Investing in Romania & its Real-Estate – is it a smart idea?

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From closer inspection, there appears to have never been a better time in recent history, than now, to invest in Romania. But why?

Country Summary:

Romania, being a key member of the European Union & NATO, with a distinctly pro-Europe mentality, is a country located at the crossroads of southeastern & central Europe. It is situated on the northern regions of the historically important Balkan Province, bordering the black sea with Bulgaria as its southern neighbor, Ukraine & the Republic of Moldova to the north & Hungary to the west.  It has strategic alliances with the USA, Canada & of course, the EU, as well as Asian neighbors & increasingly is playing a frontal role in European security.

With over 238,000 square kilometers of land area, Romania is 9th largest landmass in the European Union countries with a population of circa 19.27 million people (2017 data). It is the seventh largest populated country in the EU, (after respectively Germany, UK, France, Italy, Spain & Poland) so has a sizable populous as a domestic marketplace. Of that 19.27 million, 61% live in urban areas & population density is approx. 81 people per square Kilometer, a fraction of the density of the larger EU countries listed above. Germany & UK have 4 times more people per unit area for example.

Factors:

There are several factors that are likely to continue the trend of high incoming FDI in the near future; some of the most important benefits foreign investors are as follows:

  • Romania is one the top ranked countries in the CEE region with a large consumer base, a rising middle class & a steady growth in GDP both by % growth & personal individual consumption.
  • Romania is the best performing investment country from the CEE with commercial returns of 7-9% the norm.
  • Since Romania joined the European Union on 1st January, 2007, the country has undergone a significant change in its political structure. Today, Romania boasts being a politically & socially stable country within the European Union.
  • Crime in Romania is among the lowest in the EU, in almost every category. The exception being Bribery & Corruption, which is the focus of both internal authorities & international bodies currently including the EU with significant investment & efforts made to stamp this out.  The UK for example has 2,100% more overall crime incidents than Romania & 800% more crime events per capita than Romania.

  • Being a part of the European Union, Romania has access to structural funds directed towards the development (European funds).
  • One of the most significant advantages of investing in Romania is the strategic Geographic location of the country; its central location in the EU provides a easy gateway for foreign investors to access other markets within the European Union & also allows the investors to penetrate through the lucrative markets of Middle-East countries.
  • Foreign investors have access to highly qualified labor force including those with technical qualifications at a very low cost compared to almost every other EU member, position 27th from 28 member states, with only Bulgaria having a slightly cheaper labour force yet lacking the language & education skills levels. For this reason, many major German & French manufactures for example, have key automotive & domestic appliance plants here for the world’s leading brands. Almost every luxury car brand, from Rolls Royce, Aston Martin, Bentley, Mercedes, BMW, Porsche, Audi etc has significant components produced in Romania. The labour cost chart below is 2014 data & only shows the total labour force costs (so high management salaries in countries such as Germany should be factored into reading the data as it might distort the impression).

  • The country has abundant high quality natural resources including oil, mineral deposits & highly fertile agricultural land.
  • The Romanian government offers free access to the energy supplies.
  • In statistics released by the Romania Central Bank, it indicates that Romania shows an increase in the foreign investment from non-residents totaling approx. 4 billion euro in 2016, an increase of 18% over the previous year. In fact from 2013 with a figure of 2.7 Billion, investment has grown steadily year on year & looks set to continue.  This in turn affects a growing GDP, which in itself is among the highest % growth in the EU in 2016.

Market Growth:

With a GDP growing by 3-5% each year since 2013 & as the GDP chart shows, is predicted to continue this trend.  Inflation for 2017 is predicted at a respectable 1.7% compared to deflation in 2016 of circa 1.5%.  Inflation is considered key for the health of businesses such as manufacturing, in small doses to allow an economy to absorb the small cost increases they face. In the absence of inflation, there tends to be migration of production for example, to lower cost economies & a resulting increase in unemployment.  If the cost of goods rise relative to salaries not rising, it is on one hand more expensive for the population to afford the same goods, but simultaneously makes employment costs more attractive to business owners so has a circular effect.

Key Investment Areas

It is a fact that FDI has increased in Romania, the investor friendly policies by the State, flat tax regime of 16%, strategic location & availability of abundant natural resource & skilled labour force work in favour of Romania. Some of the key sectors/ industries that foreign companies consider investing in are:

Property / Real Estate: The overall economic growth in Romania & the surge in foreign investment is gradually creating an environment of prosperity throughout Romania as marked by the growing GDP values per capita.

The Real Estate industry in Romania is on the rise again after stagnation since 2008 & has a good scope for foreign investment. Residential yields are around 5-7% while commercial yields are 7-9% gross return & as much as 12% in some case.  The foreign investors in Romanian property are taking the advantage of the existing low real estate prices in Europe, which is predicted to increase moderately in the medium term.

Among the advantages of investing in residential Real Estate in Romania is the demand for post-1990, quality real estate property greatly outstrips the supply due to the large % of communist & pre-communist era property in existence, thereby there is good scope for growth in property prices & thus presents a good investment opportunity in terms of both yield & capital growth. Mortgage credit in Romania is increasingly available at competitive rates after a period of absence, given the low Euribor of recent years.  Growth is now visible after a prolonged period of repressed property prices & rents are rising. Hence, return on investment, or yields are very good for investors at this time.

Tourism: Romania is an exotic tourist destination. It is popular as a fairy-tale romantic destination as well as for its Gothic roots.  But it remains a largely unexploited market segment so competition is surprisingly low. It thus opens up great avenues for foreign investment. Investors can invest in establishing parks, activity centers, sports facilities, restaurants, motels, hotels, wildlife, nature & beach-related tourism.

Downloadable a free tourism guide here

IT: Romania is a strong IT market accounting for more than 5% of GDP in Romania. The country has made tremendous progress in all IT sectors including mobile phones & Internet. The domestic IT hardware market is worth in excess of 800 million euro annually.  The growth leaves a scope for foreign investment in the sector. The investors will be attracted invest to establish Software & Hardware development, Research & Development as well as call centers & technical support facilities.

Manufacturing: this is indeed a strong area of opportunity. The aerospace industry generates 400 million euro per year. Airbus suppliers have invested in excess of 1 billion euros in Brasov.  Many foreign manufacturing companies have brought large scale investment to manufacturing in Romania running in to hundreds of billions of euro across the sector, due to the low labour costs in Romania, positioned 27th of 28 EU countries (only Bulgaria has lower labour costs) & the relatively highly skilled workforce.

More than 50% of the companies who received non-refundable state aid for development were in the Automotive sector, itself a strategic sector of the EU, totaling almost 600 million euro, with authorities wanting to increase this contribution to 800 million euro as an additional tool for reducing the already respectable 6% unemployment.  Such large investment is crucial for the future of Automotive, Romania & indeed the whole of the EU, as it faces pressures with energy sources among other technologies.  This implication is beneficial to Romania since it has the capacity to provide both lower cost manufacturing, flexible working unions as well as highly skilled engineering professions to fulfill the R&D requirements of this changing industry.  Over 200,000 people are employed in the Romanian automotive sector at this time with many new positions announced in 2017 as companies expand.

See video interview of major manufacturing investors

Tax Incentives:

The Romanian Government’s rule to levy a flat rate of corporate tax at 16% (Tax for nightclubs and casinos: 5% of total revenue, or 16% of profit, whichever is higher), which is one of the lowest tax rates in the European Union, can greatly benefit the foreign investors.  All foreign investors investing in the country are sure to earn valuable profits from their investments.

Standard Corporate Tax: fixed rate of 16%

There is an alternative regime for micro companies, which is tax on turnover, (turnover < EUR 100,000):

  • 1% for companies that have at least 2 employees.
  • 2% for companies that have one employee.
  • 3% for companies with no employees.
  • Standard Individual Tax: flat rate of 16%

Human Resources:

Education levels in Romania are considered high within the EU with multi-language skills higher than many of the EU 28.  Over 100,000 students graduate annually, while Romania has more Engineers per capita that the USA, India, China & Russia.

For reasons of multi language skills, companies such as Oracle, Google, Microsoft, Dell, Orange, Genpact, many major call-center companies have created major organizations in Romania.  Manufacturing & Engineering companies such as Siemens, Bosch, Continental, Schaefler, Premium Aerotec, Autoliv, Stabilus, Pirelli, Preh, British American Tabacco, Ford, Lukoil, OMV, Renault, Valeo, Johnson Controls, Inergy, Michelin, Leoni, Yazaki & dozens more.

Summary:

As the figures show, Romania remains a strong contender for investment in a range of sectors.  At White Mountain we specialise in Real Estate (Residential, Industrial & Commercial) as well as Relocations. Recently we completed the sourcing & supporting the setting up a manufacturing (plastic box washing ) facility of 6,000sqm to support a large German auto-parts manufacturer. From initial request to full functionality was just 12 weeks including new staff, permits, approvals, equipment procurement & installation.  Another recent project was the sale of a 34 million euro commercial building giving high investment yield.

If you would like to talk to us about investing in Romanian Real Estate, please get in contact directly with the author of this document.

Damian.Galvin@whitemointain.ro, White Mountain Property, March 2017

 

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