JLL gave a retrospective of what the last 12 months have meant for the Romanian real estate market, focusing on how the health crisis has reshaped the business approach of those in this industry and to what extent we expected to happen in March 2020 really happened.
According to JLL, if we look beyond the last 12 months, we can see that what took place in the real estate market after the outbreak of the pandemic was only an acceleration of some phenomena that were already manifesting in the economy and in this industry.
The change in the way of working and, implicitly, in the employers’ needs, had already started before the pandemic, and this topic was already on the table of many managers and companies.
At the same time, there was a concern on behalf of the actors involved in real estate consultants, architects, agents, engineers, developers, tenants, banks, and investors – for sustainable buildings and measures to reduce pollution.
“The new way of working will entail the need to adjust the current office space. The residential market will grow to provide occupants with a more comfortable alternative, possibly taking into account the requirements of working from home. The industrial and logistics development market will have to accommodate the growth generated by online commerce,” said Cezar Florea, Head of Project & Development Services JLL Romania.
All these developing areas generate many opportunities for those who operate in this market.
As expected, although there was a moderate pessimism at the beginning of the pandemic, the construction activity did not suffer declines, proving resilience in the face of uncertainty, until the end of 2020. This year began with some decline in construction activity, but our estimates for the rest of the year remain optimistic, foreshadowing the whole year 2021 with a slight increase.
The office market, under pressure
The vacancy rate for office space has risen relatively steadily, the postponement of the expansion projects by most customers contributing to this.
Estimates for 2021 and 2022 are that this rate will increase even further because projects that already have pre-leased spaces cannot be postponed and it might take longer to fill vacant spaces in the absence of an increase in net demand.
The demand will come mainly from tenants whose contracts expire during this period, and who have seized the opportunity to secure advantageous contracts for the coming years.
At the same time, many other companies have preferred to extend their current contracts by one or more years, whether they keep the same space or not. Pending the end of the pandemic, they are taking the time to analyse new forms of work and adjust their own policies. It is not a simple thing, especially for those who have a large staff and with various needs and possibilities of working from home that need to be mapped to maintain the optimal level of productivity.
Another phenomenon that manifests itself on the office market is the appearance of spaces subleased by companies. At this moment, the total area available for sublease is the largest that has ever existed on the Romanian market, approximately 70,000 sqm.
“Inevitably, these spaces, many of them properly arranged for class A offices, including furnished ones, put a lot of pressure on the owners who still have unoccupied spaces in their portfolio. Not only the rent level is the problem, but also the flexibility of the contractual terms offered by these spaces, many companies, especially those that open new offices in the country, but also those based on temporary projects finding these spaces ideal, in competition with co-working spaces,” said Marius Șcuta, Head of Office Department & Tenant Representation JLL Romania.
The industrial market, on the wave
In the industrial market, demand had an interesting evolution, to say the least, given that at the time of April-May 2020 almost all leasing projects in progress were suspended indefinitely, followed by an explosive return in July-August. The market was strongly driven by confidence in logistics and distribution spaces, which supported consumption throughout the emergency period.
One of the pleasant surprises that we have been appreciating over the past year has been the strong confidence that large investors in industrial spaces showed in regards to the resilience of the industrial segment during the beginning of the pandemic.
“However, we must draw attention to the fact that, with the increase in the number of investors and the volume of spaces available for rent, the market is heading towards a new turning point. Landlords offer increasingly interesting and consistent benefits to attract tenants. Also, they are starting to face more competition from new investors who need to be a little more flexible in order to increase their client portfolio”, said Costin Bănică, Head of Industrial Department JLL Romania.
Looking for new opportunities
Another very important element that we noticed is the increase in the number of requests for analyses and market studies starting with autumn 2020 and, especially, during the first months of this year. The market is waking up from the numbness caused by the COVID-19 pandemic in the first part of last year.
Gradually, investors are beginning to gain confidence and start looking for new opportunities as the situation stabilizes. Moreover, mature investors realize that in order to take the lead in this competitive market, they need much more market research, more detailed analysis than ever before. The market no longer “swallows” any project and only studies done responsibly can make the difference between success or loss in a project.
“The customer profile is quite diverse. There are landowners or building owners who want to know what functions are best suited in the current market conditions for the assets they own. There are demands from investors who want to enter or expand into the market and seek to identify what are the opportunities and market niches with high potential. At the same time, there are requests for urban regeneration studies and building conversions, such as former industrial spaces”, said Alexandru David, Head of Research JLL Romania.
Working from home has supported the growth of the residential segment
According to the JLL Romania forecast, the demand for housing will remain strong, especially for the segments positioned at the extremes of the market spectrum (low-end and high-end), while the middle-high category will be directly affected by the postponement of the extension of the 5% VAT application to the purchase of housing and some of the buyers in this category could freeze their purchasing decision at least until 2022.
Rents decreased by 10 percent -15 percent as a result of the increased supply of apartments that were previously rented as apart-hotels and are now rented on a long-term basis, and as a result of declining demand coming from students. The return of the rental market will take place at a rapid pace, as the population’s immunization level will increase, and travel restrictions will be lifted.
The hybrid working model – from home / elsewhere and from the office – will have an impact on the design of residential products, while more and more office developers will turn their projects into mixed or exclusively residential schemes.
A new product will appear on the residential market – Built to Rent projects, ie homes purposely designed to be rented.
Also, the market will focus on established developers with strong financial support, with large volumes of units delivered, especially in the context generated by the adjournment of sector PUZs (for sectors 2,3,4,5, and 6).
Institutional investors will make their entrance on the local market, and this will reshape the rental market altogether, by implementing clear rules and international best practices, thus defining new rental standards.
“The pandemic also acted as a catalyst. It has helped in making decisions and accelerating the desire to optimize the spaces in which we live, with a much more pronounced focus on comfort. Up to this point, we have seen a dynamic specific to a mature and stable market, without the slippages we saw in previous years, due to the professionalism of the market players and the solid foundations “, said Andreea Hamza, Senior Living Department Director JLL Romania.
Many owners who wanted to sell in 2021 or 2022 postponed their decision
And on the investment market, we saw an acceleration of pre-existing trends such as increased interest in logistics properties and a re-establishment of the retail segment, but also some strictly related to the pandemic, such as the temporary cessation of hotel transactions. Classes of alternative assets will become mainstream – of these the first we will see in Romania is the residential developed especially for rent. Many owners who intended to sell in 2020 or 2021 have postponed their decision to put the property on the market.
Compared to the expectations at the beginning of the pandemic, when it was very difficult to make accurate predictions because we had not faced such a thing before, we can say that most of the scenarios we were working with were darker than what actually happened. The main positive is that the market did not freeze as it did in the previous crisis. We continued to see transactions, even in Romania, the volume in 2020 in fact exceeded that in 2019.
“Uncertainty was the main negative factor on the market. Extremely pronounced at the beginning of the period, it still persists to some degree. To what extent will working from home continue for office workers, how much of the money spent online due to traffic restrictions will be recovered by shopping malls, how quickly will business tourism return to the new context in which everyone uses video conferencing applications, these are all questions without a clear answer at this time, although one is beginning to take shape”, said Andrei Văcaru, Head of Capital Markets JLL Romania.
On the other hand, we believe that the reaction at both the macro and the individual levels was what positively influenced the market. Banks and governments continued to provide liquidity, and at the individual level the vast majority of companies and people complied with the restrictions and tried to limit the pandemic but at the same time adapted very quickly and did everything possible to continue their business and to pursue their goals.
As for the fears that are now manifesting in the market, they vary depending on the business sector. Now almost everyone expects an improvement in the next period, but it will not be uniform. Probably the main concern of real estate owners is how building users will perform/react – which will be reflected in the degree of occupancy and the income generated by them.
Unsustainable buildings will have problems with financing, renting, and liquidity
Another extremely important element is the fact that the pandemic brought in the foreground the term ESG (Environmental factors, Social infrastructure, and Governance), sustainability being included in the “E”. The whole business world has realized, and decision-makers have acutely felt it, that they cannot exist apart from their environment and that they need to really get involved.
We already see in Romania banks that require evaluations that consider the measures and investments needed to bring the assets they finance in an area with low energy consumption and pollution. Moreover, employees are increasingly educated and attentive to the quality of the spaces they occupy and have requirements for sustainability at their workplace.
“Obviously, it is still cheaper to build unsustainably, but the cost is one, and the value of that construction is different. Leaving aside for a moment the fact that the maintenance costs of a sustainable building can decrease by up to 45 percent, the implications for owners are much deeper, and the impact on value will be calculable and the savings made for a cheaper construction will no longer be enough”, said Silviana Petre Badea, managing director JLL Romania.
An unsustainable building will remain unoccupied for longer than the market average because it no longer meets the sustainability requirements of tenants.
It will cost more to be financed because banks will “charge” through lending conditions a building that does not meet their ESG standards.
It can only be sold to a group of non-institutional investors at a below-market price because institutional investors will no longer be allowed to invest in buildings that do not meet sustainability standards.
Uncertainty engulfed the market, impacting values differently
As for the valuations market, uncertainty was the first thing felt. Nobody really knew what was going on and countless questions came up on everyone’s lips. How long will the lockdown last? When will the stores reopen? When will wave the second wave of the pandemic hit? In what form? When will a vaccine become available? And so on. Uncertainties arose regarding the security of cash flow, the tenant’s ability to pay the rent, especially in retail, where sales fell sharply.
The Material Uncertainty Clause was introduced in the evaluation reports in March 2020, following the onset of the pandemic. This was not received with open arms by investors and lenders, being perceived on the one hand as having an impact on the liquidity of the property, and on the other hand, hindering the buying or selling process.
Due to the restrictions imposed by the authorities, it was not possible to carry out inspections for a certain period. Inspections are a very important part of the appraisal process, so certain clauses with lenders and investors had to be briefly agreed upon to ensure that only desktop appraisals would be enough, in some cases using customer assistance to carry out inspections from a distance.
Some of the transactions were postponed or cancelled, which made the process of estimating the value more difficult, and the valuers had to rely even more on reasoning and sentiment in the absence of market evidence.
The market reacted differently, depending on the segment, so that the logistics sector was by far the most resilient in 2020 and will remain in 2021, driven by the increase in online sales. Compared to the values from the same period of 2019, during the last year, shopping centres noticed decreases on average by 5 percent -10 percent, while on the office market the decrease was up to 5 percent. Quality industrial properties, secured by rent, have benefited from stable or even slightly increasing values, with an upward trend throughout the current year.
However, the above percentages are not exhaustive, the values being influenced by, among others, the type of property, location, class, occupancy rate, the tenant mix and their quality, the remaining period of the contract, competition.
The requests for valuations were the standard ones: for financial reporting, loan guarantee, fees and taxes, internal purpose. Requests for valuations for acquisition purposes also continued, more towards the second half of 2020. However, we can say that we received more questions than the pre-COVID period about the evolution of the market and a possible impact on value over time, especially from the banks.
“In principle, the number of requests for evaluations did not increase, but, as some of the instructions were slightly delayed with the onset of the pandemic, later the workload was much higher. Last year, the Valuations department of JLL valued properties worth 4.7 billion euros, increasing by almost 50 percent compared to 2019 “, said Alina Cojocaru, Head of Valuation Advisory JLL Romania.