Investing Romania

The Absolute Guide Series.com Your definitive guide on Romania!

COUNTRY OVERVIEW Romania’s economy received the most positive news yet in 2006 when the European Commission agreed it would join the EU in January 2007

Dambovita river, Bucharest

Situated in the southeast of Europe bordering the Black Sea, Romania is a country with plentiful natural beauty and a wealth of historical and cultural appeal. In addition to the resorts that have historically attracted tourists dotted along the Black Sea coast, the country offers visitors established ski resorts, spa retreats as well as culturally rich cities and untamed mountain regions. The dramatic Carpathian Mountains attract more adventurous visitors wishing to enjoy a range of sports, from bobsleighing to horse riding, while the Transylvania region - famously home to Bram Stoker’s Count Dracula - has its own appeal. Romania is southeast Europe’s largest country, covering over 327,000 square kilometres, and it borders Hungary, Serbia, Ukraine, Moldova and Bulgaria, as well as the Black Sea coast with its 70 kilometres of sandy beaches. The main rivers of the country include the Danube, which makes up a large part of the border with Serbia and Bulgaria. The terrain of Romania is split between mountainous, hilly and lowland areas, providing the perfect environment for a variety of flora and fauna.

The aftermath was a Soviet-occupied Romania, and the formation in 1949 of a Communist “People’s Republic”. In 1965, Nicolae Ceausescu became dictator and turned Romania into a police state, during which time a progressively heavy-handed mode of rule evolved. This period lasted up until 1989 when Ceausescu was overthrown and executed. Romania, under its new government, went on to forge closer links with Western Europe; in June 1993 it applied for EU membership and in 2004 joined NATO. Romania today is a semi-presidential democratic republic, with a prime minister and a president between whom executive functions are shared. The culture of Romania and its people are a reflection of its position at the point where three regions - Central Europe, Eastern Europe and the Balkans - converge. Romanian architecture is an example of this mix, offering interesting examples of synthesis between two trends of design, one similar to that of Central and Western Europe, the other to the Eastern Orthodox culture.

Romania was originally made up of the principalities of Wallachia and Moldavia, which united in 1859 to become Romania. Following the First World War, during which it fought alongside the Allies, Romania gained new land including Transylvania. During the Second World War, Romania joined the Axis powers and was part of the illfated German invasion of the USSR. Old medieval town of Sighisoara

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The Absolute Guide Series.com Your definitive guide on Romania!

COUNTRY OVERVIEW Much of the character and identity of the Romanian people is a product of their Roman origin, although this has evolved through the geographic position of Romania over major routes of travel and migration between continents. A good proportion of Romanians speak English – 5 million out of a population of over 21 million - due to the focus on foreign languages in the education system. Romania is now an upper-middle income economy. Once economically unstable and weak, its reform after the 1989 regime change allowed a stronger, expanding economy with low unemployment to develop, particularly since 2000 when strong demands for exports within the EU market helped the country rise out of a three-year recession. It had one of the highest growths of GDP in Europe in 2004 at 8.5 per cent, and unemployment in July 2006 was just 5.1 per cent, considered low for similar sized countries in Europe. Exports from Romania are increasing, with the first quarter of 2006 showing a 24.8 per cent year-on-year increase. The country is also benefiting from growing foreign investment, increasing at a rate of 26.8 per cent between 2004 and 2005. The effects of this have begun to reach the people of Romania, reflected in the emergence of a middle class, and the action taken to combat the country’s poverty. Romania’s economy received the most positive news yet in 2006 when the European Commission agreed it would join the EU in January 2007, albeit under a system of close monitoring. The Commission did not recommend its membership be postponed by a year, as it could have done, but instead decided that Romania would join in 2007 with attention paid to certain areas to ensure that EU standards are met. To protect its own interests and reputation, the EU may employ “safeguard mechanisms” with Romania in effect for up to three years into their membership, such as potentially withholding funding or temporarily suspending EU rights. However, Romania and Bulgaria were both congratulated by the president of the EC for their “solid” and “far-reaching” progress during the period of accession talks. Any remaining issues of concern for the EC were expected to be resolved in the months following accession “based on the current momentum”.

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13th century Castle Bran, associated with the Dracula legend

The positive effects of EU accession to Romania should be far-reaching, including a more consistent income level across the country, greater ease of trade between EU countries, reformation of some of Romania’s more outdated laws bringing it in line with the rest of Europe, and infrastructural improvements boosting the company’s already strengthening economy. Potential investors will benefit in particular from a change in real estate laws allowing foreign buyers to directly purchase land in the country, without going through the current process of purchasing indirectly through a company established under Romanian regulations. Romania has previously enjoyed success as a tourism destination during the seventies, when resorts along the Black Sea coast reaped the benefits of US-backed credits boosting the economy, and ensuring its popularity with European visitors. However, through a mix of political instability and lack of investment, the industry waned towards the end of the eighties. However, with its current improved political and economic situation, Romania has the potential to rival Europe’s other tourism hotspots, with work and investment going towards improving the country’s appeal. As well as the established Black Sea resorts, Romania also offers spa tourism which has proved popular with the domestic market, as well as ski resorts and further facilities to cater for outdoor and adventure tourism.

The Absolute Guide Series.com Your definitive guide on Romania!

INVESTMENT PERSPECTIVES Romania has been receiving widespread positive media coverage recently as the best location for the canny property investor’s money. The Channel 4 programme ‘A Place In The Sun’ reported in January of 2006 that house prices in the country “are expected” to quadruple within a decade. It placed Romania as number one in their top twenty best places to make money on property in the next ten years. One of the reasons cited was the fact that the country’s economy is set to benefit from its entry into the European Union in 2007 as well as the healthy rental returns predicted. The programme’s report forecasted that GBP 100,000 invested now could be worth GBP 514,000 in 2016, the increase largely due to the impact EU membership is expected to have on the property market. Accession to the EU will also allow the country to trade more openly and easily with Europe, which will boost the Romanian economy further. The first plan for the transition from the Lei to the European currency, the Euro, was already being prepared by the Ministry of Public Finance and the National Bank of Romania (BNR) towards the end of 2006.

The Channel 4 programme ‘A Place In The Sun’ reported in January of 2006 that house prices in the country “are expected” to quadruple within a decade

Pietrele Complex, Retezat Mountains, Southern Carpathians

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It should not be forgotten, however, that Romania was formerly a Communist state and remains one of the poorest nations in Europe. Although the country suffered high inflation following the dictator Ceausescu’s departure, it has stabilised economically since 2000 and has, in fact, begun to demonstrate a strong economic performance. In 2004, ‘HVB Bank Austria’ reported that Romania recorded a GDP growth of 8.5 per cent just behind Latvia ( 8.7 per cent ) at the top of the Central and Eastern Europe league table. Corporate foreign investment into the country has seen also seen a recent boom, with Nestle, Orange, Procter&Gamble, Wella, Equant, GE and shortly Siemens, IBM & Motorola having a presence in the capital Bucharest.

Piatra Craiului Mountains, Southern Carpathians

The real estate market within this strengthening economy is showing signs of becoming extremely profitable. This is apparent by the fact that following changes to the Fiscal Code, the Romanian Government has profited from the real estate market by taxing the profit made from reselling property after three years or less, at a rate of 16 per cent. Some potential investors have expressed concern about the current lack of availability of mortgages for foreign nationals. Anyone looking to buy in Romania at the moment will need to have cash to invest upfront or find alternative methods of financing their investment. However, this current lack of available finance does mean that the market is still at the early stages and the investors who are prepared to move in now and then wait until mortgages do become available could stand to make the greatest profits.

The Absolute Guide Series.com Your definitive guide on Romania!

INVESTMENT PERSPECTIVES The World Travel and Tourism Council (WTTC) predicts that Romania will be the fourth fastest growing tourism sector in the world, with a growth projection of 7.9 per cent per year from 2007 to 2016. All of this bodes well for a future buy-to-let market. The main areas currently experiencing investor demand are the capital, Bucharest, the resorts along the Black Sea Coast and the mountain regions of Banat and Transylvania. Another boost to the tourism market is the construction of the new EUR 2 billion super-highway being built with the financial backing of the EU. This new super-highway will be completed by the year 2012 and will substantially change the face of the country. Travel time between Bucharest and major European cities will be reduced significantly and new areas of the country will be opened up to tourists wishing to venture further afield than the capital. This will also, therefore, increase the number of locations ripe for the buy-to-let market.

Old City Hall in Oradea

Although prices are rising quickly and can be expected to increase by 30 per cent in 2006 in anticipation of EU accession, prices remain cheap by Western standards. In the capital, Bucharest, apartments start at around GBP 50,000 rising to over GBP 300,000. Elsewhere, a newly built property can cost you anywhere between GBP 45,000 and GBP 150,000 whereas a rural three-bedroom house in need of some renovation can be picked up for as little as GBP 15,000. Romania is asserting itself as a newly popular holiday destination. Air fares to Romania are inexpensive and hotels and sundry costs such as travel and eating out within the country are affordable, making it a low cost holiday option.

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View of Sibiu city

The Absolute Guide Series.com Your definitive guide on Romania!

THE KEYS TO SUCCESS 10 Factors to Ensure Success 1. Consider Your Objectives It is always important to define the objectives of your property purchase at the outset to ensure you meet your desired criteria in the end (i.e. the greatest capital growth or the perfect holiday bolt-hole). This is even more vital when investing in Romania as the cheap property prices could distract you from your original goal. Property prices as low as GBP 15,000 can seem tempting to the investor, but these properties tend to be in rural locations and can have little rental or resale potential. With a clear plan in mind, the investor has a better chance of realising the full potential of their purchase.

2. Areas

Five Star Hotel Europe in Iasi, Romania

As with any rapidly expanding market, one of the biggest potential problems of property buying in Romania is not succumbing to the hype. Since attracting widespread media interest as one of the best places for investors to place their money, more and more people are jumping on the Romania ‘bandwagon’. Unfortunately this has led to some local real estate agents marking up their prices disproportionately, simply due to interest from a foreign investor. There are also the legal and bureaucratic complications that foreign investors must currently endure prior to the simplification of the process once the country gains entry to the EU at the beginning of next year. To make the entire process as simple and ultimately as successful as possible, remember the following key points:

With some property experts reporting that Romanian property prices are rising by 30 per cent a year, the profit margins look enticing for the overseas investor

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One of the first considerations for the investor is which area of the country is right for their investment. Romania is an unknown quantity to most people and therefore it is even more important to research the various areas properly. The majority of property investment interest in Romania is currently centred on real estate in Bucharest, however other areas are proving popular such as Transylvania, as well as coastal and ski resorts. Once you have chosen the best area in general for your property, you will need to consider the exact area of your selected property. Things that will affect the value of your property will be its proximity to amenities and major cities as well as transport links. For instance, transport links are set to improve significantly with the completion of the aforementioned Budapest-Bucharest Transylvanian Superhighway, scheduled for 2012.

3. Research Research is key with any property purchase, but it is of particular importance when buying in an emerging market such as Romania. There are current complications facing the overseas investor interested in Romania, which need thorough research, such as the need to create a Romanian company in order to purchase property. However, even when the country becomes a member of the EU and things become easier for investors, there will be much research needed into the positive changes. Which laws have been relaxed, what effect will that have on your purchase, will your choice of property or areas be widened etc.? Your lawyer will be able to help you, but also do your own, independent research as a lot of information will be released on new member countries of the EU once they gain accession.

The Absolute Guide Series.com Your definitive guide on Romania!

THE KEYS TO SUCCESS It is also advisable to get your lawyer to carry out additional checks – check if there are any charges or debts of any kind linked to the property or land under offer, for instance.

7. Choosing the Right Lawyer

Herastrau Park,Bucharest

4. Choosing the Right Agent Choosing a suitable real estate agent can make the difference between a successful property search and a failed one. It is important for the investor to secure the services of an estate agent in Romania who speaks English and has local knowledge of properties available for sale. As mentioned, the investor should have a strict set of criteria for their property acquisition, based on their objectives at the outset. These should be articulated to the estate agent so that they can source suitable properties for viewing.

5. Country-Specific Considerations As previously mentioned, research into your property investment is vital when considering a country such as Romania. There are a host of considerations for those interested in Romania that investors looking to buy in Spain or France need not concern themselves with. For instance, domestic mortgages were only introduced in Romania in 2002 and there is no current system of finance, either in the UK or Romania, for British investors to buy Romanian property. While it is commonly accepted that this will change, for the time being foreign purchasers must pay cash, and acquisitions of land must be made through a Romanian company.

6. Legal Issues While it is not a requirement to have legal representation when buying in Romania, it is always advisable to do so. The amount of confusing bureaucracy involved with a property purchase means that an independent lawyer can be invaluable. Basic legal checks must be completed such as establishing that the vendor has the right to sell, i.e. the authenticity of the title deeds, the contract showing when they bought the property (or land), etc.

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You will want to hire a lawyer that is independent from any parties with a vested interest such as estate agents or people working on behalf of the vendor (it may sound unlikely but it does happen!). They should also have a good understanding of the local Romanian market as well as being fluent in English. There are lawyers in Romania that specialise in setting up Romanian foundations or companies in order for foreign nationals to be able to purchase property; however this will not be necessary next year under the EU regulations which will by then apply to Romania.

8. Finances In terms of the associated extra costs a property investor in Romania should budget for, they should allow for at least an extra 5 per cent of the original purchase price. Costs will include the lawyer and notary fees as well as state taxes and there is also an annual property tax payable in Romania. Laws have recently been passed to prevent too much speculative property investment going on in Romania and this has resulted in VAT and CGT increases that become applicable upon the resale of property and the subsequent realisation of any property price gains.

9. Profit Margin With some property experts reporting that Romanian property prices are rising by 30 per cent a year, the profit margins look enticing for the overseas investor. Also, like any country about to join the EU, Romania is undergoing rapid growth and change, which encompasses the real estate market, making potential returns impressively high. While it is still a fledgling market and there are bargains to be had, the massive profit margins will naturally be harder to come by when increased interest pushes the property prices in Romania up.

10. Long-Term View The situation for overseas investors in Romanian property will improve greatly with the country’s entry into the EU in January of 2007. How long the positive changes will take to come into effect and for practical differences to be felt by investors is difficult to say, which makes it important for investors to see Romania as a long-term investment option.

The Absolute Guide Series.com Your definitive guide on Romania!

LEGAL ADVICE As in Bulgaria, non-Romanian citizens are not currently permitted to own land in Romania unless they purchase it through a Romanian company. However, these laws are set to comply with EU regulations when the country gains entry to the EU in January 2007, which is good news for the Romanian overseas property investor.

Regardless of EU accession, there are certain legal issues that the purchaser should bear in mind when purchasing in Romania. The first is the importance of hiring an English-speaking independent lawyer who will act on your behalf throughout the transaction process. In Romania it is not a requirement to have legal representation when purchasing property; however it is highly unwise to proceed without a lawyer. There is a huge amount of bureaucracy and red tape involved with any purchase, which can be daunting even for Romanian citizens, so overseas investors will be aided greatly by an independent lawyer.

University of Lasi

Once they are part of the EU, Romania’s property buying process should become more straightforward. The Romanian Government has passed a series of laws that will allow for direct foreign freehold ownership of land in Romania five years after the country achieves full EU member status (seven years for agricultural land), which will bring the property laws in Romania in line with those of other European Union member states. As mentioned, at the present time if the type of property you choose is anything other than an apartment, your lawyer will need to establish a Romanian foundation or company in order for you to be able to own the land on which the property sits. However, the process for creating these entities is not very complex and there are now lawyers in Romania that specialise in this type of legal affair.

Once they are part of the EU, Romania’s property buying process should become more straightforward

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Opera House of Bucharest

The Absolute Guide Series.com Your definitive guide on Romania!

LEGAL ADVICE You may need to sign a preliminary contract as an agreement to purchase the property and then pay a holding deposit through your lawyer. However, the vendor may be happy to wait for the signature of the final contract; this is the day the complete cost of the property is due unless you are buying off-plan, in which case a payment schedule will be drawn up at this point. The final contract will be signed by the vendor and purchaser in front of a public notary who will legalise the transaction and submit the necessary documents for title transfer to the land registry. The purchase contract must be written in Romanian. For your own security you should request that an authorised translator performs a full translation of the contract, which you must read and understand. You can ask your lawyer if you have any doubts about terms in the contract and only sign if you are entirely satisfied with it. As previously stated, investors should allow for at least an extra 5 per cent of the purchase price for additional costs. These cover the fees for the lawyer and notary, state taxes and the annual property tax. It is worth noting that recent laws have been passed in Romania to put a stop to excessive speculative property investment. This has resulted in increases to VAT and Capital Gains Tax which are payable upon the resale of the property and the subsequent realisation of any property price gains. However, such laws, like many others in Romania, may be subject to positive change in January of next year when the country experiences liberalisation following its entry into the EU.

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The Absolute Guide Series.com Your definitive guide on Romania!

HOT SPOTS With Romania’s low property prices, together with its impressive upturn in economic performance, and imminent accession into the EU, it is little wonder that it is tipped as the country to watch for real estate investment purposes. It was forecast to be Europe’s top country for property investment over the next ten years, in a Price Waterhouse Coopers and the ‘Place in the Sun’ Channel 4 study from earlier in 2006, with a huge 414 per cent return on investment predicted. Property prices are said to have increased at 25 per cent on average every year since 2003, yet most people know little about the country’s different areas aside from the Black Sea Coast and its numerous tourist resorts. In reality, Romania offers much more than sandy beaches; visitors and house buyers are increasingly attracted to the area for its variety, including historic cities, ski and spa resorts.

Fogarasch main ridge, Southern Carpathians

The Black Sea Coast of Romania is currently attracting a lot attention from investors, as tourism grows and the resorts develop accordingly. The entire coast is around 245 kilometres in length, which includes the Danube Delta nature reserves right down to the more built-up holiday resorts in the south. Tourists are attracted to these resorts by the coast’s sloping and sandy beaches with almost no currents or tides to speak of, making it a perfect spot for family holidays. It enjoys a dry and warm climate, with a summer holiday season stretching from May to October, affording buyers a potentially lucrative investment opportunity, as well as a selection of resorts to choose from.

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Of the resorts along the Black Sea Coast, the oldest and most popular is the lively Mamaia. The resort first sprung up in 1906 on a strip of beach separating the Black Sea from the fresh water Lake Mamaia, and is now home to numerous discos, a casino, water parks and leisure parks. Its beaches are known for having the finest sand of any Romanian resort. Visitors interested in spa tourism rather than beach breaks would be interested in Eforie Nord, an established spa resort which offers its guests treatments using water and sapropelic mud from nearby Lake Techirghiol Lake. This is unusually mineral-rich and is used by those with rheumatic and dermatological complaints. The resort is sheltered from currents by off-shore dams protecting its sea walls. Catering for the slightly older and often more affluent holiday maker or resident, the resort of Neptun-Olimp was home to late dictator Nicolae Ceausescu’s private villa and jetty, until the regime change of 1989. It still enjoys an exclusive feel, and offers a variety of excellent restaurants to keep its guests entertained. It is considered to be the most elite resort the Black Sea Coast has to offer, near woodland and two lakes, and enjoys extensive facilities from sports grounds to taverns and clubs. Prices in this area range from under GBP 43,000 for one bed luxury apartment with terrace, shared swimming pool and close to the beach and all amenities. A two bed apartment in the same development would be priced at around GBP 62,000. The capital city of Romania is Bucharest, situated in the south east of the country towards the Bulgarian border. The city is very much the economic hub of the country, generating around a fifth of the country’s GDP despite having only 10 per cent of its population. The architecture of the city is a mix of the traditional, communist and more modern styles, with tree-lined boulevards below, and a number of skyscrapers overhead built in the last five years. This modern approach extends to its transport infrastructure, with bus, tram and rail links operating within the city, and international travel catered for by two airports. Low cost flights are becoming more frequent, with carriers operating throughout mainland Europe and the UK. As the largest city of Romania, with its architecture and culture ingrained in its appeal, property in Bucharest represents a safe option for potential investors looking for a city property at an affordable price.

The Absolute Guide Series.com Your definitive guide on Romania!

HOT SPOTS In the centre of Romania is Transylvania, one of the most popular tourist destinations of Romania and a familiar name to overseas visitors. The region is arguably Romania’s most beautiful, with a landscape made up of valleys, streams and the peaks of the Carpathian Mountains that surround the area. In amongst this naturally beautiful setting are a variety of different attractions for visitors, from ski resorts such as Poiana Brasov and Sinaia, health spas, hiking trails, rural villages and a wealth of customs and festivals. Much of its charm is due to the old-fashioned lifestyle that remains the norm in this part of Romania. The population of the area today has been affected by the many different groups that have passed through in the past, including Hungarians and Germans as well as Romanians, and although the area enjoys some of the conveniences of modernisation, the traditional and unspoiled nature of day-to-day life prevails.

Boats on Herastrau Lake, Bucharest

Lake Saint Ana

Transylvania is currently served by three international airports offering routes to Germany, Austria, Italy and Hungary, with further routes promised when Brasov airport is extended, expected to be in 2008. As the area’s tourism industry grows, and with the additional transport links making the region more accessible, it generates more and more interest from overseas buyers.

Romania currently represents a unique opportunity for the real estate investor

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The whole area is currently going through a programme of modernisation, which has caused a rise in property prices between 20 to 30 per cent in the last two years. Next year, the region stands to benefit not just from Romania’s accession into the EU, but also from the selection of the city of Sibiu in Transylvania as the 2007 European Capital of Culture. This is an opportunity for Sibiu to demonstrate and develop its cultural heritage, and to influence and promote its name internationally. Romania currently represents a unique opportunity for the real estate investor. The country has been congratulated by the EC on the progress it has made in order to meet the criteria for EU membership, and once it has become a member next year it will begin to see the benefits that membership brings with it. Romania offers a wide range of options to holiday makers, whether they prefer beach, city, ski or spa breaks, and investors wishing to capitalise on the buy-to-let market can currently purchase Romanian property at favourable prices, even compared to the other Eastern European emerging markets, with a view to making impressive returns.