First signs of the crisis: sharp increase in land and banks’ lack of interest

The first signs of an impending correction to Michael Lloyd were the rapid increase in land values and residential prices to levels way beyond the normal ratio of price that a buyer could pay.

“To see prices rise hundreds of percent in a few years is totally unsustainable”, said Lloyd, adding that the banking sector was becoming far too liberal and careless in the way they had assessed clients and projects in the rush to secure market share.

“The simplest sign was that all of a sudden, every businessman seemed to be a property developer, regardless of whether they had any qualification in or experience of the market”, Lloyd told Wall-Street.

As for the effects in the local market, Michael Lloyd, said the first impact would be the withdrawing of credit facilities which would mean that far few projects would get built as developers would have no further access to debt. Secondly this will impact on companies and their ability to trade, potentially causing a loss of consumer confidence and even the loss of jobs.

“All of this affects the demand for space which affects the chance of developers letting their products. These ‘bear’ market condition will exist for at least the next 12-18 months”, said Michael Lloyd.

Developers rethink their market strategies

As for the market evolution, Lloyd said Romania still has a long way to go to real tool its real estate stock for the 21st Century. Nearly all asset classes need to be developed and the leisure and entertainment facilities provided by the delivered projects are at the beginning.

“ I suspect this will come in the next bull market run. The key fact now is that the consumer has a choice and can vote with their money as to which type of property they prefer. This will mean that the real estate market has now become a true functioning market”, said the former head of Baneasa Project.

For next year, Lloyd says, the developers would surely rethink their market strategies, as the lack of funding will require higher levels of equity to be put into deals and developers will be less willing to do this, due to economic outlook.

This means that a largest number of projects are likely to be mothballed. I believe there will be a number of banks looking to recover cash forcing developers to increase equity margins which they will struggle to do. This will lead to an increasing number of ‘distressed’ sales”, said Michael Lloyd.

Lloyd also said the land market will hit a deadlock and we could actually begin to see a fall of prices in this segment as speculators reduce prices in order to keep selling.

“Prime product will continue to lease as there is so little of it about in Romania, but the secondary and tertiary market will really suffer”, said Lloyd.