Reason No. 1 – A Booming Economy
According to the National Statistics Office the economy grew an encouraging 8.2% in 2004, 5.3% in 2005, and growth of approximately 7% is forecast for 2006 and 2007. In fact, the Q2 2006 GDP growth rate was up 7.8% compared to Q2 2005, which makes Romania the fourth fastest growing economy in the EU after Estonia, Latvia and Lithuania.
Reason No. 2 – Falling Inflation
2005 also saw inflation fall to a record low of 7.5% from dizzying heights of 22% in 2002, and it is expected to fall to 3.8% by 2006. With inflation under control, this will inevitably lead to more confidence in the property buying market.
Reason No. 3 – Growing GDP
GDP (purchasing power parity) reached US$183.6 billion in 2005 and it’s projected to exceed the US$200 billion mark in 2006, that’s a 17% growth rate per annum since 1999. At this rate, Romania is set to become one of the largest economies in Eastern Europe.
Reason No. 4 – Increasing Employment
Unemployment fell to 6.2% in May 2006 (less than 3% in Bucharest) which is lower than many more developed European economies. This is rate is still falling rapidly.
Reason No. 5 – Increasing Foreign Investment
Foreign direct investment (FDI) has accelerated fast since 2001, reaching over €5,000 million in 2005, and the prestigious Vienna Institute For International Affairs predicts it will exceed €8,000 million in 2006 – some of the most impressive figures in Eastern Europe.
Some of the larger foreign investors in Romania include Renault, Mittal Steel, Siemens, Colgate-Palmolive, Philip Morris, ABN Amro Bank, Bank Austria, Continental Automotive, Daewoo, McDonalds and Coca-Cola.
Key Romanian industries (and significant exports) include clothing and textiles, industrial machinery, electrical and electronic equipment, semiconductor fabrication, metallurgic products, raw materials, motor vehicles, military equipment, software, pharmaceuticals, chemicals, petrochemicals, foodstuffs, agricultural products. The service sector grew by 8.1% on average in 2005 (construction 9.9%).
Romania has a leading role in attracting FDI in Eastern Europe. In 2005, out of the total EUR 10.4 billion in FDI attracted by countries in the region, Romania received half of these inflows. The positive trend continues in 2006, where, in the first four months of the year, FDI increased 130% over the similar period of the previous year, up to EUR 2.3 billion. Comparatively, Poland reported EUR 2.7 billion as direct foreign investment over the same period, Bulgaria EUR 765 million and the Czech Republic, EUR 564 million.
Since the late 1990s, there have been several economic reforms (many instigated as part of the country’s bid to join the EU) including the liquidation of the large energy-intensive industries and major reforms in the agricultural and financial sectors. As of 2005, a significant amount of Romania’s major companies have been privatised, including the majority of banks, the largest oil companies Petrom and Rompetrol, energy distributors and telecommunications companies.
Reason No. 6 – Growing Tourist Industry
Tourism is also becoming increasingly important to the economy and incoming tourism receipts is expected to reach $8 billion in 2006 with a 7.4% annual growth forecasted over the next ten years (Source: World Travel and Tourism Council).
Tourism is important for two reasons. Firstly, is that it is one of the fastest growing industries in the world. As air travel becomes easier and cheaper, tourism has been increasing over the last few years. Secondly,
Reson No. 7 – EU Funding
Romania has been the biggest recipient in terms of EU funding per capita between 2004 and 2006. Romania will receive an additional €30 billion for the years 2007-2013, the highest allocation of all the new EU member states. This money will pumped into the local infrastructure such as road, hospitals, schools etc.
This will inevitably lead to more jobs and therefore more people who can afford to rent and buy their own property, and with the introduction of mortgages for Romanian nationals, which have only been around since 2004, this will all lead to a massive boom in real estate prices.
EU Funding For The Ten New EU Members And Accession Countries 2004-2006 (EUR
Million)
Reason No. 8 – A mortgage market that’s about to go through the roof
Mortgage growth and debt comparisons worldwide
Romania’s mortgage lending compared to GDP is tiny in comparison to the other Western European countries. This will most certainly grow over the next 10-20 years.
Per capita living in Romania is 17 SQM (Source: HVB Bank), which is 32% the EU average.
The growth so far has been fuelled by a growing domestic middle class sector who are earning good money, and they prefer, and can afford to buy new apartments. Foreign business people will also fuel the growth.
Mortgages for foreigners have, until now, kept many property investors out of the Romanian property market, however, since joining the EU, many new products are being launched, specifically for foreigners. Come 2008, finance should be plentiful, as in the rest of the EU. IN addition, with interest rates falling from 13% in 2006 to 6.9% today, this will also fuel the growth of the mortgage market, both domestic and foreign.
Reason No. 9 – Property prices will increase in-line with wages, which are increasing 13 percent a year
At the moment Romanian wages are just 14 percent of EU average.
If Romanian wages and salaries continue to increase by an average 13 percent per year (as they have done during the previous five years), it will double around every six years. In order for wages to rise to the current level of the EU average, it will take 29 years. This is assuming the average euro wage increases by four percent per year and Romanian wages increase by thirteen percent over the same period.
The EU average wage is currently €2,335 per month.
This rapid increase in wages is good news is good news for Romanians. This means the general wealth for the typical Romanian is increasing as well as their anticipated future wealth is also seen very positively, this leads to more confidence in their personal finances which therefore leads to greater confidence in taking out mortgages and loans (see point 8 above). This creates a credit boom which is exactly what the other Eastern European countries have experienced since joining the EU in 2004.
Reason No. 10 – Lowest tax rate in the European Union
Recent fiscal reforms to make Romania more competitive (and discourage the sizable black economy) have also served to boost the property market – and promote Romania as a modern low tax country. In January 2005 the Government introduced a flat rate of 16% for income and corporation tax, the same as Honk Kong’s and the lowest tax rate in the EU.
Flat tax is believed to:
• help reduce red tape and associated difficulties and confusion
• reduce inequity (same rate for all)
• counterbalance tax dodging and cheating
• provide incentives to work, save and invest
• generate increased tax revenue, and thus
• spark off a ‘mini economic boom’
A low-tax environment attracts foreign companies which leads to both Foreign Direct Investment and therefore more jobs for Romanians. This again means many more people are able to afford to take out mortgages for property.
Comparison Of Personal Income Tax Rates in Europe
(Highest personal tax rate used for comparison.)
Conclusion for the next 20 years?
In 2007, it is my prediction that property prices, subject to global economic conditions, will increase by about 20-25 percent with a further 20-25 percent increase for 2008. My long-term forecast for the next 20 years (from 2007), is a 12 percent increase per annum, with up to 25 percent increase during the initial 5 years.
This will be due to low property prices, a massive influx of FDI, EU funding, growth in tourism, growth in jobs, people taking advantage of new low interest rates, an increase in foreign property investors and financial institutions taking advantage of low residential and commercial property prices.
Even based on a conservative 12 percent per year, prices will double every six years and will rise eight times over an 18 year period.
If you are interested in buying property in Romania, you can download Darren’s free 78-page book called ‘How to profit from the NEXT biggest property boom in Eastern Europe’ by going to www.BucharestProperty.com