RABO NewsBrief

By Michael MacBrien, EPF director general

The property industry is part and parcel of the wider economy, and property business success is largely about tailoring investment projects to future economic trends. However, that doesn't mean that property investors need to be just passive risk takers. The future is not out of our hands. Indeed, the main purpose of organised real estate is to be a player in the political process that helps shape the economy. For real estate, that 'economy' is increasingly the EU. Though real estate is by its nature subject to national and sub-national regulation, the levers of macro-economic policy are shifting to the EU. Global investors and analysts increasingly think in terms of asset allocation to the EU and Romanian real estate has to demonstrate comparative advantage in that context.

For that reason, the overriding objective of organised Romanian real estate should be to reap the full benefit of EU membership, sine qua non for making the Union's fastest growing state a top destination for global property investment. There are five keys to that:

  1. membership of the Schengen border-free zone
  2. adoption of the euro
  3. full and proper use of EU funding
  4. adoption of economic reforms crucial to facilitating property investment
  5. preservation of the EU freedom to invest in real estate without obstacle


There is nothing more alienating - more contrary to the European ideal - than borders and border guards inside the Union. It makes a Schengen investor feel he's in a foreign place. It makes companies less willing to make Bucharest their regional capital, which is a shame because it has the potential to be the Union's South-Eastern hub. It's incomprehensible that the European Commission didn't follow through on President Juncker's September State of the Union declaration that Romania and Bulgaria are to join Schengen immediately, but the problem seems to be some last-minute concerns about independent judiciary, cross-border crime and corruption. Surely one more heave and it'll be done.

The euro

I wrote about "asset allocation to the EU". It may not be the EU, but just the Eurozone, or even just an avant garde of the Eurozone led by France and Germany that is prepared to pool economic policy instruments and create a significant market-stabilising budget as well as harmonisation of company taxation and important elements of social policy.

Wall Street analysts - never hostage to political correctness - are already giving a life of its own to the Eurozone, treating it like a country and forgetting the EU. As the Eurozone further consolidates, and as the post-Brexit EU will be overwhelmingly Eurozone anyway, it is to be expected that global institutional investors seeking to put X% of their capital into European real estate will do so more and more exclusively in the Eurozone, not just because of the substantial comfort of a single currency, but also because of the perception of a deeper, more complete and transparent single market than that of the EU. Real estate investment cannot escape that. Nothing is more important than freeing Romanian real estate from the euro handicap.

Why the delay? Romania is qualified! Inflation, deficit, exchange rate, long-term interest rate, compatibility of legislation … the job is done or almost done! Even the bizarre self-imposed requirement of 'real convergence' (that Romanian purchasing power be 60% of the EU average) has been easily surpassed. What a strange situation where the foreign minister says in the same breath that the country "meets all formal requirements", "could join the currency union even tomorrow" and … "will adopt the euro in 2022"!!! It's like a tennis player at match point who just can't finish the game.

EU funding

Romania could find itself facing the problem that everyone had for so long but that the others have finally escaped. Global investors have been putting big money into European real estate for over twenty years, but until recently it was only for the capital cities, as if the rest of the country didn't exist. Only lately have they fanned out into 'secondary' cities, which is good not just for those cities, but also to avoid bubbles in the capitals. The handicap for Romania's secondary cities is poor intra- and inter-city transport infrastructure.

Fortunately, after a slow start in the previous funding period with only about € 130 million spent on the road linking Zalău and Răstoci, the bypass around Suceavea and the road between Dej and Baia Mare, for the current 2014-2020 period the EU has committed € 9.4 billion (with only an extra 2.4 billion of matching funding required of Romania) to a Large Infrastructure Operational Programme that takes a holistic approach to, inter alia, the Romanian components of the Trans-European Transport Network. That scale of investment will end up producing the kind of cutting edge transport infrastructure that the EU gave Spain and that contributed so much to Iberian real estate investment attractiveness. It's important to ensure that the same scale of effort is retained in the 2021-2027 funding period, for which negotiations begin this spring.

Economic reforms

As a result of the financial crisis, the Union devised a way by which, on the advice of the Commission, all the EU member states gang up on each one in turn, telling each government what reforms it has carry through to keep the country from creating systemic risk for the Union. It's called 'EU Economic Governance' or 'the European Semester'and it's been a godsend for real estate, because it liberalised rent control and modernised planning law in several countries. Every year, EPF produces a chart of the countries targeted for the various property-relevant policies and in 2017 as usual, Romania was clean, nothing required!

It's not what it seems. For Romania, there's simply no room for real estate as the EU priorities for the country are budgetary, fiscal, labour markets, gender equality for pensions, the wage-setting mechanism, education, healthcare, civil service improvement and public procurement reform. But that doesn't mean that there aren't major property-relevant issues, and the Commission has other ways of addressing these.

Planning law

A few years ago, the Commission's attention was brought to the extreme failings of Romanian planning law:

  1. Excessive use of derogative planning alteration practices
  2. Insufficient involvement of the public and stakeholders in the planning process
  3. Restrictions on private ownership rights
  4. Insufficient updating of general urban plans
  5. Lack of coordination between layers of planning authorities and documentation
  6. Lack of predictability of amendments to planning legislation
  7. Insufficient clarity for prerequisite permits
  8. Absence of silent approval procedure
  9. Too many bodies involved in issuing permits

Those kinds of flaws weaken the whole economy, not just real estate development. It's particularly tough for foreign investor/developers who have to navigate these inefficiencies without insider experience or contacts. It is our understanding that progress has been made in the meantime, but if not, the Commission has many ways of pressuring the government.

Property registration

The Commission is concerned to safeguard taxpayers' money and has developed 'Integrity Pacts' by which, for projects that the EU co-funds, the local contracting authority conducts a transparent and accountable process monitored by a civil society organisation. Romania submitted a tender for EU co-funding of a project for "Enhancing Coverage and Inclusiveness of the Property Registration System in Rural Romania" to be carried out by the National Agency for Cadastre and Land Registration and monitored by Transparency International Romania. That's really important because here too even more so for foreign investors, a modern and properly functioning cadastre is the bedrock of real estate activity and the wider economy.

Freedom to invest in real estate

Four Freedoms underpin the EU Internal Market: free movement of goods, services, people and capital, the last of which guarantees the right to buy and sell land and buildings anywhere in the Union without obstacle. Capital movement is also the only Freedom that extends beyond Europeans even to foreigners, doubtless to encourage inward investment to the Union. Now, out of the blue, there's a political movement to restrict foreign purchase of farm land, if not for Europeans, whose rights are ironclad, at least for non-Europeans.

The target of all this anger isn't foreign farmers or even foreign agro-industrial groups, it's institutional non-agricultural investors who are viewed as speculators, entering the game because the extreme mechanical increase in farmland prices outperforms returns in their 'normal' real estate investment business.

The country at the epicentre of this peasant's revolt is Romania, the land with the highest rate of foreign farmland investment. One estimate is that 10% of Romanian farmland is now in the hands of third country (non-EU) investors and a further 20-30% is controlled by EU investors. But interestingly, Romanians don't seem to be leading the revolt. They're not even following all that much. In the European Parliament's Agriculture Committee, where the uprising began, half the Romanian contingent didn't even bother to vote.

It's easy to understand why. The Commission's research underlines the benefits of foreign investment in agriculture: a solution to under-capitalisation, productivity gains, adding value to under-utilised land and putting abandoned land back into cultivation, improving market access and working conditions for farmers and increasing farm exports, all things that are probably very welcome in rural Romania.

Romanians should step into this debate, before somebody gives their country 'protection' they never asked for.

In the end, the picture for real estate mirrors the country itself: close to breakthrough, on the verge of 'normalisation' in core Europe. Match point.