Potential impact of the war in Ukraine on the Romanian construction market

Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania

Construction in Romania is not directly impacted by the conflict in Ukraine, however, there are several issues that would be indirectly made worse by it: construction costs, interest rates and inflation.

Construction costs already grew at a fast rate in 2021 (+25% yearly average over 2020), and even more so in early 2022, with January seeing a 41% increase in costs compared to January 2021. In these circumstances, an increase in energy costs and base materials due to both import difficulties and increases in global prices would lead to even higher costs and discourage investment in new construction. The Romanian economy is not strongly connected to that of Russia, Ukraine or Belarus, with imports from all three countries totaling at less than 5% of all imports into Romania in 2019 and exports to them totaling less than 2.5% of all exports in 2019 (last year unaffected by the pandemic, source: NSI). However, there are some segments where trade intensity is much higher: energy and ores. In 2019, 37% of all mineral fuels and oils and 40% of ores came from one of the three countries. Thus, trade difficulties would negatively impact the availability of fuel and materials and, thus, the price of construction.

Brasov, Romania, 3 March, 2022. Photo by Traian Titilincu on unsplash.com

While construction costs impact supply, the other two issues (interest rates and inflation) work together to negatively impact demand. The National Bank of Romania increased the reference rates to 3%: the 5th raise since September 2021. This will have a knock-on effect on the costs of consumer and new mortgage loans, making them more expensive, at a time when the residential real estate prices are highest since 2008 with asking prices for apartments up 20% in March 2022, compared to the same month of 2021 (source: imobiliare.ro). Coupled with record levels of inflation, especially related to fuel, heating and food, this would make financing new home purchases exceedingly difficult, and will push demand down.

Although the non-residential construction market, thanks to the easing of restrictions, was on recovery track, all the previously mentioned factors would hinder recovery. Additionally, the subsector would also have some specific challenges such as global supply chain disruptions due to sanctions, rising energy and transport costs at a time when there is a moderate worker shortage and increased pressure from employees for more remote work options.

When it comes to civil engineering, demand for construction remains high, but the ability of the government to deliver on that demand will be hindered by reductions in the available budget for investment. Increased construction costs make public investment more difficult. The increasing current account deficit, the need for subsidies to counter the effects of inflation and energy costs on the most vulnerable citizens and increased defense spending (to 2.5% of GDP in 2023, from 2% in 2022) are all eroding the public funding available for construction of civil engineering projects. The saving grace of the segment will be the availability of EU funding, however even that will be made less effective by the increases in costs. 

How will Romania’s National Recovery and Resilience Plan impact the construction sector?

Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania

The Romanian construction is poised to grow in both 2022 and 2023. The main drivers of growth vary, including low interest rates and excess liquidity that boost the residential subsector or the use of EU 2014-2020 cohesion funds to help boost civil engineering.  At the same time, the pandemic and the responses to it negatively impact construction, mainly in terms of hotel and restaurant construction, but also when it comes to office buildings. The EU Recovery and Resilience Facility (RRF) is another potential source of funding that could help counter these negative effects and maintain Romania’s construction sector on a positive growth rate for the near future.

Detailed construction forecast up to 2023 for Romania is available in the latest EECFA Construction Forecast Report that can be purchased on eecfa.com.

What is the PNRR?

The National Recovery and Resilience Plan (PNRR) contains the projects and measures Romania aims to implement in order to benefit from the EU’s Recovery and Resiliency Facility (RRF). The RRF is a temporary instrument used as a means to mitigate some of the pandemic’s effects on the members’ economies and has a total funding budget of EUR 723.8bln (out of which EUR 29.2bln are available for Romania).

The RRF sets minimum targets for climate spending (37%) and digital spending (20%), which Romania has pledged to exceed (41% and 21%, respectively). Romania’s Recovery and Resilience Plan includes 171 measures (out of which 107 are investments) and has six pillars, mirroring those of the RRF.


How do the RRF and PNRR work?

Out of the total amount, Romania can receive EUR 14.2bln in grants and EUR 14.9bln in loans (this is 13.09% of 2019’s GDP). A pre-financing payment of 13% of each financing source has been granted to Romania, with the remainder of the loans and grants arriving in up to 10 installments, which are themselves conditioned on the achievement of the milestones agreed with the EU in the PNRR. These milestones include several legal, policy and administrative reforms, as well as the completion of investments on time. Thus, the amounts received could be delayed or even rejected if Romania fails to achieve its milestones and targets.

How will this impact the construction segments?

Residential construction

The PNRR has provisions for both new construction and renovation of dwellings. In terms of renovations, the plan has EUR 1bln allotted for improving the energy efficiency of around 4.3mln sqm of residential stock. To put this into context, in 2019, the entire residential renovation market in Romania totaled EUR 800mln (source: NSI). This measure has a deadline of June 2026, and the first step is for the Romanian Government to create a national support scheme (by March 2022) and the local authorities will award the actual contracts.

Regarding new construction, 4418 new units will be built for the housing of young people from vulnerable communities and 1104 new units for teachers and healthcare professionals in areas where access to these services is lacking, such as villages and small towns. The assignment of contracts will again be tasked to local authorities, according to a grant scheme built on national level. The program has a deadline of 2022 for the assignment of contracts and 2026 for the actual construction. The impact of this measure on the construction segment would be rather small, since, for comparison, in 2019 there were 67488 new residential units constructed across the country (source: NSI).

Non-residential construction

The PNRR should impact several types of non-residential construction, but mainly healthcare, education and public buildings.

In terms of healthcare, there are several investments planned:

  • Renovation of at least 3000 family doctors’ practices by the end of 2023.
  • 124 additional neonatal intensive care beds would be made available through the modernization/extension of 25 intensive care units, by the end of 2024
  • 30 outpatient care units would be built or renovated, also by 2024.
  • 200 community centers would be built or renovated by mid-2025.
  • And finally, by mid-2026, 25 new hospitals would be partially financed by the program with a focus on the energy efficiency of buildings. This would also cover the required medical equipment.

When it comes to education, there are also several projects planned, including:

  • 110 new childcare facilities (EUR 230mln),
  • 10 mixed integrated vocational campuses (EUR 338mln),
  • 300 000sqm of educational spaces to be renovated, another 46 400sqm built with a “green” focus and 3 200 electric school minibuses to be purchased (EUR 425mln),
  • construction and modernization of 19520 reading places, 6625 canteens and 19130 student housing places for universities (EUR 260mln),
  • Additionally, 75 000 classrooms and 10 000 labs would be re-equipped across the country (EUR 600mln).

The total budget of these investments in healthcare and education exceeds EUR 4bln if we include the equipment. For comparison, the total expenditure for the construction of healthcare, education and recreational buildings in 2019 was EUR 284mln (source: NSI) so the impact of the PNRR here could be rather large. The renovation of public buildings is also included in the plan with a target of 2.3mln sqm to be renovated with a focus on improving energy efficiency on a total budget of EUR 1170mln and another 1.3mln sqm for moderate renovation (EUR 575mln). For comparison, in 2019 the entire administrative building segment saw less than EUR 266mln invested in renovation (source: NSI), so here, again, PNRR could help grow the construction segment.

Civil engineering

PNRR targets several civil engineering segments as well, with a focus on public utilities, transportation and energy.

In terms of public utilities, the water network would be expanded with 1600km and sewers with 2900km until mid-2026 on EUR 800mln. For reference, in 2020, compared to the previous year, the networks increased with 1500km and 1898km, respectively, so this would in effect be comparable to the current yearly output in this segment. Another focal point is waste management with EUR 1239mln allotted for various investments in waste collection, monitoring and recycling. 

Sustainable transportation takes up more than 1/4 of the total PNRR budget, with an EUR 7.62mln allocation. This would include:

  • EUR 3.480bln for railroad infrastructure – 2426km of rail renewals, 315km of modernized rail and 110km of electrified rail. For reference, in 2019 the value of railroad construction was EUR 185mln (source: NSI).
  • EUR 3.095bln for the construction of 429km of motorways (equivalent to the amount of new motorways completed between 2012 and 2020). The program will finance several segments on the A1, A3, A7 and A8 Motorways. For comparison, in 2019, EUR 227mln were spent on motorway construction (source: NSI).
  • EUR 600mln for the metro networks in Bucharest (5.2km) and Cluj Napoca (7.5km).
  • EUR 620mln for green transport infrastructure – electric vehicle charging stations (52) and urban bicycle lanes (1091km).

When it comes to energy, the focus is of course on renewable and green initiatives:

  • EUR 460mln for 3000MW of new wind and solar plants and developing battery storage facilities (480MWh). For comparison, the net generating capacity for wind and solar power across Romania in 2021 was 4273MW (source: Transelectrica), so this program would significantly increase production capacities.
  • EUR 515mln for renewable gas transportation, green hydrogen production and energy storage using hydrogen (1870km distribution pipeline).
  • EUR 300mln for methane production for electrical and central heating (1300MW).
  • EUR 280mln for battery and photovoltaic panel production and recycling (2GW worth of batteries /year).

Conclusion

The PNRR’s impact would be maximized by reaching the appropriate milestones and targets on time, and by using this program together with other financing sources, like the national budget or other sources of EU funding.

Thus, if implemented fully, it could have a positive impact across the entire construction sector, from residential and non-residential renovation, to road, railroad and energy related construction.

Despite the pandemic home prices in Romania are increasing. But why?

Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania

Spectrum Residences, Constanta, Romania. Source: re-act.ro

One year later.

In January 2020, the World Health Organization started issuing the first warning of a novel coronavirus emerging, and on 26 February the first case was confirmed in Romania. Measures taken to try and contain it led a state of emergency and a lockdown introduced on 16 March. One year later, we can look back at how the residential real estate market reacted to the pandemic and the economic crisis that accompanied it, and we can make an attempt to understand where the market might go next.

To start with, prices on the residential real estate market in Q1 2020 reached their highest value in the past decade and an unease started to permeate the market with flashbacks to the 2008 credit crunch and the massive drop in prices and transactions that followed. This made many developers rush to complete projects before the market collapse, a trend we described in a previous blog post.

Prices did indeed start to drop slightly by Q3 2020, but they remained at a level higher than that of the previous year and by the end of the year the early indicators pointed to a return to growth. This has been pointed out in other markets as well and seems to have impacted a large number of developed and developing economies. However, each country is different, and in the case of Romania, albeit some of the causes of this phenomenon are shared, the outcome and forecast might be different.

Residential forecast is available in the latest EECFA Construction Forecast Report Romania that can be purchased on eecfa.com

Everything is relative and so are prices.

One can wonder if these prices are too high, and if they might grow further or if we’re looking at a potential bubble that will burst in the near future. We previously addressed some of these questions in (yet) another blog post.

Since then, the main factors have changed in light of the pandemic, but it might still be useful to look at the same ratio between income and home prices that we analyzed then and bring it up to date. In 2007, the average net monthly income could buy you approximately 0.20sqm of an average located two-room apartment. By 2017, when we last ran this test, one could buy 0.46sqm with the average wage. For 2019 and 2020 alike, our estimates place this indicator at 0.50sqm and so home prices relative to income actually seemed to be relatively stable.

Why some prices were expected to fall and why they haven’t.

While in general there might be a plethora of reasons for residential prices to drop, in the case of the pandemic-related economic downturn we were initially looking at several factors, somewhat similar to those we saw in 2008, such as unemployment, lower income, higher mortgage default rates, stricter lending criteria, higher interest rates and/or a rush to sell off properties by underfunded developers. In the case of the pandemic, some of these did indeed happen:

  • Employment did indeed decline between March and November 2020, but only by 2%-3% compared to the same months of the previous year (source: NSI). This was largely due to the employment protection measures taken by the government, which provided incentives to furlough personnel rather than firing them.   
  • Average income rose during the pandemic. Even in April and May, the months worse hit by the lockdown, net wages actually grew by 2% over the same months of 2019 (source: NSI). This was also maintained by the furlough scheme that provided payments of up to 75% of wages for the employees of companies affected by the pandemic.
  • Loans past due declined. By November 2020, the share of loans past due in total loans was 4.83%, down from 5.46% in November 2019 (source: NBR). Granted, this is still far from the 1.24% average we saw in 2008 but is well within the general descending trend of the previous three years. There was some government support in this segment as well, with the possibility of postponing loan repayments for those negatively impacted by the pandemic, and some banks also took their own measures in this direction.
  • Lending criteria and interest rates. Lending conditions remained relatively stable while interest rates for mortgage loans declined slightly by November 2020 over November 2019 (-0.5pp, source: NBR). This was partly due to the impact of the tax change in late 2018 that raised interest rates in 2019 over their trend and was later reversed.
  • Developers had a more secure line of financing. While during the previous recession in 2008 a lot of development was carried out through credit, by early 2020 many properties under construction were pre-sold, and down payments on these provided the necessary cashflow to continue building and even wait longer to find buyers in order to sell at a better price.
  • Furthermore, due to the reduced spending possibilities with the shutdown of non-essential travel, in-restaurant dining and entertainment venues, spending habits changed. Despite income slightly growing (on average), the saving rate went up and thus by end 2020 the population had a lot more money saved on their accounts, even if the term deposits didn’t go up as much. This high level of very liquid capital can be used to fund residential investments, be it renovation, construction or purchasing a new home.

Where the market is heading.

The longer-term trend of price increases on the residential market continues to be the most likely scenario as demand continues to outpace supply in many of the larger cities like Bucharest or Cluj Napoca. Some potential events would bring merit to a more pessimistic outlook:

  • Changes in employment and income might be ’ticking bombs’. As said, a lot of the market stability is due to government intervention in preventing mass unemployment and ensuring a minimum income. Once these braces come off, there are genuine concerns that the labor market might see a correction, which would have a negative impact on the residential real estate market. The risk of this is somewhat low, though, since a large portion of those furloughed have returned to work (with some notable exceptions in the hospitality industry), but a small correction could still happen.
  • Medium- and long-term changes in work trends. With the surge in remote work due to the pandemic measures, one can wonder if this would lead to more structural changes in the way people work in the future. If remote work becomes more common for a significant proportion of people, this will have a massive impact on the residential market. It would lower demand in large cities and increase it in metropolitan areas and smaller cities. This would be somewhat limited in the case of Romania, though, as the country still has relatively large economic segments being less prone to remote work such as manufacturing and construction.
  • We are already noticing some changes in home buyer preferences. After spending more time at home, either in lockdown or from working at home, home buyers now focus on larger homes, preferably with a yard or at least a large balcony.

Case in point: Cluj Napoca.

Taking Cluj Napoca as an example, the local real estate market is seeing massive demand increases as young people, mainly in the IT field, move to the city to study and take up work. They enjoy higher-than-average income and living in the city gives them proximity to various entertainment and services options, access to a booming labor market, entrepreneurship, and business opportunities. But they also have some major downsides: high rents and residential prices that chip away at their income, gridlocks, light and noise pollution and many other disadvantages of living in a city. With the advent of the work-at-home scheme, they might be more interested in relocating to homes in the neighboring rural area (even more so than they are now) and thus retain a higher share of their wages without the downside of commuting. This would put less pressure on the residential market in the city itself, and lead to lower rents and prices. The city thus becomes less interesting for developers and construction might slow down.

The conclusion.

Despite the pandemic, home prices are seemingly growing. While this might seem strange at first, the actual impact of the current recession on home purchases is limited since the average individual still has their job with a similar or even higher income and is actually spending less of their income on goods and services and thus can afford to save for a down payment. 

In the shorter run, the market shows some signs of overheating, but is far from brittle. If the pandemic recovery turns out to be lengthy and there are major changes in the way work is done, it could limit prices and drive them down temporarily. However, if you are holding out in buying a home waiting for prices to collapse, you might be in for a bit of a disappointment.

Q1 2020 sees rush to complete ongoing projects in Romania

Written by Dr. Sebastian Sipos-Gug – Ebuild, EECFA Romania

The first quarter of the year 2020, mostly starting with mid-February, was marked by ominous economic forecasts. Thus, some decline in construction activity was to be expected, and indeed newly started construction projects dropped to just over EUR 1.3bln in Q1 2020. This amounts to a 14% decrease compared to the equivalent period of 2019, according to the latest edition of the EBI Construction Activity Report for Romania.

At the same time, the amount spent on construction increased by 25%. Coupled with the record amount of completed construction works (nearly double that of the first quarters in each of the previous 5 years), lends us to the conclusion that investment was increased in order to rush and complete the (at the time) ongoing projects, before the anticipated negative economic impact of Covid-19 took place.

Covid-19 changes in reporting frequency

In light of the Covid-19 pandemic and the accompanying economic impact, the data visualization for EBI Construction Activity Report is currently updated on a monthly basis, rather than quarterly.

Renovation activity increases in building construction

Building constructions started for the first quarter of 2020 dropped by 3% over the same period of 2019. However, the amount of new building construction for Q1 2020 is actually higher than in the first quarters of 2014-2018, and thus this small drop is more due to the good performance in 2019 than a clear sign of decline for 2020.

Looking at renovation figures, however, we can notice a somewhat new trend: that of increased renovation activity. While new building construction can, and in some cases was, pushed back due to uncertainty regarding the economic conditions, renovation works are less prone to this effect since they are more urgent in nature. Furthermore, as government measures started to be implemented in March, individuals and businesses alike needed to make adjustments to their living and working conditions: spaces were converted to quarantine centres, offices and industry alike had to adapt to new conditions and started to ensure layouts that allow more social distancing, hospital wings were relocated and so on.

Civil engineering output exceeds expectations, but low activity starts caution about future

The first quarter of 2020 saw an estimated expenditure of EUR 804mln on civil engineering projects, exceeding any single quarter since data aggregation started in 2014. The high level of output achieved came with the completion of many ongoing works and comes with a significant caveat: the quarter was also markedly worse than the previous year in terms of Activity Starts, with a 38% drop over Q1 2019. The most notable drops in new projects were in the segments of road and public utilities. Both reportedly had quite an increase in output over the same period, and thus the focus here seemed to be completion, rather than starting new projects.

Regional disparities in new construction activity

Despite the national-level decline in new activity, a large level of regional disparity can be noticed. The Center, South and West regions are showing an actual increase in construction starts compared to Q1 2019 in several segments, moving against the overall trend of the country. This could be an indicator of the higher level of resilience of local construction markets and a higher investor confidence in local economies. These regions might also be tardier in their response to the anticipated crisis, but it’s something to keep an eye on in the future and more data will show how resilient they are.  

EBI Construction Activity Report

The EBI Construction Activity Report is a quarterly publication that relies on the project information database of iBuild and is prepared by Buildecon and Eltinga. It comprises an analysis of projects based upon several object types: multi-unit residential construction, non-residential (further split into 9 segments) and civil engineering (split into 8 segments). The report offers information about the number and value of projects started or completed, and an estimate of the total amount spent on each segment in that quarter. If you would like to receive a data visualization for the EBI Construction Activity Report free of charge, please write to us at the ebi@ibuild.info e-mail address.

Romania C-19 situation in construction (status on 30 April 2020)

Written by Dr. Sebastian Sipos-Gug – Ebuild, EECFA Romania

UPDATE ON 7 MAY 2020: from May 15 on a “state of alert” will take over the “state of emergency”. People will be allowed to move freely within localities without having to declare their destination, but only in groups no bigger than 3 people. Movement restrictions in towns under quarantine will remain in force.

Timeline

  • 26 February: the first confirmed case reported in Romania
  • 11 March: schools closed
  • 16 March: the Romanian president issued a state of emergency, granting the government enhanced emergency powers to cope with the pandemic. At the time Romania had 168 confirmed cases and no deaths.
  • 17 March: restaurants closed, and all public gatherings and events suspended
  • 21 March: shopping malls closed
  • 22 March: first death attributed to Covid-19 reported
  • On 24 March a state of lockdown was announced via military order and the population was restricted from moving freely outside of home, with several exceptions (work that cannot be done remotely, essential shopping, assisting the elderly, medical emergencies, walking pets, personal exercise in the proximity of the home, volunteering, agriculture). A proof for the valid reason for leaving home is required, with citizens asked to produce a personal statement prepared before leaving the home and/or to have a proof of employment. Elderly citizens (65+) were further restricted, being allowed to leave the home only for 2 hours per day (11:00-13:00). However, retailers were instructed to provide preferential service to them during this interval.
  • On 15th May, the State of Emergency is up for revision. However, even in the event of it being lifted, some restrictions are to remain in place, like the interdiction on festivals and large gatherings and the mandatory use of face masks in public spaces and on means of public transport.

Construction Works

  • While the lockdown significantly reduced the mobility of persons, it provided little restrictions in the range of work activities that could be done (dental work, non-emergency medical interventions, hospitality and in-house food service).
  • As of the writing of this article, there have only been a few major construction works delayed and, anecdotally, some projects are in fact moving faster than scheduled, such as bridge and road construction, taking advantage of reduced traffic. DIY works are also reported to be ongoing, with furloughed workers from other industries taking advantage of the time at home to engage in renovation works, with a noted increase in online sales of DIY retailers.

The new EECFA Romania Construction Forecast Report is planned to be issued on 29 June 2020. Sample report and order

Factors limiting the construction sector’s performance

The direct impact on the ongoing construction activity has been minimal since no restrictions were in place specifically targeting construction works. Recommendations regarding social distancing were given, but not mandated. Several indirect factors, however, were expected to limit the amount of construction activity:

  • Initial concerns over construction material availability have been raised. However, as of yet, no major shortages have been reported. Some manufacturers noticed a reduction in direct sales to individuals, however, B2B material sales have continued at comparable levels and online sales have increased.
  • Occasional worker shortages have been reported, as some workers have taken medical leave or used vacation days, especially in the early stages of the lockdown. Fortunately, no major shortages have been reported due to the infection.
  • At the same time, other companies have had to let employees go, with 37.750 work contracts in construction having been terminated from the start of the emergency period as of 29th April.
  • Lack of interest in investment is expected, especially in the hotel and restaurant segments, which will likely reduce demand in the current year. With slim changes of reopening for the summer season, tourism related construction is expected to be postponed.
  • Trends in office construction are also expected to change, with working from home on the rise and open office plans under scrutiny.
  • Lack of public funding could have a major negative impact on construction activity once the initial blow of the pandemic passes. Many county governments and city halls have used a large portion of their investment funds for measures aimed at reducing the spread of the virus, and thus there remains little for projects like infrastructure development or renovation. On national level, according to several governmental agencies, public deficit is set to reach 6.7-7.3% of GDP in 2020 and economic growth is to be stunted, with a decline of at least 1.9-4.7% of GDP.
  • Lack of private funding is also a major concern, with many companies losing significant resources and burning through their savings and credit lines.
  • At the same time, more than 1 million Romanians have had their work contracts suspended and 270 thousand lost their jobs since the state of emergency was instated (as of 29th April) and thus their spending power would have been significantly diminished.
  • Real estate transactions are showing signs of slowing down, with March 2020 seeing 4.6% fewer houses and 11.7% fewer apartments traded compared to the previous month. The market remained 8.5% more active than March 2019, however.

Anticovid measures in construction

There are no specific measures announced, as of the time of writing this article, aimed to supporting construction. However, there are some measures that could, indirectly, help:

  • The government is providing the resources to pay 75% of the initial wage for those with suspended contracts, helping public consumption remain afloat, with a positive impact on companies trying to retain qualified workers and maintain their cash-flow.
  • A RON 15bln program to support small and medium enterprises (“IMM Invest”) was launched on 28th April, providing state-backed loans for investment and working capital.
  • EUR 750mln have been allotted from EU funding for Romania for supporting small and medium enterprises, with a further EUR 300mln for assisting workers with suspended contracts.
  • The government’s economic recovery plan takes into account using infrastructure construction to boost the economy (which would increase the deficit even further). However, as of the writing of this article, no plan has been approved, and so the impact it would have cannot be assessed.
  • The government backing of mortgage loans for first time home owners is expected to continue into 2021, rebranded as “One family, one home” (Romanian: “O familie, o casa”), which should help counter some of the negative effects on the residential market. Its impact on the market diminished in 2019, with regular loans becoming almost as affordable, but it comprises a large portion of the segment nonetheless, since the programme covered 45% of all ongoing mortgage loans in March 2019.

Mixed Feelings on the Romanian residential market

Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania

Romanian snowglobe
Source: https://sofiaadventures.com/romanian-souvenirs/

Revisiting the Romanian residential construction market

We previously looked at the stability of the Romanian residential construction market and the likelihood of a correction even in the scale of the 2008 one. A lot has happened in the year since our previous post and we see ourselves faced with a similar question regarding the future of the residential construction, albeit now of a substantially different one. Previously, the main threat to market equilibrium used to be the oversupply due to speculative development. Now, we are faced with the distinct probability of a drop in demand.

Emergency Government Ordinance no. 114/2018 (EGO 114)

Residential construction was quite active in 2018, and our previous analysis indicated that despite significant growth in the past years, the market could be considered relatively stable. This has changed dramatically due to government intervention at the end of the year through Emergency Government Ordinance no. 114/2018 (EGO 114).

There are a number of features of this legislative paper directly and indirectly impacting residential construction: changing the minimum wage for construction workers, tax breaks for construction companies, changing the taxation of telecom and energy companies, and a new tax on bank assets.

Construction

Starting with 1st January 2019, the minimum wage for construction workers has been raised to RON 3000, up from RON 1900 previously, and higher than the RON 2080 value for the rest of the economy. The government also included in the Ordinance a tax break for these wages, exempt from income and health taxes, yielding a much better net to gross ratio for employees. However, the total impact on salary costs for companies remains significant. According to Continue reading Mixed Feelings on the Romanian residential market

Growing too fast? The stability of the Romanian residential construction market

As the housing market in Romania is seeing a rapid expansion, this rings the bell to some experts: there is a growing concern that the 2008 turmoil might repeat itself. Can the 2008 crunch be back in the Romanian housing market? This article is looking at the probabilities of this to happen.

Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania

High-end residential project, Herastrau, North of Bucharest, Romania. Source: http://www.ascendproperty.ro

For almost a year now, concerns have risen regarding the Romanian residential market. Any instabilities in this field would have major implications across the whole construction sector, since residential construction accounted for approximately 1/3 of the yearly construction output of Romania in 2016.

Opinions emerged regarding the similarities between the 2007 and 2017 market dynamics, and reports by the National Bank (BNR), National Statistics Institute (NSI) and real estate agencies indicated unusually high growth rates of residential prices.

So, how likely is a correction event?

To answer this, we must look at the idiosyncrasies of the Romanian construction market, the similarities and differences between the collapse in 2008 and the current status.

The residential construction market in Romania is a mix between large projects, run by speculative developers, small projects contracted to construction companies and projects built by the owner.

Romanians are generally home owners, with 96% living in a house they own. They are also very fond of building homes themselves, mainly in the rural areas. This trend of self-development, mainly in the rural areas, is relatively untouched by macro-economic phenomena. Any disposable income is invested into construction materials that are used to build up or expand the home, leading to very low construction costs.

The main source of instability, however, is that of speculative urban (or suburban) development. With profit margins boosted by the real estate price increases and high demand, investments into residential construction are attractive. This has been evident in the years leading to 2008, as the number of homes in multi-unit buildings completed in 2008 was nearly three times that of the previous year, and the number of permits for this building type doubled yearly between 2006 and 2008.

The current status of the market is optimistic. Two-digit growth rates are estimated for 2016 and 2017, with EECFA’s forecast being positive until at least 2019 (the latest EECFA Romania Forecast Report can be purchased here).

Those who express concerns regarding these growth rates look at the similar results of 2006-2008 and expect another collapse of the market to take place. Other concerns are that much of recent growth has been backed by government subsidies. Under the ’Prima Casa’ Program, the mortgage market has considerably grown since 2010. Continue reading Growing too fast? The stability of the Romanian residential construction market