Monia Dobrescu, Partner at Mușat & Asociații, spoke to Property Forum about real estate companies’ growing interest in alternative financing options and Romania’s tax framework for real estate investments.
This interview was first published in Property Forum’s annual listing of "The 50 most influential people on Romania’s real estate market”.
What are the prospects for the financing conditions of real estate companies this year?
The last few years have been difficult economically and socially, but the Romanian real estate market has managed to pleasantly surprise us with its ability to adapt to new conditions. Even in an unpredictable market, developers have continued with their projects, in many cases quickly adapting their business strategies to anticipate customer needs.
However, more restrictive financing conditions than in previous years in the real estate sector and the fact that applicants’ compliance with bank requirements is being watched more carefully have come as a natural consequence of recent economic developments.
Monia Dobrescu
Partner
Mușat & Asociații
Key interest rates rose for both the leu and the euro. How important is this for the financing environment of real estate projects?
It is natural that an increase in interest rates will affect both demand and supply in real estate. Investors and developers are more cautious in taking out loans amid concerns about interest rates, inflation and economic developments, while customers prefer to wait in the hope of balancing prices.
Experts predict that the impact of tighter financial conditions on the market has not yet been felt and that the real estate market will be shaped by interest rates (resulting in higher costs of developing or buying property). It is true that so far, interest rate increases have not had a significant impact on real estate transactions, which remain at a similar level to last year. It would be reasonable to expect this to change, as I do not think any developer is considering operating at a loss or very low profits.
Also, as investments are not necessarily the most profitable during this period, most likely customers who are not driven by urgent purchase needs will remain on hold.
How did the real estate client portfolio of Mușat & Asociații develop during 2022 and what are the prospects for 2023?
A large part of the real estate transactions we were involved in during 2022 are projects started or considered in the previous year and they were successfully completed. We are talking about both acquisitions and exits. We also have some new projects that were announced at the end of 2022, real estate acquisitions and business transfers with a predominantly real estate component, which is good news, especially in the current geopolitical context.
Given the tightening of monetary policy, some sectors of the real estate market (such as office or residential) are likely to stagnate this year. However, our portfolio consists also of clients in the industrial and logistics segment, which remains amongst the most dynamic, as well as retailers who are continuing their development work that makes us optimistic about 2023.
How attractive is Romania in terms of financing conditions compared to other Central and Eastern European markets?
Romania continues to be attractive and to be viewed with interest by investors, maintaining its strategic importance in this part of Europe. Despite the rise in mortgage interest rates, statistics show that Romania has not seen a decrease in annual transactions, particularly in the main segments – office space in city centres or suburban areas and properties with logistic functions.
What are the financing alternatives accessed by real estate companies outside the banking system?
Real estate companies are increasingly open to accessing different types of financing from the traditional banking system, including alternative ways of external financing such as investment funds or even crowdfunding. Recent national regulation of crowdfunding services is facilitating a new type of real estate investment in Romania, offering fast funding with relatively low costs, accessibility and flexibility.
Developers who do not have the possibility to finance from internal sources can thus opt for additional options to the established public or bank financing instruments.
What impact does real estate investment under ESG principles have on the structuring of financing transactions?
ESG regulations and standards are constantly developing and intensifying, especially in the green finance and procurement sector, with a focus on lending policies. Thus, companies that meet sustainability criteria by integrating an appropriate sustainability strategy into their business plan will benefit from lower financing costs, lower interest margins, longer maturity or lower amortization and will boost their competitive segment. In addition, the implementation of ESG standards can be seen mainly in the retail, industrial, logistics and office sectors by starting renovation and retrofitting processes in order to improve efficiency and reduce consumption.
What were the most important property transactions you assisted last year?
In 2022, we assisted Teconnex, a world-class manufacturer in the automotive industry, with the acquisition of the industrial platform in Tureni, Cluj County, where Teconnex was a tenant and where it currently operates. Also, we provided legal assistance to several companies in the Catted group for the sale of the Business Park Chitila logistics park, with a total leasable area of 7,000 sqm, and a 45,000 sqm plot of land in Ștefănești to the real estate developer Globalworth, and subsequently, for obtaining financing from Libra Internet Bank for the development of the CATTED Family residential project. Moreover, we assisted HAVI Logistics, one of the major players in the logistics services sector, in connection with the sale of its distribution centre in Bucharest, Sector 1, with an area of approximately 10,000 sqm, to a local residential developer.
How attractive is the legal/tax framework in Romania for real estate investors?
Being considered a priority sector, since construction activity is decisive for the completion of public and private investment projects, the fiscal framework for the real estate sector has a number of favourable provisions. Tax breaks on income tax and social security contributions, as well as an increase in the minimum wage in construction, will continue to apply until 2028, which has increased the attractiveness of the sector.
At the same time, the increase in the threshold for the 5% VAT rate for housing sales was also a further beneficial measure to facilitate real estate transactions between developers and individuals. However, in the context of the financial impact of the pandemic and the war on the economic environment, and therefore on the state budget, 2023 started on a negative note.
Thus, the legislator has tightened the tax treatment applicable to sales of real estate by individuals by removing the non-taxable ceiling of 450,000 lei and introducing a tax rate of 1% or 3% depending on the period of ownership (more than 3 years or not).
