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Mru Patel

Mru Patel

Investor

Epi


Romania: Debunking The Myths (Part III)


Today I want to talk about what I believe puts some people off investing in Romania. And I want to explain why the reasons are rubbish! This is part III of a 3-part series.


de Mru Patel la categoria Investiţii / Finanţare


Publicat la 01.03.2009 | 4401 vizualizări | 0 comentarii


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“In uncertain times the best strategy is always to follow the big investment money.” Financial Times

Now, I'm the first to admit that I personally have looked at a number of my Romanian investments, seen the growth, and - yes, I admit this - I've taken the profits. I've sold - flipped, basically, and made significant profits. That's how I helped my investors and covered my operational costs and expanded my investment portfolio. Look, I know we at EPIS always say think long-term and invest the same way. And I'm the first to advocate that. But we always talk about that as a strategy. Flipping isn't a strategy; but, hell, if the opportunity comes along and the profits are great, why not! Interestingly, when I've done this, I've sold to a Romanian!

Generally, though, my investment strategy in Romania is long-term (min 3-5 years) because that is how I see the biggest profits being made. So, back to following the money. FDI was around €7 billion in 2007. The World Bank estimated that €7 billion was sent home by Romanians abroad last year. I personal ly think this figure is much larger due to a lot of the international companies and their structures.

These are giant figures. These big investors are placing their money where they see the best potential long-term. Ford or Nokia doesn't intend to rip down multi-million euro factories in the next couple of years and relocate to the next super-cheap centre, do they?

So, you want to know where to invest?

You want to piggyback on huge amounts of research, the like of which an individual investor can only dream about and you want to reap the benefits of increasing affluence created by the seriously big investors? Then follow the serious money - to Romania.  Yes, times are somewhat uncertain right now - probably all over the world. When we look carefully, nowhere is immune.

But the smart strategy still applies - in the CEE pick the location in which to invest that offers the best long term fundamentals, that is growing from a low base AND the place where the big money is going.  Pick quality.  A great investment location is a great location is a great location - for the long-term. Jones Lang LaSalle, CBRE and a number of other Real Estate Experts research showed that “Romania is the fastest growing economy and Bucharest is the fastest growing city with the highest returns in Europe”. Look at it this way. The UK market has its problems right now, of course it does. But, would a new build in the heart of Chelsea  still be snapped up? Of course it would! At what price?

OK, here's another one that keeps coming back - Romania is 'expensive'.  This one really drives me nuts. Why? Because when people say this they are drawing a conclusion based on their own lack of knowledge of the country, its demand drivers and the market. Dare I say 'ignorance'? Yes, I do!

Expensive relative to what?

What these people are saying is 'I had a fixed idea in my head that it would be cheaper than it is. But the reality doesn't fit my preconceptions, so my conclusion is not that I was wrong. No, it's that it's 'expensive'. This is so wrong-headed it astounds me.

Romania is not a Borat-like place with donkeys towing cars around! Bucharest is rapidly becoming a modern, sophisticated capital with plenty of high earning professionals, with an expensive lifestyle. Just take a trip here with me and you will see what I mean. Five years ago people said the same about Poland, that it seemed 'expensive'. Now, would you have bought in Poland five years ago if you had hindsight from today? Well, you don't need to be Warren Buffett to answer that one!

There is so little mortgage debt in Romania that we haven't even seen the start of the real growth in this property market. Just look at India 10 years ago pre financing to now.  Pick up a local paper and check out the price of some of the older city properties - €1400 psm is the average going rate in Bucharest - this is more than some of the new builds on offer!

And, remember, the overwhelming majority of older blocks types of apts are owner-occupied, this is the key point - so that is locked in equity that can easily be transferred to the new build market WHEN the new builds are available with some financing help which the Government’s National Bank and its regulations  is really trying hard to kick start.  The reason the old apts are selling for such prices is that there is simply not enough new product available to buy. In fact the prices of the old apts were higher and have dropped the most in the real estate market as some supply is now available. 

I don't go much for back of the fag packet calculations, but here's one I saw the other day in a property magazine that I can't resist: The official population of Bucharest from the last census (years ago) was 2.5m. Last year, just over 300,000 new cars were registered (excluding imports and registration outside the city but brought in!) in the capital. Overall 2.8m cars are registered. Now let's assume that one car equates to two people, which I think is very conservative, especially in a developing country. Suddenly we have a population of over 5 million. For those who recall my earlier marketing research presentations, I predicted that Bucharest would grow to over 5M in population within 5 years.......is it there yet? Who knows?  I digress...

Now, let's assume that a measly 1% of those want and aim to buy a new property by moving out of existing older apt or or even downsize to a new 1-2 bed apt? That's 50,000 people. Last year some 3,500 units came to market in Bucharest. The local authority figures here state that Bucharest has a need for 100,000 new homes (a figure I could debate) but even as a minimum Over the next three years, a further 25,000 will be sold! And the reality is that the proportion of people wanting to buy is more like 10%. So where is the problem?

Now, finance! My banking friends, please skip this part !

Whilst we all love and hate banks at present and they still get paid for putting us in this crap and get paid again to take us out of this crap from not only fees but our taxes as well, where is the justice??? Sorry short jab my banking friends. Yes, finance in Romania ain't great. No one can pretend it is.

BUT, but, but...let's once again look at Poland. Finance in Poland nowadays is relatively OK, but not easy by any means.  If I'd said to you do you want 60% to 70% growth in Poland a few years ago, you'd have said, 'Sure'. If I'd said, 'Oh, but the finance is quite hard work and the products, though changing, are still not the best. So, do you still want the 70%-odd growth?' Well, you wouldn't have needed to be Donald Trump to have answered that one, would you?

Besides, the finance market for foreigners is moving at breakneck speed in Romania - it took four years in Poland to achieve what we're now seeing happen in one in Romania.  But, as I've said before - and again today - don't worry about the finance because it will be there. I have already borrowed here before and it will return albeit harder next time. And when it comes the prices will only go higher like in the past 2 years!

The next stage now is to analyse the investment portfolio based on my  new analysis of working out the Intrinsic Property Value (IPV). I study every deal and the current portfolio is being assessed for IPV, with the following:

  • location (from all angles)
  • growth in employment
  • growth in disposable income
  • growth in lending
  • relevant supply of property

For those of you who got this far, now here is what I am doing:

  • Invest new monies on distressed and strong deals with at least 65% below current market and my new formula of intrinsic property value based on a number of factors listed above.
  • lip for residential and commercial with some refurbishment due to the distressed purchase neglect by owners with no money
  • Hold good rental properties with yields of over 8%

Those who would like to know more please drop me an email and your interests and potential amounts you would like to invest be it directly, via my structure or into a fund.  I hope you found this note informative and useful. Please let me have your views for future notes.


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