Contents
Contents
We were somewhat optimistic in general about Romania in 2023, but even more so when it comes to cementing views about the rosy medium- to longer-term view. Looking at how things are now, the bullish longer-term views about Romania’s economy and its real estate sector remain fully reasonably, while the outlook for 2024 also better than what we thought a year ago about 2023. Objective arguments, however, stand no chances when faced with highly uncertain times, which could greatly alter the elements of the equation in the blink of an eye. While concerns about economic factors (and particularly monetary ones) in the Western world have subsided to a significant extent, geopolitical risks are still dialed up to eleven. With this in mind, thinking about the future via scenarios and general directions rather than forecasts and actual figures looks like the safer way. That said, most scenarios still point to a good outlook for Romania, particularly when looking beyond 2024.
1.
Economy: Taking off in 3, 2…
We start the year with a few reasons for unmitigated optimism regarding Romania’s economy (maybe with a longer-term view), from the hefty capital inflows expected via EU funds to the unprecedented fast-track improvement of the country’s infrastructure to the re-shoring trend that places Romania in a favourable light. Yes, there are also causes for concern, both internal (a somewhat known quantity, like the country’s gaping fiscal imbalance) and external (where huge uncertainties persists). While these factors refer to a longer timeframe, they may yet produce positive effects in 2024. Furthermore, a (still) tight labour market together with an improving external backdrop for Romania’s main trading partners coupled with the pullback in inflation suggests that 2024 should turn out better than 2023. Looking for GDP growth in the 3% area for this year.
2.
Infrastructure: A major makeover
Up until a few years ago, Romania’s subpar road and rail infrastructure (for instance, it ranked quite low in the bottom half of the World Economic Forum’s competitiveness indicators) was improving at a snail’s pace. Things started changing quite rapidly a couple of years ago and now, the situation look set to look drastically different by the end of the current decade. The country’s c.1,100 km network of high-speed roads could double in size by 2030 as around 800 kilometers of are currently being built, with works set to start sooner or later on other projects. It is also good that the railways are not forgotten, as major modernization works are also set to be carried out in certain parts of the country. The prospect of an improved infrastructure backdrop over the next several years, alongside a potential Schengen area entry for terrestrial borders – which looks closer than ever before as of early 2024, is already turning investors’ eyes on regions of the country with lower wages and improved availability of employees, leading to a better distribution of growth and economic resources.
3.
Geopolitics: Still on top of the agenda
Romania’s position amid the geopolitical shake-up taking place globally is quite unique; while the country’s leaders and its population remain firmly anchored with the Western bloc, the country’s geographic position, alongside its specific economic advantages (notably the widest gap between labour costs and labour productivity, which is comparable to China’s for instance) support the idea of Romania becoming a hotspot of logistical and manufacturing activity amid the re-shoring trend. The CEE is set to become the center of gravity for European growth, said the National Institute of Economic and Social Research last year, the UK’s oldest think tank. While companies cannot ignore Asia or parts of South America for production, they can diversify their operations better to mitigate risks and the CEE, including Romania, is well placed to see much more investments in the coming years – something which we are starting to notice in Romania as well. Unfortunately, not all is positive and we must also keep in mind scenarios where things will flare up further on the global scale, with new armed conflicts.
4.
Politics: Mind the noise in a super-electoral year
The planets have aligned and all possible election types (minus a referendum) are taking place in Romania in 2024, from EU Parliament in the first half of the year to the all-important general and presidential elections alongside local elections towards the end of the year. The main scenario political pundits are expecting is a continuation of the current governing coalition post-elections, a pro-EU/pro-Western socialist-liberal coalition; surveys also suggest this majority is possible, so it depends on the parties aggreging on terms after the elections. Though a lot can still happen, so there is still room for surprises. That said, we need to emphasize a somewhat more positive situation for the longer term, as the lack of elections starting 2025 does create a context more favourable towards adopting some less popular, but necessary, reforms.
5.
Office: Lowest deliveries in over a decade
The developers’ confidence in the office markets has shifted dramatically after the pandemic and the rise of remote work; amid this context, a sole major project of c.16,000 sqm could be delivered this year in Bucharest, for instance, which would make this the poorest year we have based on our internal data (so probably this would be the lowest pipeline since at least 2004-2005, when the office market was in its infancy stages). That said, demand is decent, with the absorption rate of vacant spaces on par with the average of the past cycle, so quite respectable and a far cry from 2020-2021 doomsday scenarios for the office market. With this in mind, a slight pickup of demand could very well mop up vacant spaces and tilt the market to a landlords’ one, something which is already happening in certain submarkets/areas of Bucharest, for instance. This is also due to the fact that well-located, ESG-compliant buildings are in much higher demand and this trend should continue into 2024, leading to more upward pressures on rents for these products.
6.
Industrial: Playing the long-term game
The unprecedented rise in rents (over 10% per year in both 2022 and 2023) is denting the appeal of Romanian warehouses for international companies, but when taking into account all costs, from labour costs to land prices to rents, the CEE and Romania especially remains a very good choice. While it may be difficult to predict the shorter-term fluctuations of I&L leasing demand – meaning 2024 may turn out a bit worse than previous years if Romania follows a similar path to the expected dynamic in other neighbouring countries – it is safe to assume that tenant interest will remain reasonably robust, particularly when compared to pre-pandemic levels. The market is in a new paradigm. Romania’s sub 7 million sqm of modern warehouses the country has at the start of 2024 is a figure that is not well suited to the country’s development path (keep in mind the infrastructure changes as well), let alone the expected increased demand amid re-shoring. With this in mind, the future for the local I&L market remains very bright.
7.
Retail: The return of the big projects
While the last few years have belonged to the retail park, with deliveries in small- and medium-sized cities at decade highs, things are changing as the market has proved resilient enough in the last few years. Following the delivery of the biggest retail scheme in many years in 2023, a mall in Craiova, we acknowledge the rising interest for large project, both standalone and integrated in major mixed-use projects. 2024 will see works continue or start on a multitude of such schemes throughout the country. Meanwhile, on the consumers’ side, the drop in inflation and hefty wage growth should continue to fuel the spending appetite and retail sales may actually accelerate relative to 2023; that said, following inflation spike we saw in recent years, we would expect discounters to again be at the top of preferences as households may continue to want to save money when possible.
8.
Residential: Demand to pick up, affordability again to increase
To start off, we want to emphasize that many of Romania’s cities and dynamic economic areas face overcrowding, sometimes at a significant level. This means that longer-term demand for appropriately priced residential units in many areas of the country is fundamentally supported. With this in mind, the expected easing of the central bank’s monetary policy (expected to start by mid-2024) alongside the robust wage growth should help buying interest; we already saw some green shoots in the second part of 2023. Another aspect worth mentioning is that for the most part, price affordability, relative to wages, had deteriorated a bit in the last couple of years; as of 2023, however, this trend reversed a bit and we expect this to continue. It is also important to underscore the local elections due in the second part of 2024, which could shake up some things with local authorities in certain cities, as well as provide more clarity about longer-term policies.
9.
Land: A decrease in appetite, but solid results
We have started seeing a slight decrease in investor appetite (as measured by new inquiries) in 2023 and this trend could continue in 2024 as many developers have plots for future developments; furthermore, uncertainties persist and many investors would rather see a deeper recovery of commercial real estate and residential markets before fully committing. That said, many large deals that have been in the works for quite some time could be finalized in 2024, leading to a quite good year actually. Many investors have been seeking some opportunities and discounts, but sellers are not willing to offer that many as they have not felt significant pressures like, say, during the 2009-2011 period. This means that good land plots will continue to demand a hefty premium over the rest. Furthermore, there is a growing conviction among the sell-side of the market that the economy might accelerate in the forthcoming year and if longer-term uncertainties dissipate a bit, then land prices may start increasing again more substantially.
10.
Investment: The light at the end of the tunnel
With interest rates at the ECB and Fed expected to start coming down by mid-2024, albeit with a much slower pace than they went up, things could start looking up for the local investment market. There are some bigger tickets in the works at the start of the year, but after some deals fell through in 2023, it is difficult to have any certainties. Volume-wise, we could see 2024 as quite similar to last year’s half a billion Euros, but a lot depends on several of the bigger ticket items which could help drive the result much higher or lower if they are not closed. Hence, we could still see local yields move out a bit more to improve the country’s relative attractiveness. Still, Romania’s prolific economic performance as of late (as well as its rosy outlook) coupled with the fact that the country’s commercial real estate sector has missed most of the favourable price action that took place in other European markets over the last decade could shield it from further material declines in capital values.