You have also the possibility to buy a flat, but for the amount mentioned it will be a flat in an old building where the quality is not the one requested by people who want to rent flats in Bucharest. You have also to consider that if you rent out, you must have somebody on the spot for the administration and there are not yet specialized companies in Romania. Furthermore, it would be a flat which would suit well to Romanian tenants and in this case you would have even a problem to get your money from the rent as they do not dispose of stable finance.
If a foreign investor buys a flat for renting, he chooses foreign tenants (embassy employees, employees from multinationals or HNWI) and those people rent only new and very expensive flats. In an old building you have to take care also about the way it had been built, as Romania is a seismic region and not in all periods, construction rules were observed by construction companies as they are today.
All this to show you, why not even me, and I am born in Romania, has bought a flat in an old building. And a certain period, we could buy one for EUR 10’000.
Which would be the return of an investment in a residential construction project?
The real estate business is very dynamic in Romania. The prices of plots seem already high, but the potential of sale compensates. We can arrive at ROIs of about 100% (cautiously calculated) exactly because of the high demand in flats. It is the habit there (also conditioned by the extremely buying market) to reserve a flat from the plans with a down payment of 15-25% as soon as the building authorisations are delivered. Therefore you have almost all the time a positive cash flow and need a credit line from a bank only in case you do not want to presell all the flats in view of a future price increase. As soon as the building is covered the owners of the flats complete payment up to 80%, so that we may even return to the investor the initial amount. A SPV can be created with a very small amount and is dissolved at the end of the project.
Who buy the flats you develop?
After thorough study of the market, I decided that we concentrate on residential and target the middle class Romanian citizen, i.e. we build very good quality blocks of flats but with flats in smaller sizes, in order to have them become accessible to the middle class in formation. The existing promoters (not that many) have constructed only luxury flats and now villas. The targeted clients were the employees in embassies, expatriats working with multinational companies and foreigners. But in my opinion building good quality flats but middle sized is a business which takes place quicker and the investor gets the profit earlier.
I mean by middle class - mainly upper middle class - young professionals, who very often have graduated from British or American universities. Their parents have been, for example, retro ceded some properties which were nationalized during the communist regime and they sell them now. I have very often seen the following scenario, when parents of a young couple have put together the 30% which are necessary to buy a flat/house using for the rest of 70% a mortgage which will be granted by every bank in Romania.
What distinguishes you from other service providers?
The business which I introduce to my investor has the following characteristics: transparency, over average return on investment and limited in time, i.e. 18 - 24 months. This is the way for me to distinguish myself from other providers of real estate investment. My intention is to reduce the risk for the investor in reducing the time of the exposure. Everybody can buy nowadays a flat in Bucharest. But he will have all the work to do after he has bought it, because there are not yet companies which manage your property in your absence. In investing through a SPV gives the investor the possibility to quit the Romanian market after his project has been finished and he was paid out his dividends.
Which clients do you target in Romania ?
We target mainly the upper middle-class living in Bucharest. We also target employees of Embassies and Multinationals. They lived a certain period of time in Romania and have learned about the investment opportunities there. We also target the foreign investor who buys a flat in order to sell it or to rent it. And last but not least, the Romanian emigrants who want to reserve a home for the time of their comeback or the Romanians who had the chance to get un employment abroad.
How is such a project financed?
Mortgages are arranged by the banks. It is not the habit of the country that the promoter arranges the financing of the investment. The promoter has to bring up the amount which is necessary to the purchase of the plot. We get a mortgage for 70% of the value of the project. At the same time as soon as the construction authorisations are delivered we start to sell on plan, with a prepayment of around 25%. The mortgage with the bank is used as a credit line for the case we are short of cash.
How do you structure your fees ?
Our fees are success related. The Management fees are paid during the project and represent the operational costs. After the flats/plots are sold a success fee is due to Leader Inv. & Cons. A spread sheet with progressive success oriented fees will be attached to the contracts which are signed between the shareholders of the Project Company and Leader Investment & Consulting SA.
Explain me the procedure how to invest in a SPV
Before I find the suitable land plot I need to have a commitment from the investors. Business is very quick in Romania and good plots disappear overnight. So, as soon as I pulled together investors for about EUR 1MIO, they have to create their company in order to be able to buy the land.
Of course I help for all the formalities and if somebody cannot come - as opening a company is a document signed in front of a notary and people should be present - he/she can give me a power of attorney and I can sign the documents for the person.
But I strongly encourage the investors to visit our offices and to have a personal discussion with me. When they come for opening the project company we shall have a look at several plots and they can block the business in paying a certain amount through the notary. The procedure will be completed when the company is created. In between I make a double checking of the ownership of the land plot through my lawyers and we get a document mentioning all the landowners from the time before the Second World War. As soon as the land plot is in the name of the SPV (Project Company) we can start the procedure of making the plan and asking for building authorisations.
What are the services you offer in Romania?
The services we offer in Romania are threefold:
1. We take over the Project Management of a SPV (Special Purpose Vehicle) created by the investors. This SPV should build residential real estate for the Romanian middle class and sell the flats on a retail basis. The investors (or may be one big investor) create their company and buy a land plot which is suitable to such a project. Based on the equity the SPV takes a construction credit in a Romanian bank for about 70% of the cost of the operation.
We offer to the retail client only projects with a construction permit, so that the credit becomes immediately effective. We have also the sales channels and we can start selling flats off the plans as soon as the SPV becomes owner of the plot/project. It is usual that people reserve their flats in paying up to 30% of the value. In this way we have almost all the time a positive cash flow. About one year after the project has started we have sufficient cash as to return already the invested amount to the investors. We may be also able to pay a dividend (taxed with 16%).
At the end of the second year we have normally sold out all the flats and cashed the whole amounts. At that time we can pay another Dividend. Company's capital gains are taxed with 16%. With the end of the fiscal year we can liquidate the SPV and pay to the investors the residual amount. The return on such an investment is about 80% after taxes at the end of the project. If you consider that the invested amount is blocked for practically only one year (as we return it to the investors as soon as the cash flow allows it) we consider that this can be an investment with an over average return. Leader is guiding the investors from the time of the creation of the SPV to the end of the project. Our fees are success oriented. We charge a fixed amount per quarter, which includes accounting, administrative, marketing and sales costs. At the end of the project we calculate the brutto profit of the SPV and according to a spread sheet which is part of the management contract and has been agreed upon with the investors, we charge a success fee.
2. We may also take over the Project Management of a SPV which acquires land for rezoning. The same pattern as above is applied. The investors create their SPV and buy the land. A sufficient amount should be available for doing all the infrastructure and equipment of the smaller plots. We divide the land into smaller plots (of about 500sqm each) and sell them on a retail basis. Leader charges 5% of the invested amount at the beginning of the project and another 5% as soon as the certification (PUZ) has been received. A success fee of 20% of the gross margin is charges when all the plots are sold. Such a project takes about 1 year to complete. The ROI is about at least 80% after taxes.
3. We endeavour also to help bigger investors who want to acquire office buildings, commercial surfaces, manors, palaces as well as agricultural land. We apply in such a case a brokerage fee of 3% and if the investors need some help for starting their business in Romania we may help them and charge on a daily basis.
At the moment we have many offers in agricultural land which can be rezoned. There are many investors around and the prices are continuously increasing. We consider an investment in land as very profitable.
This is a general description of our business in Romania. In order to be able to advise you correctly we need to know in which sector of Real estate you want to be active. How long do you want to leave your investment in Romania and also the amount you want to invest. As soon as we have some details on your investment aims, we may be able to propose something to you
