public system is in need of reform. The accumulation

of foreign-currency denominated debt by households and

companies and a depreciation of about 10% of the local

currency against the Euro during the second half of 2008

put a strain on debt servicing by borrowers in 2009.

The budget deficit was expected at more than 7% of

GDP and the government was obliged to agree to

EUR 20 billion of international aid led by the IMF.

On the positive side, the current account balance has

significantly improved. The deficit contracted by 69%, from

EUR 16 billion to EUR 5 billion, which represented 4.5%*of

GDP (versus 12.3% at the end of 2008). Although the FDIvolume represents roughly half of the activity recorded

in the same period a year before, it indicated continued

interest of investors towards Romania and has successfully

covered the current account deficit up to October.

Inflation was at 4.74% at the year end and is

targeted at 3.5% for 2010 and 3% for 2011.

In 2010 the Romanian economy is expected to return

to growth (albeit by a modest 0.5 2%) based on

expectations that western economies will rebound

and improve our export activity, banks will re-start

lending and consumption will start to grow. For 2011

the World Bank estimates a growth rate of 4.6%.

Lending is currently very tight due to both lack of credit

supply and its very high cost. Banks started to compete

fiercely for attracting local deposits at the beginning of

the year as foreign funding has dried up. Interest rates for

deposits in local currency recorded as much as 16% in Janu

to March, while the price of new loans exceeded 20% in th

same period. The cost of money has come down significan

by the end of the year towards 15% in local currency,

while interest rates on deposits have fallen below 10%.

The year-end exchange rate between the Euro and RON

(4.25) was considered sustainable by most analysts and

the RON could even strengthen in the following year.

Some traders in Bucharest and London are already betting

on this strengthening of the local currency in 2010.

A large domestic market, a cost effective labor pool, a

correction in real estate prices and a stable currency add

to significant opportunities for businesses and investors,

was the case five years ago. The major positive difference

to add is that Romania is currently a European Union

member, a status that provides it with significant stability

GOVERNMENT: ROMANIA HAS A PRESIDENT

AND MAJORITY COALITION GOVERNMENT

Last years demise of the coalition government arose in a

delicate period amidst the deterioration of public finances

Planned disbursements of funds from the country s EUR 2

billion aid led by the IMF were put on hold until the count

has a strong government in place able to commit to strict

IMF requirements on reforms in the public system (among

others to reduce the fiscal deficit to 5.9% next year).

ECONOMICOVERVIEW

National Bank of Romania*

MACROECONOMIC INDICATORS

2008 2009 20

Real GDP (% change) 7 7

CPI (%, yoy, eop) 6.3 4.7

Current account balance (% of GDP) 12.4 4.8

Unemployment rate (eop, %) 4.4 7.6

Sources: FocusEconomics, National Commission for Prog


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Therefore December elections were eagerly expected when Romanias former

president, Traian Basescu, was freshly re-elected and a new government was

appointed headed by the former Prime Minister Emil Boc of PD-L. After being able

to secure a partnership with UDMR and other minority parties, as well as the

joining in the party ranks of some PSD representatives, PDL is mathematically

the leader of a majority coalition, having the prerequisites to effectively lead

the government in a coming period that demands for serious reforms.

Last year brought negative effects: economic contraction, rise

in unemployment and increase of the budget deficit. But in

2010,the Romanian economy is expected to return to growth,

based on exports and a revitalization in consumption.

69%Contraction of the

current account

deficit

FDI volume washalf of the activity

recorded in 2008.

Investors continued

show interest towa

Romania.

Source: National Bank of Romania


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6

By the end of 2009 a record supply of new buildings

were developed, taking the total stock of office space

to 1,250,000 sqm. Concurrently, however, adverse

economic conditions led to a major decline in office

space transactions leading to higher vacancy rates and

lower rents. Therefore 2010 represents a an ideal time for

tenants to reduce their rental costs by securing convenient

office space at sustainable financial terms. Now is the

right time to assess the market and make a move.

SUPPLY

Office supply peaked in 2009 as close to 405,000 sqm

of modern quality space was delivered on the market,

double the amount in 2008. This was a result of projects

that started during the 2007 2008 period of boom for

the real estate industry, projects that took between 12 to

20 months to deliver, some suffering postponements.

From the total delivered space, only 15% was located in the

city centre, while the remainder was evenly split between

the semi-central and peripheral areas. While office stock

in the latter areas has grown steadily since 2006, the

evolution of CBD supply registered a slower pace due to

the reducing availability of land plots for development.

Taking a glance at who delivered office buildings in 2009,

the majority were foreign developers. Among them, three

Greek companies delivered 30% of new supply, a similar

volume to that delivered by domestic firms on the market.

DEMAND

In 2009, over 90,000 sqm of space was leased, uniformly

distributed between the three office areas. The average

space leased on the market was around 1,300 sqm.

Most companies that leased space in 2009 had

done so due to one of the following reasons:

Their current leasing agreement expired

The opportunity to find superior quality space at lowerents and also a good chance for companies

to relocate their headquarter closer to the centre

Force majeure incidents created immediate

demand for roughly 13,000 sqm on the market.

Compared to 2008, office take-up decreased by 60% last

year. To put this into perspective, more than 80% of the

leasing activity in 2008 was driven by preleasing, whereas

in 2009 none of the transactions represented pre-lets.

This situation has two main causes. Firstly, the office

vacancy rate has increased materially since 2008 so

pre-leasing was no longer essential as companies couldfind space in most of the existing buildings on the market

Secondly, taking into consideration the economic downtu

most companies were confronted with the insecurity of

their future operations or with downsizing and lay-offs. A

a result, expanding the necessary office space was not on

their agenda. Finally, companies with the need to extend

space prospected the market but did not commit in 2009.

Sub-leasing was an option for companies looking

to cut costs, especially for those with leased areas

larger than 2,000 sqm. Companies that took such

measures were from the auto industry, the construction

sector and also those in the consultancy field.

OFFICEMARKET

Colliers International monitors class A buildings, over 3,000 sqm.


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2009 economic conditions changed the market rules, as business downturn led to

significant increase of the vacancy rate. The lack of pre-leases commanded no grou

breaking for major projects. As rents dropped, 2010 is an ideal time for tenants to r

their rental costs by securing convenient office space at sustainable financial terms

By December 2009 vacancy grew considerably in all areas

and the overall rate hiked to 18% after an almost zero

vacancy in 2007 and 3% in 2008. The CBD area registered

an unusual 10% vacancy, together with the semi central

area, while the periphery peaked at a record 30%.

RENTS

While it was common to pay between 22 and 24 EUR/sqm

for CBD office space in 2008, rent levels in 2009 dropped by

20%, below the EUR 20/sqm threshold. A similar drop has

been registered for the semi-central and peripheral areas.

Although the new market conditions brought space at

significantly lower rents, relocation costs were rather high,

determining most companies to find short term solutions

and try to renegotiate or sub-lease some of their space.

In an effort to make their projects attractive to

tenants, landlords became flexible in offering incentives

such as rent free months and allowances for fit out

expenses. For tenants, such measures have the

advantage of lowering the net effective rent.

For a five year contract, it is common for a company to

benefit from a three month rent free period. For longerlease terms, free rent periods can increase. Overall these

extras lower the net effective rent by 10% or more.

FORECAST

Our research shows that 2010 will bring another ca.

200,000 sqm of new office space, 50% less than has

been delivered in 2009. This potential supply will be

found mainly in buildings where construction was held

up in 2009. In addition, unlike previous years, 2009

witnessed no ground breaking for new major projects.

There are in total around 500,000 sqm of office projects in

pre-construction phases, but with very low likelihood tha

any of these will be started in the next six months, meanithat for 2011 2012 expected new deliveries will be low.

Overall, rents will maintain their downward trend establis

in 2009 by another 10 to 15%. In some areas, where vacanc

is already high, we may even see a 20% decrease in rents.

Due to this trend, companies occupying multiple spaces/

leases will have a great opportunity to consolidate.

Also centrally located buildings, with good access, will

be available at lower rates compared to 2009 and

2008, becoming financially attractive for a larger base

of clients. For the CBD, vacancy rate is anticipated to

stay within 10%, while the overall market vacancy rate

is expected to further increase to reach 20 25%.

We expect that those companies who have closely prospe

the market in 2009 for better space at affordable rents, bu

did not commit to a space, will close their searches. This

would lead to more than 50% increase in leasing activity

compared to 2009, according to our estimations.

On the other hand, landlords will remain flexible in

their negotiation with potential tenants, continuing

to offer incentives for fit out and free rent periods,

thus lowering net effective rents. Agreements

will be more advantageous for tenants.

On the longer term, as we dont expect to see significant

new supply in 2011 while the economy and business

is forecasted to grow, the market equilibrium will

change again. For all these reasons, 2010 will likely

be the ideal time for tenants to make their move.

Horia Moldovan associate director, office leasing division

LEASE VS. PRELEASE2008 2009

Lease 18% 100%

Prelease 82% 0%

RENTS (EUR/sqm/month)

CBD Semi-center Periphery

Average rent 18 20 14 15 10 12

Parking price 120 100 90

Service charge 4 5 3 4 2.5 3.5


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8

RETAILMARKET

In a market shaken by the difficult economic period,

where overall private consumption levels dropped

by 15%, retailers main focus in the first half of 2009

was the optimization of their store network.

SUPPLY

2009 witnessed the highest discrepancy between the

number of shopping centre projects officially announced

for delivery and the actual delivery of space. Some projects

were delayed for 2010, while others were postponed for

an indefinite period of time. Thus, although more than 20projects were announced to be completed in 2009, totalling

835,000 sqm of GLA, only 27% of the announced retail space

was actually delivered 158,000 sqm of GLA in Bucharest

and a further 70,000 sqm of GLA outside of the capital.

The supply of existing retail space available for leasing was

reduced by the closing down of two retail schemes (Armonia

Braila and Trident Sibiu). Concurrently it was boosted by

rising vacancy levels in existing shopping centres. Adding

all the sources of retail space supply, namely current

vacancies in existing shopping centres and new projects

with anticipated delivery in 2010 and 2011, total availability

of modern retail space now stands at around 337,000 sqm.

Of this, 128,000 sqm are available in existing centres while209,000 sqm are offered for prelease in future developments

both in Bucharest and other locations nationwide.

DEMAND

In an attempt to ensure the survival of their brands, retailers

started to implement various restructuring strategies

by looking at each of their stores as a profit centre. Thus,

they applied cost reduction measures ranging from rent

renegotiations to the closing down of unprofitable locations.

Despite such measures, some retailers did not

manage to meet their financial obligations towards

creditors and were forced to declare insolvency.

Even though insolvency is seen as a drastic undertaking,

for retailers with cash flow issues, it represents a legal

protection from creditors that provide them with the

opportunity to restructure and renegotiate their contract

with suppliers and with landlords. Therefore, even if a

retailer is under insolvency, they are still in a position

to maintain well performing stores and to expand innew locations if very good opportunities arise.

The first part of the year was very poor in terms of

leasing transactions. In the second half we noticed a

significant increase in demand for retail space, especially

in existing shopping centres. Thus, retailers that managed

to adapt to the new economic conditions started to

look strategically towards the future and seize the good

opportunities that appeared on the market: obtaining

locations in well performing shopping centres at

competitive rent levels. Moreover, 2009 also marked the

entrance of a few notable brands such as Decathlon,

C&A or Kiabi. The new brands focused first on opening

locations in Bucharest where they targeted both theexisting and the newly delivered shopping schemes.

The GLA we presented excludes the hypermarkets

and other big boxes from the retail schemes.

1

DELIVERIES

In Bucharest In the countryside

Militari Shopping Center,

Grand Arena, Cotroceni

Park, Extension of Plaza

Romania

Galleria Suceava, Galleria Piatra

Neamt, Era Oradea, Extension

of Iulius Timisoara,

Extension of ERP Focsani

Total GLA: 158,000 Total GL A: 70,000

NEW TENANTS 2009

Retail type Brands

Fashion

Desigual, Franco Feruzzi, Xs

Jack&Jones, Vero Moda, Sasc

Brooksfield, C&A, House, GA

Yamamay, Kiabi

Accessories & Jewelr y Coyoco

Health & Beauty Marrionaud

Sportswear Go Sport, Kix, Decathlon

Kids Sergent Major, Smyk

Home dco Next Home

Food Cinnabon


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RENTS

In the cost cutting mindset that dominated the economy

in 2009, retailers started extensive rent renegotiation

campaigns in almost all shopping centres. The magnitude

of the renegotiations varied dramatically from one unit

to another and it depended on the retail segment, the

reputation and performance of the shopping centre, as

well as on the importance of the retailer for the centre.

Rent reductions ranged between 10% and 50% and thus

created significant differences in rent levels betweenshopping centres, especially in the countryside. Regardless

of the level of discount, renegotiations were usually

concluded for limited periods of six months up to one year.

The strong negotiating positions of retailers that still have

the financial power to expand also forced a significant rent

decrease in projects under construction. The conditions

that some of the anchors are requiring in order to enter a

shopping centre can include, apart from a low rent, free

rent months or fit out allowances. The rent concessions

are usually granted for 1 or 2 years, though landlords

are trying to limit their loss as much as possible.

FORECASTBased on official shopping centre announcements, 2010 should

bring six new shopping centres to the market, totalling

209,000 sqm of GLA. Some of these projects may still be

delayed until 2011, while the supply of retail space in other

regional locations might continue to be impacted negatively

by further closures of poor per forming shopping centres.

Nevertheless, we expect that improving economic and

financial conditions could help some of the projects that are

currently on hold to restart construction works, but none of

these could realistically be delivered by the end of this year.

The demand for retail space and hence the number of

transactions are expected to increase in 2010, especially

towards the second half of the year. Demand will remain

focused on existing shopping centres, while pre-leases will

only be signed for shopping centres with a strong chance

of being delivered (proven financing, active construction

works) and with a good location and tenant mix. The

demand for retail space in the coming year will not be

sufficiently high as to determine a rise in the rent level.

On the contrary, the current renegotiated rents are expec

to be maintained at least until the second half of 2010. For

the worse performing centres, they are expected to see

further rental decreases last long into the end of 2010.

HIGH STREET

The general declining trend of the retail market was

felt throughout Bucharests high street market.

Nonetheless, the prime retail area still significantly

outperforms the secondary and peripheral areas

both in terms of vacancy and rent reductions.

In order to secure new tenants, landlords were compelled

reduce their asking rents by an average of 20 25% compa

to the beginning of the year (or 30 35% from the peak rea

in H2 2008). Even retail spaces with well performing tenan

suffered rent reductions through renegotiations of 15-30%

were concluded mainly for a temporary period of 1 to 2 yea

Demand for prime high-street locations came mainly from

luxury fashion brands and coffee shops. Apart from the

decrease in rents, the flourishing of the coffee shop segm

was also facilitated by the progress of infrastructure

works in Bucharests Old City Centre (Lipscani area), the

solving of legal issues with some of the retail propertiesand the areas increasing appeal to the younger crowd.

The outlook for the Bucharest prime high street in

2010 is promising as demand from luxury brands is

expected to increase. Rents, however, will continue to

witness slight reductions, especially in the secondary

and peripheral areas, as the demand from banks,

telecoms operators, pharmacies and casinos the

main clients before the crisis will remain low.

Demand for retail space and the number of transactions are expected

to increase in 2010, although not sufficient to determine a rise in the

rent level. The outlook for the Bucharest prime high street in 2010 is

promising as demand from luxury brands is expected to increase.

Georgiana Andrei manager, retail division

HIGH STREET

Area Vacancy Rent decrease

Available spaces2 Occupied s

Prime 10% 15 20% 10 20%

Secondary 15% 20 25% 15 25%

Peripheral 20% 25 30% 15 25%

asking prices

following renegotiations

2

3


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10

2009 was a silent year for the industrial market. Due to

modest deliveries, the stock of industrial space increased

very slightly, while the demand for logistic space was also

very weak during the year. The first important transactions

could be seen to the end of the second semester.

SUPPLY

At the end of 2009, the industrial stock for Inner- and

Greater Bucharest had changed very little compared

to 2008. Only 33,000 sqm of new stock was delivered

on the market, a y-o-y decrease of 90% in newsupply, taking total stock to 900,000 sqm.

Influenced by the recent economic downturn

developers stopped or postponed the construction of

their projects. New deliveries, which occurred only in

the first quarter, represented extensions of existing

industrial parks which were started in early 2008.

In these conditions, availability started to become a

visible problem on the market. Large scale space was

difficult to find, only one unit larger than 10,000 sqm

being available to potential tenants. Most logistic parks

only had units of between 1,000 3,000 sqm on offer.

Outside of the capital, Helios Phoenix delivered

15,000 sqm within Olympian Logistic Park in Brasov.

Other projects have been postponed, driven by a

lack of financing and increasing levels of risk.

DEMAND AND VACANCY

Demand for industrial and logistic space also registered a

decrease. A total of almost 100,000 sqm was leased in 200

roughly 50% of the volume recorded in the previous year.

Market uncertainty, driven by worsening economic condit

in late 2008 and early 2009, meant many occupiers froze

their expansion plans. This is the main reason why Q1

2009 recorded very low activity only 6,000 sqm of space

being leased. As companies adapted to the new reality an

moved on, leasing picked up in the latter part of the year.

In an attempt to reduce costs, tenants renegotiated

rents, reduced occupied space or relocated. These

movements have increased the vacancy rate threefold

since 2008, settling it at 12% at the end of 2009.

In the most important transaction closed on the

Bucharest market in 2009, Antalis leased 10,000 sqm

in Portland Trusts Bucharest West logistic project. The

transaction was intermediated by Colliers International.

The landmark transaction last year took place outside

Bucharest. Unilever, the consumer products conglomerate

was advised by Colliers International in securing a30,000 sqm industrial space including over 1,000 sqm

of annexed office space in West Park Ploiesti. The space

will serve as a regional distribution centre for Unilever.

INDUSTRIALMARKET


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RENTS

The winners of changing market conditions were smaller scale tenants who were able

to find more options on the market. Tenants looking for warehousing units smaller

than 3,000 sqm could find readily available space at rents representing a 10 to 15%

discount compared to the previous year. However, larger units were more challenging

to secure, and rents have not moved significantly in this area. As a result, the rent range

between maximum and minimum rents on the market has decreased substantially.

FORECAST

Millennium Logistic Park was the only speculative development under

construction at the end of the year and will add 12,000 sqm of new space to theindustrial stock in southern Bucharest. Considering this, we will have only very

limited new stock delivered on the market before the second half of 2010.

As a result, tenants with large requirements will have to secure space by pre-lease

agreements or in built-to-suit facilities in order to obtain a good level of rent or

to simply secure space. On the other hand, smaller tenants will enjoy the current

vacancy levels in terms of finding optimum locations, competitive rent levels

and favourable contract terms. As absorption of the available spaces continues,

however, landlords will not stay as flexible as they are today, which makes the

current period most attractive for potential tenants to renegotiate or relocate.

The vacancy rate is expected to increase further in the short term, up to 14% in 2010, due

to tenants who are expected to release occupied space in the first quarter of the year.

Markets outside Bucharest are also developing in terms of industrial space

supply, most notably cities like Ploiesti or Timisoara. In 2010 West Park in

Ploiesti will bring 30,000 sqm of modern warehousing space to the market, fully

leased by Unilever. In Timisoara, Invest4See will deliver the first phase of 12,000

sqm in Timisoara Airport Park, the construction of which started in 2009.

INDUSTRIAL SPACE RENTS

Area (sqm) Evolution E/sqm/mo Outloo

< 3,000 Decrease 4.50 4.75 Stable

3,000 10,000 Stable 4.00 4.50 Stable

> 10,000 Slight increase 4.00 4.25 Stable

As market conditions improve, we may see a decrease of the available space by

the end of 2010. With the occupation of the available spaces, however, landlords

will not stay as flexible as they are today, which makes the current period most

attractive for potential tenants to renegotiate or relocate their operations.

Viorel Opait manager, industrial division

12%Vacancy rate

Business uncertaint

led to cost cutting

options.

Tenants renegotiate

rents, reduced

occupied space or

relocated.


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12

LANDMARKET

After nine months of standstill, the land market in

Bucharest started to revive towards the end of 2009.

Despite the substantial re-adjustment of prices that fell

back to 2006 levels, the value of land assets transacted

last year hardly reached 10% of the value recorded

in 2008. However, the change in perception over the

last months brings confidence that the market will

witness a positive development in the coming year.

DEMAND

The demand for land properties was very limited throughout2009. The abrupt slowdown on the end-user markets

(residential, office, retail, industrial space) combined

with the fear of a potentially extended economic crisis

determined investors to be extremely cautious in acquiring

land. The lack of bank financing for land purchase was

another underlying factor of the steep fall in acquisitions.

The most active buyers in 2009 were the large retailers,

especially discount stores (such as Plus Discount,

Penny Market) and Do-It-Yourself (e.g. bauMax)

that are still continuing their expansion plans at the

national level. These buyers prefer semi-central plots

in densely populated neighborhoods or peripheral

locations benefiting from very good exposure.

Demand also came from private high net worth individuals

that were searching for very good properties at highly

discounted prices. Even some developers chose to use their

surplus of cash to take advantage of the opportunities that

appeared during this period rather than continue with

projects that were proving difficult to sell or lease. The

most relevant example is the EUR 30 million acquisition

made by Liebrecht & Wood for approx. 60 hectares of land

for commercial use located at exits from Bucharest.

The new restrictions of the Urbanism Law that came into

force on October 1st represented a big factor of concern

for potential buyers. The new regulation limits the

construction density allowed therefore some investors

have conditioned the acquisition of land upon obtaining

Building Permits, in order to insure against the risk of

attaining lower than desired building coefficients.

SUPPLY

As a consequence of the difficulty in obtaining bank financ

for developments due to the very strict conditions (40 60

equity; 40 50% pre-lease for office projects, 50 60% pre-

for commercial centers and minimum 30% off-plan sales

in case of residential projects), developers were forced to

put projects on hold. In some instances large port folios of

land were put up for sale most of which having mortgage

loans attached. Thus, they were looking for investors that

would either acquire the land by taking over the loan or

enter into a joint-venture agreement in which to bringfresh equity into a development. However, in the majority

of cases, the mortgage loan exceeded the price that

potential investors were willing to pay for the properties.

Towards the end of the year, some banks started

the long-awaited liquidation of guarantees for non-

performing loans. However, what they brought so far on

the market were mainly unattractive properties. In the

case of good properties, banks preferred to restructure

rather than execute loans. Towards the end of the year

the market also witnessed the first bankruptcy cases

among developers. The most noteworthy example was

EFG Crevedia Development, owner of approx. 124 ha of

land in Buftea, which was finally sold by the liquidatorat approx. a 75% discount from the expected price.


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PRICES

If during the first part of 2009 landowners and investors found it difficult to

estimate property values in the context of the general uncertainty in markets,

by the year end the market got closer to an expected price balance. The average

decrease in asking prices for land plots in Bucharest ranged around 40 60% of

the levels registered during the peak period. However, not all landowners were

ready to accept the market downturn and, as a consequence, we witnessed

situations of similar properties being marketed at significantly different prices.

The total value of transactions completed during 2009 was almost 90%

lower compared to that of the previous year. The price discount differedsignificantly depending on the type of buyer involved. While retailers and

companies buying to develop projects for their own use accepted discounts

of approx. 50%, investors proved to be extremely opportunistic and ready to

acquire only at 20 30% of the price they would have paid in 2007 2008.

FORECAST

The market signals towards the end of the year, including the increasing

number of closed transactions, gave landowners the confidence that 2010 will

bring more activity on the land market. We estimate that prices have almost

bottomed out and only slight downward adjustments, if any, will be seen.

We expect the first part of 2010 to remain dominated by the quest for distressed land

that has appeared only in very limited amount untill now on the market. By the end

of next spring, we should have a clearer understanding whether banks will proceedwith the execution of non-performing loans at a larger scale than in 2009, including

also good properties. Nonetheless, investors on the land market will likely start

having a less opportunistic approach and will make decisions based on the absorption

potential of the local market for end products rather than for speculating purposes.

90%Drop in transaction

volume

Large retailers were

the most active

buyers in 2009.

Demand also came

from private high n

worth individuals.

Distressed land has

been extremely sca

in 2009.

The land market was probably the quietest segment of real estate

during 2009: very few and mostly opportunistic buyers, only low-value

transactions actually completed and in small number, delayed reaction

of landowners with respect to adjusting price expectations.

Sinziana Oprea broker, land division

AVERAGE ASKING PRICE FOR LAND IN BUCHAREST (EUR/SQM)

Area Sub-area Price

Central Aviatorilor, Dorobanti, Romana, Universitate, Unirii 1,500 2,500

Semi-central Baneasa, Crangasi, Progresului, Vacaresti, Mihai Bravu, Colentina 500 800

Peripheral Sisesti, Pipera, Ghencea, Berceni, Pantelimon 200 400


14/28

14

Beyond the turmoil of 2009, the new year will provide

many opportunities for investors to buy assets in the

Romanian market. The low liquidity levels of 2009 and the

less intense competition for assets led to adjustment of

expectations by vendors and indicate towards a bottoming

out in the market. The forecasted return to growth of

the economy, the long-term undersupply of stock in

occupational markets and the return of banks support are

the primary reason for an up-turn in transaction activity.

Investors who will be first on the market will benefit most.

TWO TRANSACTIONS IN 2009

In a harsh global economic environment the Romanian

investment market came close to a standstill in

2009. However, two transactions of reference were

closed with a total value of EUR 120 150 million,

indicating that this period still provided opportunities

for investors able to close transactions.

The start of the year saw the acquisition of Fabian

Romania Limited from the London AIM market by

Black Sea Properties. The London based fund owned 11

properties, six of which were income producing offices,

with a total Net Asset Value of around EUR 80 million.

In the second half of the year, European Retail Park

Braila, a retail scheme of 53,000 sqm developed

by BelRom, was acquired by New Europe Property

Investments (NEPI) in a transaction estimated at EUR

63 million. The deal was financed by a mix of debt,

conditioned share swap and buyers equity tying the

announced yield of 9.4% to these particular conditions.

PRIVATE EQUITY FUNDS LOOKING FOR HIGH RETURN

With core funds out of play and not expected back earlier

than the second half of the year, only private equity funds

were looking at opportunities. Their targets were yielding

products that could provide 25% IRRs on invested capital.

Some funds had also yearly cash-sweep requirements,

around 15% on equity. With difficult financial markets and

no distressed sellers, these were challenging targets.

Moreover, buyers estimated rental value of proposed

projects very conservatively, which led to a substantialdiscounting of the price estimated by vendors. Although

the price changes on international markets have reduced

the expectations of local vendors, the above conditions by

investors led to prices that were mostly rejected by vendo

In terms of product classes, buyers were looking at all

commercial property assets, a sign of trust for both the

business and consumer markets. Bucharest was singled o

as a target market only by some active players, while othe

funds were looking at opportunities in the region as well.

PRICES

Four reasons made it difficult to determine fair prices

in the market last year. First was the very low liquidity.Second was the complexity of the closed transactions

either in terms of the assets traded or the financing

structure. Thirdly, the high bid/ask spreads between

investors and vendors highlighted aggressive positions by

both parties. This was facilitated by the lack of pressure

on buyers, not rushed to spend money in an unsafe

context, as well as sellers, unforced by their creditors.

The anticipated volume of distressed sales failed to appear

and some banks have even publicly stated that they would

not execute debtors but prefer alternative solutions. Four

most investors (although not all) were focused on their

IRR targets and not yields, which varied greatly dependinon the specific parameters of each player and project.

The positive outcome, however, is that the yield gap

started to close. If the estimated spread was as much

as 250 bps in the first semester, it had closed to 100

bps in some cases, in favor of buyers, by year end. This

is an important indication of a thawing market.

INVESTMENTMARKET


15/28


FORECAST

Most of the fundamentals support an attractive investment environment in the

following year, inviting investors to act on the opportunities lying ahead.

First, conditions in the international economic and financial markets have markedly

improved and investors have commenced activity in the more developed markets.

Secondly, the reducing bid/ask spread is the most important sign that there is

interest to trade by parties on both sides and that agreements are getting closer.

Thirdly, with time passing it is more likely that banks will put pressure onnon-performing products and some quality assets could feel the heat too.

Fourthly, we may soon see a new phenomenon of forced buyers. The

clock is ticking on the committed capital that needs to be spent or returned

to shareholders, which makes the least sense for money managers.

Finally, many investors believe long-term in Romania due to the size of its

market and the economic and political safeguard of its EU membership.

The country is now post-elections and there are forecasts for positive

economic growth this year. At current stock levels, the commercial

property market will be in short supply once business grows again.

We believe that the main risks to real estate investment in 2010 will be related

to Romanias coupling to the international economy. In the unlikely but possibleevent of a second round of disruptions, Romania will feel the impact.

The un-friendly financial and sluggish lease markets of last year persuaded investors

to consider more innovative schemes for financing and structuring deals. We will see

more of these approaches in the year ahead as buyers and vendors bridge the gap.

The positive outcome of 2009 is that the yield gap started to close.

If the estimated spread was as much as 250 bps in the first semester, it had

closed to 100 bps in some cases, in favor of buyers, by year end.

This is an important indication of a thawing market.

Blake Horsley manager, investment division

120 150 Mil. ETotal value of the

two major

transactions

closed in 2009

Black Sea Global

Properties bought

Fabian Romania Ltd

New Europe Proper

Investments aquire

European Retail Par

Braila.


16/28

16

CONSULTINGresidential market

Whereas until 2008 the supply of new apartments came

solely from developers, last year the market witnessed

a new supply source of new appartments: the investors.

Thus, after several years of being the largest consumers

of new residential projects, during 2009 investors entered

into fierce competition with developers to offload stock.

Demand evolved from a standstill during the first

quarter to modest activity in the second quarter and

to an increase in sales towards the year end due to

the start of the Prima Casa program in July.

SUPPLY

The end of the year found the residential market with

a total supply of approx. 9,000 unsold new apartments

available for sale either directly from developers (6,000

units) or from investors (approx. 3,000 units). Compared

to 2008, however, the volume of modern residential

supply available for sale registered a decrease of 18%.

The 6,000 unsold units are available in 35 projects, already

delivered or under construction. Although no new residential

project started during 2009, supply levels witnessed

changes either due to projects or phases being put on

hold or due to apartments reentering the market as aresult of pre-contracts being cancelled by customers.

Several projects that registered great success during the

booming years (100% off-plan sales) were severely affected

during 2009, as their delivery date occurred in the middle of

the financial crisis and many pre-contracts were cancelled

because buyers could no longer complete the sale.

The most common method of payment for off-plan

apartments required an advance payment when signing

the pre-agreement and a final installment to be paid at

the delivery of the project. As a result of the impossibility

to meet the final payment, a large number of units could

not be sold and eventually became available for sale.

The delivery of new flats continued to increase in

2009 as modern residential stock reached almost

11,000 units at the end of the year. 2,000 units were

completed during the first half of 2009; a further 4,000units were delivered in the second half of the year.

DEMAND

In total, approximately 1,300 apartments were sold during

2009 (in apartment complexes with over 200 units), a 63%

contraction compared to 2008. Putting aside investors

demand share in 2008 (around 30% of the total sales), the

reduction in end-user demand compared to last year was

50%. In 2009 investors did not buy on the residential mar

Demand behaved differently throughout the year. The

first half of the year started with a three months deadlock

period and ended with total sales of 515 units, driven by

projects that accepted the new market conditions andoffered smaller prices and favorable methods of payment.

In the second half of 2009, demand was supported by

the governmental program Prima Casa. However, the

program only influenced the sales activity of those projec

that reduced their price and offered apartments in the

limit of 60,000 EUR. Consequently, during the second

half of the year, approx. 800 more units were sold.


17/28


PRICES

The 2009 end of year analysis shows moderate reduction in prices for new

appartments (19%) comparable to the prices decrease for old units (20%). The

average price for new dwellings closed the year at 1,300 EUR per built sqm (without

VAT), marking a 19% reduction from its December 2008 level. The price had a steady

evolution throughout 2009, with a similar decrease for each half of last year.

Most developers preferred to keep higher asking prices on their lists, but were

more flexible when negotiating with clients. Therefore, the effective price

for a closed transaction may be up to 10 15% smaller. Moreover, developers

offered a variety of incentives such as: fully furnished and equipped kitchens,parking spaces, storage rooms or discounts for a limited number of units.

FORECAST

Most likely, 2010 will follow a similar pattern to last year: supply will witness very

little change, demand will depend greatly on governmental initiatives and end-users

confidence, while prices will continue their falling trend, but at a smaller rate.

The stock of 9,000 unsold units at the end of 2009 qualifies the residential

market in Bucharest as oversupplied at the moment. However, when

comparing the stock of new apartments in Bucharest to other capital

cities in Central Eastern Europe, it is easily noticed that Bucharest lags

behind significantly on a stock per capita basis. Thus, over the medium-long

term, we believe that Bucharests residential market has great potential

for further development. Over the short term (2010), real demand willgreatly depend on the Prima Casa program and any new governmental

initiatives (e.g.: 5% VAT for all new apartments regardless of price and size).

Thus we expect the downward trend in prices to continue,

although at a slower pace. We estimate that the price decline

for 2010 will be moderate, up to a market average of 10%.

63%Reduction in total

demand in 2009

Investors did not bu

residential properti

End-user demand h

halved.

Prima Casa program

supported demand

the second semeste

Note: The Consulting Division monquarterly the residential market in

terms of new supply, sales and pric

During 2009, the residential market witnessed an oversupply of delivered

apartments. In addition, the market lacked in off-plan sales. Most likely, 2010 will

follow a similar pattern to last year, with little changes in supply, while demand

will remain dependant on governmental initiatives and end-users confidence.

Stefania Baldovinescu manager, consulting division

Sources: National Institute of Statistics, Czech Statistical Office, Hun

Central Statistical Office, Central Statistical Office


18/28

18

VALUATIONMARKET

WHY ETHICS?

Recent events in the financial world have demonstrated the

destructive effects of unethical conduct and made this a

very important concern in political and business thinking.

Ethics also became a major topic in the real estate

community over 2009. Did appraisers play an important

part in the inflated values on the market or were they only

witnesses to the tremendous change which happened

during 2006 2008? Have they remained impartial and

correctly reflect underlying market fundamentals? Did theyrespect the code of ethics recommended by regulatory

institutions or surrender under the short-term pressures of

fast emerging markets? In this paper we would like to discuss

how ethics in valuation can be measured and controlled.

Clients of valuation services have the right to receive

clear answers about what measures are implemented

by a service provider in order to assure high levels

of professionalism and ethical standards.

The importance of ethics is also crucial for the provider

company itself. Research completed by RICS and issued in

May 2010, surveyed major real estate firms to reveal the

extent to which ethics matter: All the firms involved in thestudy recognize that high ethical standards are essential to

maintaining the reputation of the firm and that of the wider

profession. It is well recognized that individual professional

reputation, as well as corporate reputation, has an economic

value which is enhanced by high ethical standards. Ethical

principles therefore have a commercial value. Perhaps more

significantly, the absence of ethical values has a commercial

cost, and sometimes the cost can be devastating where the

outcome is loss of business and/or serious adverse claims1.

ETHICS IN THE VALUATION FIELD

The definition of professional ethical conduct endorsed by

the Royal Institute of Chartered Surveyors, a governingbody for the real estate profession globally, is simple

and explicit: giving of ones best to ensure that clients

interests are properly cared for, but in doing so the wider

public interest is also recognized and respected.

Taking only the first part of the definition would be a

mistake, especially for the appraisers who are often under

client pressure. The wider public interest is an essential

reason why an appraiser should remain an independent

party in the valuation process (consider for example

the relationship between a borrower and a creditor).

WHO ARE THE REGULATORY

INSTITUTIONS IN THIS MATTER?

The Royal Institute of Chartered Surveyors (RICS) has

developed the most recognized code of conduct for the ReEstate profession in Europe and beyond. RICS membership

requires respecting the rules of conduct developed by

the Institute. The most important companies on the real

estate market in Europe employ RICS members or are

member firms themselves. The general principles and

rules of conduct by RICS are presented in their Red Book

publication, Practice Statements and Guidance Notes. In

addition to the Practice Statements RICS issues separate,

but consistent, Rules of Conduct for Members and Firms.

A similar code of conduct, specially devised for appraisers,

is presented in the International Valuation Standards

by the International Valuation Standards Committee. In

Romania, these rules are officially adopted by the NationaAssociation of the Romanian Appraisers (ANEVAR).

RICS standards and rules are mandatory only for its

members, while the norms imposed by International

Valuations Standards and ANEVAR are mandatory

for all the authorized appraisers in Romania.

WHAT ARE THE MAIN PRINCIPLES OF

CODE OF CONDUCT IN VALUATION?

The main common values promoted by RICS, IVS and ANEV

are: Integrity, Competence, Confidentiality, Transparency,

Independence and the Management/Avoidance of Conflict

of Interest. In the following we will briefly describe eachof these. Unless otherwise noted, quotations are made

from the Rules of Conduct for Members, June 4th 2007,

or the 6th Edition of the Valuation Standards, both issued

by the Royal Institute of Chartered Surveyors, or the

International Valuation Standards, 8thedition, 2007.

RICS Research Report Ethics for surveyors, an educational dimension.

Commercial Real Estate Practice and Professional Ethics May 2009

1


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Integrityis related to overall professional behavior of the

valuer, advising him to be honest and trustworthy in his

or her activity: never deliberately mislead, whether by

withholding or distorting information. This code expects the

appraiser to not put his own gain above the interest of clients

and consider the wider interest of society in their judgment.

Competenceis related to the technical knowledge of the

appraiser and to the concept of specialization. Members

shall carry out their professional work with due skill, care

and diligence and with proper regard for the technicalstandards expected of them. A valuer should deny an

instruction if it is outside of his or her professional

competence or there is a limited awareness about the

proper approach of the valuation subject. In this latter

case the valuer should form a team together with an

expert in the field. Acceptance of any competence

makes a valuer accountable for all his or her actions.

Confidentialityis one of the most important concerns

in the relationship between the valuer and client. It

also affects third parties as the real owner of the

valued property or the lending bank. There is a general

duty to treat information as confidential where that

information becomes known as a result of the professionalrelationship, and is not in the public domain. If due to

an existing conflict of interest, the confidentiality cannot

be kept, then the instruction should be declined.

Conflicts of interestis another important pillar. The valuer

should declare any potential conflicts of interest, personal

or professional, to all relevant parties. This issue appears

especially when the appraiser has previously analyzed the

subject property before the current instruction or in the

case when the valuer is part of a larger company, including

other departments that have different interests in the

subject property. In this case the appraiser or the firm

should complete several actions in order to avoid such aconflict. The creation of Chinese walls is such an example. A

potential conflict should be disclosed in writing to the client,

agreement sought and obtained as to how it will be managed

and the result should be included in the terms of engagement.

Independence and transparencyare the main values

that should be achieved by an appraiser in order to avoid

conflicts of interest. A valuer should not let sentiments

or their own interest to effect professional judgment and

should share the full fact with the clients, making things

as plain and intelligible as possible. Independence is

endangered, for example, each time the valuation result is

discussed (read negotiated) in advance of its completion

with either the client or another party interested in the

valuation. It is necessary for the valuers to identify any

threats to their independence and objectivity and takethe appropriate action before accepting the instruction.

WHAT SHOULD A CLIENT KNOW BEFORE

SIGNING THE TERMS OF ENGAGEMENT?

The client should understand how the valuer must transla

into reality the ethical principles presented above and ins

that his interests are not in conflict with the service provi

Please, find below these and several other issues that the

client should address before signing a service contract:

1. What is the relevant experience of the

valuer with similar properties?

2. Are there any possible conflicts ofinterest regarding this instruction?

3. Might the valuer manage the conflict, if any?

4. How does the valuer ensure confidentiality

for the information provided by the client?

5. What is the complaints handling procedure

within the valuers company?

6. What is the level of the valuer s professional indemn

A client should know before signing the terms of engagem

if the company has working complaints handling procedu

and professional indemnity insurance. Also, the client mayask if the valuer has undertaken continuing professional

development or if he or she has recent experience in

the relevant area. These issues do not exhaustively

cover all the ethical standards, but they should help the

client create a proper relationship with the valuer.

Clients of valuation services have the right to receive clear answers about what

measures are implemented by a service provider in order to assure high levels of

professionalism and ethical standards. Ethical principles have a commercial value.

Raluca Buciuc associate director, valuation division


20/28

20

BUILDINGSURVEYING

As the market followed the negative trend of the

last year, no new greenfield developments managed

to obtain financing for medium and large projects,

either commercial, office, residential or industrial.

In the present business context, the importance of

Project Monitoring has substantially increased as it

provides to the stakeholders, most importantly to

the banks and investment funds, a useful tool for

risk management in the construction process.

Professional building surveyors can provide not only

technical supervision but also leasing contract analysis,

expenditure completion scenarios according to market

segment, demand forecasts on specific real-estate

markets and detailed expenditure cash flows.

Currently, in Romania, there are approximately 90

supervised projects under development. The monitored

projects, controlled by the most active companies in

this field, represent residential compounds (45%), office

buildings (20%) and shopping centers (35%) and a few

infrastructural developments and building refurbishments.

In the present article, we would like to offer a brief insightabout two important aspects which contribute to the

success of one project from the construction perspective:

FIDIC contracts, and proper management of soft costs.

FIDIC CONTRACT GENERAL CONDITIONS

REGARDING THE INSURANCE

In the present real-estate market, only the experienced

developers managed to succeed in delivering announced

projects within reasonable targets of budget and timeline.

For the parties involved in a construction agreement,

it is recommended to follow the conditions of a FIDIC

contract (Federation Internationale des Ingenieurs

Consultants), which can significantly reduce their riskexposure. Still, a special care should be paid to the

implementation of the General Conditions of the FIDIC

contract which must be aligned to the Romanian law.

The requirements for the construction works insurance

serve to protect the involved parties against the

potential risks related to the construction process.

Therefore, the FIDIC terms and conditions recommend

that the insuring party (the Contractor or the Developer)

shall insure the Works, Plant, Materials and Contractor s

Documents for not less than the replacement cost

including the costs of the demolition, removal of debris

and professional fees and profit. In addition, an insurance

which shall cover liabilities for claims concerning

Contractors Personnel must be maintained during the

entire working period for the involved human resources.

The insurance terms should also cover the situation whichmay arise when one party is charged in respect of an

incident for which another is responsible, either partially

or totally. So, it is recommended that the insuring party

maintains insurance against each partys liability for

any loss, damage, death or bodily injury concerning any

physical property or person (other than the ones mention

above), as a result of his entrepreneurial activity.

SOFT COSTS MANAGEMENT

When estimating the construction budget, the main focus

is usually set on the hard costs, more precisely on the dire

costs of the construction and utilities. Besides these, it is

important to take into consideration all the indirect costs

related to the project, also known as the soft costs, and testimate them not only considering the particularities of

project, but also considering the trend of the market. The

soft costs usually include project management expenditu

consultants costs, building permits, design fees, brokerag

fees, marketing costs, financial costs and contingency cos

An accurate estimate of these costs, as well as the

presence of a professional project management during

the construction process, assures a successful completion

with minimum overrun. Excesses became common

phenomena in the market during the last two years and

lots of projects were delivered with cost overruns of at

least 5 10%. These undesired additional costs can beprevented during the development process, conditioned

by a careful monitoring and analysis of the expenditures

correlated with a distribution of soft costs per category.

Our experience shows that a higher percent of soft costs i

usually allocated to project management and design fees

(around 3% of the hard costs each). Project management c

are related to the construction administration team, whil

design fees vary depending on the size and type of the pro


21/28


Other costs, which are usually estimated as percentage of the

hard costs, are the Building Permit fees, including the costs

of the building permit and the municipal taxes estimated

to be 2.4% of the hard cost and the Consultants costs

(real estate, legal etc.) which are generally calculated based

on the market evidence at 1.5% from the hard costs.

Brokerage and marketing fees are usually approximated

based on revenues generated by the project on completion.

Marketing fees are typically estimated at 1%, while brokerage

costs at 12.5% of revenues obtained during the first year for commercial properties or 1% of total revenues for

residential developments. Soft costs also include financing

fees which are usually set at 9% of the financed amount.

In addition to these types of costs, it is recommended to

allocate a safe amount to contingency (roughly 5% of hard

costs) in order to cover the possible price changes and

costs arising from special risks. From our experience, we

noticed that different overruns can also appear due to

unexpected soft costs, and the above contingency does

not always cover these additional costs. A special care is

recommendable to be paid during soft costs estimation,

in order to avoid supplementary expenditures.

The graphic below shows how soft costs (estimated

as percentages out of the hard costs) can fluctuate

during the different phases of the construction period.

Even though real estate markets are in continuous

change, the underlying trends must be understood for

a correct estimation of soft costs in future projects.

A significant amount of soft costs is spent at the beginnin

of the project, in the pre-development phase, when the

costs with Consultants, Design, Marketing and Building

Permit are considerable higher than the ones registered inthe following period. In the next phases, all these costs w

know a downward trend, with the exception of Consultan

which will slightly grow at the end of the construction. If

the movement of Contingency depends of the Hard Costs

evolution and Financial Fees depends of the total costs

evolution (hard and soft costs), the Project Management

fees are usually constant during the project development.

Also, from the experience of previous projects, Brokerage

fee is rather stable during the construction, larger fees be

registered in the last phase, before the final completion.

When estimating a construction budget, the main focus is usually set on the hard

costs. Moreover, it is very important to take into consideration all the indirect

costs related to the project, also known as the soft costs. An accurate estimate

of all these costs assures a successful completion with minimum overrun.

Raluca Laudoniu manager, building surveying division


22/28

22

NATIONAL HOTEL MARKET ANALYSIS

The tourism industry was one of the most affected by the

downturn of world economy, whose effects were visible

from as early as Q3 2008 and which finally led to a severe

decrease for both hotel services demand and tourist

expenditure. The cutting down of travel budgets determined

travelers either to decrease the length of stay, either to

downgrade transport and accommodation to a lower,

cheaper solutions or to use new technologic solutions as

a substitute for travel. Business and conference tourist

segments were the most impacted and destinations thatrelied on those types of customers were the most affected.

The decrease in demand for hotel services was confirmed in

Q4 2008 and has continued across 2009, and consequently,

the number of tourists seeking accommodation in

Romanian hotels reduced with 14% y-o-y and the

average length of stay dropped to less than 3 days.

As a result, the occupancy levels went down by 20% as

compared to the figures registered in 2008. The second half

of last year has however, showed signs of slight recovery

thanks to room rate adjustments operated by hoteliers and to

a stabilization of the economic climate in Western European

countries, which are the main tourist generators for Romania.

The most important overnight generators were still the

neighbor countries: Hungary (25%) and Bulgaria (12%) which

have decreased y-o-y by 4% and 20% respectively. The

most significant drops in the number of tourist arrivals

were registered by Germans ( 15%) and Italians (14%).

The hotel offer was relatively constant as compared to the

previous year, most projects that were in the pipeline at the

beginning of 2009 being delayed or canceled, while no new

developments were started due lack or cost of financing.

Around forty hotel projects are however announced

for the following years which will add almost 6,000

rooms to the existing supply. The penetration rate

of international brands is still one of the lowest in

Europe, with little over 7% of hotel inventory, currently

being affiliated to an international chain of hotels.

The number of transactions has also decreased significant

with an estimated volume lower then EUR 15 million.

Even though many properties were on sale due to the

difficulties that arose, buyers failed to appear because

they either found it difficult to finance such acquisitions

or they decided to wait for the price to go even lower.

BUCHAREST HOTEL DEMAND

Tourist arrivals decreased on average by 8% in Bucharest

in 2009 and the average length of stay reduced from 2.1

nights in 2008 to 1.8 last year. Since 80% of tourism in

Bucharest is business-related, the Capital has been seriou

impacted by the economic crisis that forced companiesto reduce their expenses for traveling and inflicted major

changes in tourists behavior. Upper segments of hotels

were the most affected, especially in terms of rates.

The occupancy for the Bucharest hotel market was 56% in

2009, a decrease by 7% y-o-y, significant drops being seen

in the first 6 months of the year, while towards the end of

2009 the values came close to the levels registered a year

before. The real problem for hotels was the room rate, wh

staid constantly and consistently below levels of 2008, wit

an average value of EUR 73 in 2009. The average daily rate

decreased by 30% y-o-y, and the biggest challenge in the

following years for hoteliers will be to build-up ADR again

HOTELMARKET


23/28


BUCHAREST HOTEL STOCK

Segment # of Hotels # of Rooms 100 Rooms

5-star hotels 11 2,038 2 3 6

4-star hotels 52 5,899 24 13 15

3-star hotels 63 2,640 48 10 5

2-star hotels 21 912 15 4 2

1-star hotels 6 375 3 2 1

Total 2009 153 11,813 92 32 29

BUCHAREST HOTEL SUPPLY

At the end of 2009, Bucharest accounted for 153 hotels, with

little over 11,800 rooms on the Bucharest hotel market.

Even though the accommodation supply has increased by

12% y-o-y, the Bucharest hotel market still shows signs of

immaturity with regards to the hotel offer: the majority of

hotels have under 50 rooms (60%), segmentation is severely

unbalanced (over half of hotels are 4-star properties), brand

penetration is still low (13% of the total number of hotels).

FORECAST

After a difficult year 2009, the following year 2010 shows

some moderate signs of optimism. Western European

countries have started to post quarter to quarter

increases of the GDP and Romanias economy is expected

to rise by 0.5% in 2010. As GDP has historically been a

good indicator for the appetite to travel, an increase indemand for hotel services is consequently expected.

In the same time, hotel supply will remain relatively const

on the short term since access to financing will continue

to be difficult. Subsequently, many of the existing projects

in the pipeline will remain blocked and new ones are will

be very scarce. This is the reason why we believe that

occupancy levels will continue to recover from the drops

they previously registered. Rebalancing demand and supp

ratio will determine also the ADR to stop falling, and star

to increase but in a smaller pace than the occupancy.

The problems which hotel owners are facing will raiseopportunities for investors: both the acquisitions of

distressed properties priced below their market value,

and the investment in new build hotels, thanks to

the decrease in land value and construction costs.

Despite the difficulties, opportunities for hotel investmen

still exist especially for midscale hotels, in secondary

cities and in mixed-use developments and. Hotel

chains and operators will strengthen their presence

as financial institutions will require professional

operating solutions as an guarantee for good results.

Trend Hospitality

Baneasa Business & Technology Park

4244 BucurestiPloiesti Ave., Building A2, 4th floor

District 1, 013696, Bucharest, Romania

Phone: +4021 203 5065; Fax: +4021 203 5061

Email: [email protected]

Web: www.trendhospitality.com


24/28

24

REAL ESTATE INVESTMENTS INROMANIA TAXATION ASPECTS

The recent legislative developments in the area of tax

law that entered into force starting 1 January 2010 have

brought some important changes for Romanian taxpayers.

However, the real estate business environment in

Romania is not significantly impacted by these changes.

We are presenting below some key aspects that should be

considered by individuals or companies investing in Romanian

real estate properties either directly or via a Romanian entity.

TAXATION OF RENTAL ACTIVITIES

Rental income is subject to a flat 16% tax that is applicable

to both companies and individuals but with certain

differences in the computation of the tax base.

Specifically, in case of Romanian companies, apart from

other tax deductible expenses, the tax base is decreased

by the fiscal depreciation of the building (except for land

which may not be depreciated). Further to the latest

changes of the tax regulations introduced in May 2009,

reserves from the revaluation of fixed assets, including

land, performed after 1 January 2004 will be gradually

recognised as taxable income proportionally with the

recognition of tax depreciation of these assets or at

once at the time of their disposal. This rule concerns therevaluation reserves that are deducted from profits for tax

purposes through depreciation or through expenses with

alienation of assets. In effect, this change eliminates the tax

revaluation of assets which was available for several years.

With regards to the rental income obtained by

individuals, the tax base is determined by deducting

a 25% expense quota from the gross income,

which in effect reduces the tax rate to 12%.

Alternatively, individuals also have the option of deductin

actual expenses. If an individual closes more than 5 rental

agreements, he/she has to register as merchant and pay a

16% tax on rental income less relevant deductible expense

DISPOSAL OF REAL ESTATE ASSETS

Capital gains obtained by Romanian companies from

disposal of Romanian real estate properties are subject

to a 16% profits tax (minimum income tax rules was

introduced starting 1 May 2009). The taxable gain is

determined as the difference between the selling priceand the fiscal value of the fixed assets sold. In the case of

depreciable fixed assets (buildings), the deductible fiscal

value is defined as the entry value less fiscal depreciation

Distribution of net profits is further taxed with a 16%

dividend tax. However, there are situations when the

tax can be reduced below 16% and even to nil (e.g. via

tax treaties, EU Parent-Subsidiary Directive).

As an alternative, the shareholders of a Romanian

company can opt to sell the shares of the company

rather than selling the companys property. In this case,

they are liable only to the 16% income tax applied to

the capital gain obtained through the company sale.

In case of capital gains obtained by individual investors

from disposal of real estate property, the tax depends on

the period of time the property was owned for. Namely,

the tax for real estate properties sold within 3 years

of acquisition stands at 3% of the transaction value for

transactions up to RON 200,000, while for transactions

exceeding RON 200,000, the due tax is RON 6,000

plus 2% of the amount which exceeds RON 200,000.


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A building is new if sold by the end of the year following its first

utilization/occupation, or is transformed in certain conditions.

1

Sales of properties held for more than 3 years, are taxed at 2%

of the transaction value for transactions under RON 200,000,

while for transactions exceeding RON 200,000 the due tax is

RON 4,000 plus 1% of the amount exceeding RON 200,000.

Individuals performing sales of real estate as a business

cannot apply the above rules but instead they need to follow

a taxation scheme similar to that applicable for companies.

VAT ASPECTS

Rental of real estate property is normally VAT exempt.However, any taxable person performing rental activities

may opt to charge a 19% VAT on such transactions.

As a rule, the sale of old buildings/parts of buildings

and the underlying land, as well as of any other type

of land is VAT exempt without deduction right unless

the taxable person performing such transactions

opts to tax the sale with 19% VAT. This exemption is

not applicable to sale by a taxable person of a new

building or land on which buildings can be erected.

Starting with December 2008, a 5% VAT tax rate

has been introduced for the sale of social housing

(including related land) under certain conditions(i.e., houses of maximum 120 square meters and not

exceeding RON 380,000 in value net of VAT).

Individuals trading in real estate as a business are to

be treated as taxable persons. Thus, when performing

taxable operations (e.g. sale of new buildings) the

individuals are liable to register for VAT purposes if the

volume of their transactions exceeds EUR 35,000.

LOCAL TAXES

Owners of buildings are liable to pay an annual building

tax to the local authorities. For companies, such building

taxes range between 0.25% and 1.5% of the book value

of the building. However, the building tax may increase

to up to 10% if the building has not been re-valued for 3

years. For individuals, the tax rate is 0.1% and is applied

to the value of the building, which is calculated based on

minimum established values provided by law (starting

from 2010 these values were increased by approximately

20%). Hence, for equivalent property, the tax base forindividuals can be considerably lower than for companies.

With regards to the tax on land, both companies

and individuals owning land are liable to pay a tax

which is established as a fixed amount per square

meter, depending on the location of the land.

Local councils may grant exemptions from payment of

building and land taxes to companies under certain state

aid schemes established for regional development.

Ernst & Young provides a range of services

including assurance, advisory, tax advisory

and compliance, and transaction advisory.

Ernst & Young srl

Premium Plaza Building, 15th Floor

6369 Dr. Iacob Felix Street, 011033 Bucharest

Alex Milcev, Tax Partner

Phone: +40 21 402 4000

Fax: +40 21 310 7124

Email: [email protected]

Web: www.ey.com


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26

On 14 October 2009, the Law no. 261/2009 approving the

Emergency Government Ordinance no. 214/2008 entered

into force, modifying the Construction Law, i.e. the Law

no. 50/1991. This normative deed brought a series of

significant changes to the procedure for authorization

of constructions in Romania. These changes have been

further implemented by the new methodological norms

to the Construction Law, approved by the Order no.

839/2009 of the Ministry of Regional Development and

Housing and producing effects as of 23 November 2009.

The legal novelties are a consequence of the integration

in the European Union and of the correspondent

obligation of legislative harmonization; this time the

aim was to harmonize the construction legislation with

the environmental assessment procedure under the

Council Directive 85/337/CEE. The stages for obtaining

the authorization of construction works have been

reconsidered for including those allowing the assessment

of the environmental impact of a particular project.

Any applicant for a building permit (demolition permits

excluded) must, after obtaining the urbanism certificate,

apply to the environmental protection authority

for an initial assessment. This authority will decidewhether the respective project falls into the category

of projects subject of the environmental assessment.

The applicant shall then notify the competent public auth

confirming its initial application for obtaining the buildin

permit. The procedure for environmental assessment

shall take place after the submission thereof, but prior to

drafting/finalizing the technical documentation and shall

be completed by issuance of a statement/point of view of

the environmental protection authority, or by issuance of

an administrative deed of the environmental protection

authority, which shall be different depending upon the

environmental effects of the investment objective: an

environmental permit or a Natura 2000 endorsement.

Another concern of the law maker was to implement

a mechanism for ensuring the transparency of the

endorsement/ authorization procedure.

To this aim, the public is informed and consulted

in relation to the proposed investment.

The building permit and its annexes must be published

on the local public authoritys website or posted at its

headquarters. Furthermore, any person whose rights or

legitimate interests has been prejudiced by the issuance o

the building permit or by the refusal to issue the building

permit is entitled make a claim in relation thereto.

The suppliers and the administrators of urban facilities

are under the obligation to post at their headquarters and

on their web pages all the data necessary for drafting the

technical documentation for obtaining their approvals.

Steps have been taken for standardizing the permitting

related requirements when the intended development

exceeds the administrative territorial unit of a county

(or Bucharest city limits, as the case may be).

CHANGES TO THE CONSTRUCTIONSPERMITTING PROCEDURE


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Furthermore, some clarity has been brought in relation to

the major changes in design; the changes of the theme have

been expressly defined. In case of changes of the theme, a

new building permit has to be issued; the changes of theme

will lead to starting the permitting procedure of the project

again to the extent they exceed the limits of the original

endorsements/environmental administrative deeds. In case

such changes occur, the developer/owner must stop the

performance of works until a new building permit is obtained.

In respect of the local changes to the technicalsolutions, under limited conditions, they do not

require the issuance of a new building permit; those

conditions have been clarified to a certain extent.

In addition, the rule that the building permit and the permit

for the works for site organization have to be issued in

the same time has been introduced by Law no. 261/2009.

The celerity of the permitting process remains a grievance,

but some positive measures have been implemented in this

respect. To the extent the documentation is complete, the

bodies competent to issue the endorsements required under

the urbanism certificate must comply with their obligation

to issue the respective approvals/endorsements within 15days from the date of the application. Failure to do so is

deemed to constitute tacit approval (except for endorsements

issued by the environmental protection authority).

The sanctioning regime has been amended in

several respects, making the law rougher.

For example, buildings erected without a building permit

on land belonging to the public or private domain of

the state or administrative-territorial units may be

demolished without a demolition permit and without

a court ruling ordering the demolition, on the offender

costs. The complaint against the sanctioning minutes

shall not suspend the demolition of such buildings.

The mandatory contribution of 0.5% of the estimated valu

of the construction works to the Construction House,

provided under the Emergency Government Ordinance no

214/2008 has been now removed. However, it continues to

provided for in other pieces of

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