Romanian inflation crept up to 3.81% in May, from 3.77% in April, after the government doubled rents for council accommodation, but investors believe growth will remain sustainable in 2007, even after the current account deficit doubled year-on-year in the first quarter. The following year may present more risks to economic performance, however, as rampant domestic demand and credit growth could begin to correct.
Inflation is still on course to meet the central bank’s 2007 target of 4.5%, said Ionut Dumitru, head of research at Raiffeisen Bank in Bucharest, especially given the strength of the Romanian leu, which surged to a five-year high against the euro this week.
Against this backdrop, Dumitru is anticipating a 25 basis point rate cut on June 25. Ivailo Vesselinov, emerging Europe economist at Dresdner Kleinwort in London, believed there might be further cuts of 50 basis points in total by year-end, due to the central bank’s concerns over currency appreciation, and despite signs of more expansionary fiscal policy.
Vesselinov emphasized that the hike in council rents will not have a wider effect on the real estate sector, because most state-owned residential properties were privatized in the early 1990s, and rents had in any case remained stable for a long time, despite rapid increases in real incomes.
Gijs Klomp, managing director for ING Real Estate Investment Management in Romania, added that foreign investment is mainly focused on retail and office space. There have been signs of cyclical overheating in this sector across central Europe, but Klomp said Romania was distinctive because of the underlying structural growth.
“At the moment, Romania has one of the lowest ratios of commercial retail centres per capita in Europe, and the stock of office space per thousand capita in Bucharest is also among the lowest,” Klomp told Emerging Markets.
However, Klomp pointed out that supply in Romania is relatively elastic, due to the limited planning restrictions compared with Western Europe, and he therefore anticipated that the pipeline would catch up with demand over the next two years, despite shortages of construction workers. Yet, he believed that rents should flatten, rather than falling sharply, because there is still pent-up demand in the economy.
“Household indebtedness in Romania is low compared with other countries in central Europe, and food consumption is a high proportion of retail sales, which is a sign of an immature market,” said Klomp.
Still, as more shopping centres are completed, investors in retail space will need to pay increasing heed to location and the choice of tenants, Klomp warned.
“The right retailers will see their turnover increase, and higher turnover means they will be able to sustain higher rents. But if you have a unit at a location or with a concept that will have difficulties when the competition becomes strong, you will have to accept a lower rent as more accommodation becomes available,” said Klomp.
In the office sector, supply was also increasing, and quality will become a key determinant for success, said Klomp.
“Where you see so much new supply coming into the market, offices that have just been built are now accepted to be the best in the market, but in the coming years you will probably see the market standards shift upwards. So you have to be very careful what you are buying at this stage, otherwise you could face economic obsolescence in a couple of years,” he concluded.
(For more analysis of Central European real estate markets, see "Safe as houses in Central Europe?").