Market update – Office & Residence
The real estate market in Bucharest has entered a phase of maturity. Romania’s integration into the European Union, the sustained economic growth of the last 5 years, and the development opportunities that appeared in all fields of activity contributed decisively to the dynamization of the market at the end of 2006 and the beginning of this year.
OFFICE MARKET (rentals and sales) SME segment
What started in the first months of 2006 with a large number of medium-sized companies interested in relocating the headquarters proved to be the real dynamics of this segment, intensified towards the end of the year and in the first part of 2007.
Demand in the SME segment
Taking into account the number of people working in SME companies – including companies with 10 to 250 employees – the segment of SMEs represents 50% of the office space market. Therefore, targeting areas between 100 and 2500 sq m, the demand from these companies has increased on all its sub-segments. Thus, if we refer to the same period, a year ago, the number of requests for spaces between 250-500 sqm increased by 22-30%, while for areas of 100-250 sqm, there was a record increase of 40- 45% compared to 2005.
For spaces over 500 square meters, the increase was between 15-20%. In 2006, the tendency to change the preference of SME companies for spaces in office buildings, instead of those located in villas, was confirmed and accentuated. This is because some of the companies founded in the past have now gained stability and financial security to afford a space in an office building. Also, the number of established companies – both Romanian and foreign – is growing.
Although declining in weight, there are certain types of companies that still prefer spaces in villas, mainly due to their specific activity. Such companies are law firms, advertising companies, private kindergartens. An essential part of the companies interested in purchasing headquarters is also interested in villas, and this is because the small sales spaces in office buildings are very few on the market.
The supply of offices for SMEs; the quantity of space was, unfortunately, not as dynamic. The office buildings delivered in 2006 were quite a few. Given the fact that the land available in the city center was smaller and smaller, in 2006 were delivered predominantly medium-sized buildings, with areas between 200-500 sqm/level and layout on 3-7 levels, so varying between 1500-3500 sqm.
The supply deficit was compensated as in previous years by the office spaces in the villa. Special attention was paid to 3-4 levels, especially those with a structure similar to office buildings, namely designed with large open spaces, possibly easy to partition. Individuals or medium-sized developers have usually implemented this concept.
The demand registered an accentuated dynamics in 2006, with over 70% higher than in 2005. The average sought-after areas varied between 2000-3500 sqm, but there were also requests of 8000-10000 sqm. The largest share was the requests coming for class B and B + buildings, with good access to means of transport (ideally and subway), especially for back-office destinations.
The most active companies in terms of relocations in the corporate segment continued to be banks, IT, and telecommunications companies, the latter bringing in particular requests for call-center type spaces. If in the past larger IT companies, usually local ones, most often went to semi-central areas (which still had to ensure proper access to means of transport), in the last 6-9 months there has been a growing number of IT companies, coming from abroad, who preferred the central areas, even at the cost of higher costs.
Although 2006 marked the year of reaching a threshold of almost 1 million square meters of office space, with over 180,000 square meters delivered within it, the offer remained overall at a lower level than demand. Therefore, over 40-45% of office requests were resolved through pre-lease contracts, provided the supply was maintained at a lower level than demand. However, some companies were also forced to postpone the relocation for a certain period or to accept compromise solutions. Almost half of the delivered spaces were located in buildings smaller than 5000 sqm, especially in the central areas. Buildings with larger areas, levels, and overall, have been delivered in business parks. Still, few have been in full development as a concept. Also, large buildings were delivered within the Pipera area.
Rent level and trends 2006 meant a year of relatively stable rent maintenance. There were punctually areas and categories of spaces for which specific increases were registered – between 5 and 15%. It is usually about the buildings that offered smaller areas for rent, under 400 sqm, in relatively central areas. The criterion of the area seems to influence more and more the price of a building, priority over the class, and the endowments of the respective building.
Rents in 2006 Type of space Rent level (Euro/sqm) Villa 11-14 Heritage villa 18-23 Class A office buildings 17-19 Class B office buildings in central areas 13-16 Class B office buildings in semi areas -central 11-13 Class C office buildings 8-11 Trends For 2007, it is announced to complete projects totaling over 400,000 sq m of offices, located mainly in non-central areas. It is time for more significant developments, making it possible to bring large areas to the market in a relatively short time. Thus, the end of 2007 is likely to mark a time of slight decrease in rents, with a margin of 5-15%. A decisive influence regarding the price of space will have its location and facilities, first of all, access to the means of public transport. This is an element that will tend to dominate in the long run.
The sale prices for the office buildings varied, for the medium-sized buildings (under 2000 sqm) being between 1800-2300 Euro/sqm built. For the projects of upper-class spaces, the prices varied between 2000-2800 euro/sqm. The demand for local companies targets the small surfaces (between 500 and 1000 sqm), which is quite challenging to find a corresponding one on the market. The requests from various categories of investors, and especially the institutional ones, requesting very high-quality products, proved to be very numerous. As there were few viable projects available on the market, many investors have considered the option of buildings not yet rented.
Demand Despite a visible decrease in the level of demand in the first part of 2006, by approx. 30-45%, more accentuated on certain types of properties, the second semester brought an exceptional recovery of the demand for residential spaces. The most sought after luxury homes continued to be 2-3 bedroom spaces. The predominant clients in this segment are ex-pats employed in various multinational companies predominantly, but also those from various institutions and diplomatic missions.
A decisive criterion in choosing the home continued to be the proximity of certain educational institutions, such as the American School (located in the Pipera area), the British School (situated in Herastrau), or the French School (located in the Romanian area). To know: Unlike the practices from other countries, in Romania, usually, the rent expressed does not include the utilities related to space. These are paid separately by the tenant and are delimited in two categories – the utilities of the complex/condominium (a fixed amount), and those related to the utilities themselves (which are calculated according to the actual consumption recorded by independent meters).
VAT (19%) is usually added to the rent if the owner of space is a legal person. The new tax regulations in force have eliminated the rent from the deductible expenses of a company, except for the situation in which the tenant is the administrator of the respective company, or there is a declared working point of the company at the respective address.
For the utilities related to a rented space to be deducted, it is necessary that they be re-invoiced by the owner. Offer The new spaces delivered in 2006 followed the Sos. Nordului axis (the best areas being considered those positioned at the main stage, overlooking Herastrau Park), Primaverii (here being developed especially exclusive buildings such as architecture and interior design, but also as the price), Aviatorilor, Dorobanti, Floreasca, Kiseleff. The new homes emphasize the existence of dressing rooms, spacious and bright rooms, with exceptional finishes, especially in the bathroom and kitchen area; the presence of storage spaces is also considered a particular advantage. Penthouses continued to enjoy the interest of tenants; with average surfaces of approximately 250 sqm, particularly generous terraces and panoramic views, the penthouses were located in 2006 at rents of over 5000 Euro/month.
Last year, the last stage of the Washington Residence complex was completed. It was a project that can be called the best complex realized so far in Bucharest. The compound was designed as a unitary whole, an area that in addition to very comfortable and elegant living spaces, offers many other benefits that increase the quality of life: fitness area, mini-park, children’s play area, all in one area located in the middle of Bucharest, but still in a tranquil area and full of greenery, everything around increasing the feeling of security.
Rent level and trends Bucharest continues to be one of the most expensive European capitals in terms of residential space rents. In 2006 there were no significant changes. The 2-3 bedroom apartments seem to enjoy the highest stability in terms of the lease. Type of space Rent level (Euro/month) Apartments with 2 rooms (1 bedroom) 1,500-1,800 Apartments with 3 rooms (2 bedrooms) 1,800-2,500 Apartments with 4 rooms (3 bedrooms) 2,500-3,800 Villas with 3-4 rooms 2,500 -4,000 Villas with more than 4 rooms 3,500-5,000 In the residential segment, prices are set primarily based on their location, number of rooms, and the degree of comfort offered (including both finishes and additional facilities).
In the long run, the complexes – be they apartment buildings or villa complexes, seem to attract more and more tenants, provided additional services. However, the proximity to the center and the location in certain traditional residential areas will maintain good profitability for smaller developments but located in select areas.
The home sales market continues the upward trend. The significant increase registered by this field was due to the rise of purchasing power and access to real estate loans, but also to the growing interest of investors for the real estate market in Bucharest. The housing market is structured, depending on the clients concerned, in 2 categories: a. Luxury housing market b. Housing market for middle and middle class plus Luxury housing market The segment of luxury residential housing, whether we are talking about villas in residential complexes or apartments in new buildings, was the first targeted by investors. Still, since 2005-2006 it has passed into the background, its place being taken by the housing segment for the middle and middle-class plus.
On the upper segment of the market, Romanian or foreign medium-sized developers are currently active, targeting central or northern locations where small buildings of 10-50 apartments or villa complexes of 10-30 villas can be built. Profile of the buyer of luxury homes: the person holding management positions and who buys for his own use or as an investment, natural or legal persons who buy only as an investment. Leases follow about half of the sale-purchase transactions, the property re-entering the market to generate income. The main criteria that influence the purchase decision are location, the ease with which the property is rented, the possibility of obtaining an attractive rate of profit, the development perspective of the area.
Customers interested in purchasing luxury apartments will be more and more attentive to the location and neighborhoods and quality of finishes and equipment. Prices on the luxury housing market The factors that most influence the price level for the luxury segment are: the area (central and northern) that offers the proximity of parks or green spaces and the quality of finishes. Primaverii –3000 – 4000 EUR / sqm built Aviatorilor – 3000 – 4000 EUR / sqm built Arc de Triomphe – Kilessev – 3000 – 4000 EUR / sqm built Herastrau 1800 – 3000 EUR Dorobanti – Floreasca – 2000 – 2500 EUR / sqm built Domenii – 2000 – 2500 EUR / sqm built Cotroceni – Mariott – 1600- 1800 EUR / sqm built Housing market for middle, and middle class plus the offer for the middle class has grown steadily in the last two years, being launched on the market several buildings, both 10-50 apartments as well as residential complexes that reach 1000-1500 apartments.
Profile of the home buyer for the middle and middle class plus: young people (25-35 years old), active (or young families), who buy for their own use or investors who buy for rent or resale. Over 70% of sale-purchase transactions target those who want to live in purchased homes. Over 80% of transactions are made through mortgages. For the middle class, the most important factors that influence the purchase decision are the proximity of public transport, shopping centers, parks, green spaces, distances from the center.
The sale price of the houses for the middle and middle class plus is between 1000-1800 E / sqm built: Baneasa Antena 1- 1600 – 1700 EUR / sqm built Unirii Alba Iulia- 1300 – 1800 EUR / sqm built Unirii Vitan Mall – 1300 – 1500 EUR / sqm built Semicentral – Vitan, Militari, Drumul Taberei, Colentina, Titan, Teodor Pallady, etc.– 900 – 1400 EUR / sqm built The surface to which the price applies is composed of the built surface + share of the surface of shared spaces. Built area = Usable area + interior and exterior walls + balconies. The common spaces represent that percentage of the total common spaces (staircase, elevator, halls) located in the perpetual and forced common property of all the owners in the respective building.
On the real estate market in Bucharest, according to the estimates for the next 3-5 years, the sale price of the properties will increase, with values of at least 25-50% depending on the location and project. The main factors that will influence the increase in prices are – the increase in housing demand amid the boost in mortgage demand due to changes announced by the NBR by which the advance will no longer be mandatory. There will be changes in the maximum debt ceilings. – increase in labor costs in construction – increase in land prices. The most dynamic segment of the residential market will be apartments for middle and upper-class plus.