2. - A look into the future -
Trends, Drivers, Opportunities
Author: IAMBLA Vitalie
iambla.v@gmail.com
3. Country Overview
Moldova is situated in South Eastern Europe, north of the Balkans, at the crossroads of commercial routes that join
Western Europe and the CIS countries. It stretches 350 km from North to South and 150 km from East to West, and
has a total area of 33,846 sq.km. (about 12,600 sq.mi.).
Booming remittances, FDI, and banking sector have propelled the local economy over the last decade. GDP growth
is projected to continue its strong pace in the future, supported mainly by the projected recovery in external
demand from the major trading partners Russia and Ukraine, by the expanding commercial balance with EU,
accelerated remittances and by the ongoing liberalization and deregulation of the economy.
3
4. Market Overview
Real Estate market in Moldova experienced a boom period during the last decade and many
developers have benefited greatly from soaring property prices.
The fastest development pace has been achieved by the residential sector, almost entirely being
developed in Chisinau. From total new living space completed yearly in urban area over the last
decade, more than 90% have been deployed in Chisinau.
This boom has been fueled almost entirely by a huge inflow of foreign capital, mostly remittances
from Moldova citizens working abroad, and to an insignificant extent by mortgage financing.
Captivated by increasing prices and fast returns, majority of developers have prioritized residential
projects over long term commercial initiatives.
Highly rewarded opportunities in residential real estate have attracted many suspicious and
untrustworthy market players. The crisis' positive consequence was the market's sifting out, riding
of the weakest developers and leaving real professionals in the business.
Today, the local housing market is going through a bust cycle. The mass of external investment
capital left the country, leaving the housing market chiefly to local demand.
Even though before the crisis the market had been almost entirely driven by investments of local
population, in most cases speculative ones, foreign investors had enlarged considerably their
attention for this market, mostly attracted by the highly rewarded dwelling rent segment.
4
5. Market Overview
After a free fall during 2009 and first half of 2010, prices appear to bottom out in the second half of
2010, showing weak recovery signs. However, it is too early to assess the current situation of the
market as a turning point upward.
In some cases, on the edge of a swift supply decrease and new projects in the pipeline, some
developers have started to follow a more optimistic scenario, trying to increase prices. However, in
the luxury segment, a slight price decline was reported.
Currently, local developers are not able to gain strong profits from apparently favorable demand-
supply dynamics. On one side, a modest increase in demand is being complemented by low
supply, as a result of strong reserve from Moldova’s banking sector to lend real estate developers.
On the other side, highly difficult access to mortgage financing continue to favor renting and
impact home-buying decisions.
Recent crisis has shown how vulnerable is the housing market in Moldova to changes in the
financial and economic situation in countries where most Moldova citizens temporarily emigrated.
The local market weakness is reflected by the exposure of the economy to external factors, the
domination of money transfers from EU countries and Russia, and the residential market's small
scale compared to the potential force of speculative investors.
Before the global financial turmoil, price dynamics on the local residential market had used to
follow the dynamics of money transfers from abroad.
5
6. Market Overview
Currently, the situation is changing. Even though the volume of these increased by 5.1% in 2010,
the average price per sq.m on the secondary market has decreased from a level close to 700
euro/m2 in January to about 630 euro/m2 by the year end.
As a consequence of the lack of cash-flow through sales, developers reacted on the pricing side.
However, local developers are less flexible in terms of price movements than secondary market
players.
It is worth to mention that despite significant price drops on the secondary market, demand did not
return to a sufficient scale. This result is a clear sign that local real estate market during the pre-
crisis period became overheated by speculative investments.
Concerning new residential segment, in most cases developers have attempted to maintain pre-
crisis asking price levels, even when it was clear that transaction prices on the secondary market
were regularly lowered.
Currently, most transactions are done with one and two-room apartments, mostly on the secondary
market. Even though most of these apartments need additional investments in modernization,
these are cheaper, more affordable for long term investors.
If during the pre-crisis period the market had been driven mostly by speculative investors, currently
most of real estate transactions are done primarily by long-term investors, which do not look for
speculative gains.
6
7. Market Overview
This strong interest for residential sector investments shown by speculative investors have been
driven primarily by the lack of viable substitutes on the market.
Banking sector is permanently exposed to risks, as most credits are contracted by agri-food sector
companies, which are regularly threatened with embargoes on the Russian market, major
consumer of Moldavian agri-food products.
Concerning investments on the financial markets, these opportunities still look like SF options for
the local population.
In addition, along with local speculative players, foreign investors have been attracted by the
relatively lower prices compared to those in other CEE countries. Currently, the situation is
changing dramatically.
During the last couple of years speculative investors have redirected their interests to other
countries, with a much higher purchasing power, that were hit hard by the global crisis and real
estate prices plunged to levels equal to or close to those in Moldova.
Before the crisis, the development of local residential landscape had been fueled primarily by
opportunistic factors, like skyrocketed remittances, positive economic climate on the global level,
housing boom in most countries. Most of local developers had strongly believed that every new
sq.m developed would be sold, easily and with soaring return. In the end, the fairytale has
vanished.
7
8. Market Overview
In Moldova, remittances still remain the major economic driver, particularly for real estate sector.
As average monthly nominal wage is about 180 EUR, while official monthly average subsistence
level per capita is about 80 EUR, and the mortgage financing system is highly underdeveloped,
housing transactions have to rely mostly on other external funding.
As I mentioned, in Moldova mortgage lending remains highly subdued. Most local banks offer
mortgage funds for 15-20 years period, at an interest rate of about 15%. In addition, provided
funds cover at best only 60-70% of the total value of acquired property. It is worth to point out that
before the crisis, mortgage funding had been offered mostly for a 5-10 years period, at an interest
rate of about 20%.
It is obvious that in these conditions, mortgage financing system in Moldova has very limited
potential to succeed.
From the potential perspective, residential market in Moldova is most appropriate to be compared
with those in Baltic states. These former Soviet republics have many common demographic and
geographic characteristics: number of population, population density, average living floor per
inhabitant, lack of natural resources.
Along with the above, the housing stock has many similarities as well - Soviet-era apartments. In
these countries, most of apartment buildings were deployed in the Soviet era, and in almost all
cases these had been built according to several building plans across the Soviet Union.
Thus, analyzing the potential of residential real estate market in Moldova, it seems to be highly
useful to look closer on the recent development trends in this sector in Baltic states.
8
9. SWOT
Strengths
●
Sustainable development during the past years and promising prospects for future growth
support the increase of residential real estate
●
The idea that “every family must have his own dwelling” strongly supported and
promoted by most Moldavians will not disappear in the near future
●
A large part of Moldova citizens who earn money abroad will continue to consider
investments in real estate as the most promising investment option.
●
Rapid development of chains of building materials stores and tough competition provide
customers with a wide choice of goods at affordable prices
●
There is a considerable number of construction companies in Moldova which are able to
build decent-quality houses according to the complecated projects provided by the
customers
●
Local population puts strong emphasis on quality, trendy products and services related to
the construction sector
9
10. SWOT
Weaknesses
●
The purchasing power of population is far behind those of EU countries
●
The mortgage financing system is underdeveloped
●
Lack of public sector investments in new residential projects
●
High exposure of the local economy to external factors, like remittances and energy
resources
●
As a result of emigration of qualified construction workers, there is a lack of highly skilled
labor force for building, renovation and repairs
●
Currently, in Moldova most residential developers are highly leveraged
●
Difficult access to financing or refinancing sources
●
No clear vision of urban development
●
Some projects are being developed without complete set of documents, which causes
corruption
●
Population lost confidence in real estate developers which demand upfront payments
●
High bureaucracy and under the table payments during the startup phase
10
11. SWOT
Opportunities
●
New constriction projects can be developed in the suburban area of Chisinau, as well as
in regional towns
●
Such indicator as floor space per head in Moldova is much lower than in EU member-
states (21 m2 in Chisinau, 20.1 m2 in urban area of Moldova, 23.3 m2 in rural area, and
more than 30 m2 in most EU countries), therefore it can be increased
●
More residents will move to suburbs because of improving transport services, changing
attitudes to the distance from home to work or city centre as well as their need for
healthier environment
●
The problem of the growing unemployment in the regions caused by the population
migration to large cities will sustain demand for dwellings in urban areas
●
On the road to EU integration, old dwelling houses are being renovated in order to
reduce their maintenance costs and to ensure energy saving
●
The well known affinity of Moldavians for housing sector will not disappear. A large part
of Moldova citizens who earn money abroad will continue to consider investments in real
estate as the most promising option
11
12. SWOT
Threats
●
New development projects lead to disappearance of green zones and causes more
jams traffic
●
Lots of bureaucratic procedures and difficult access to commercial debt may cause the
present investors in housing projects to leave and to scare away new investors
●
High dwelling prices do not allow many people to buy dwellings
●
Recent crisis has decreased significantly the volume of money transfers from abroad
●
The financial and economic turmoil has created many attractive investment
opportunities in real estate sectors of many EU countries
●
Political uncertainty in Moldova increases costs of financing and refinancing sources for
real estate developers
●
In terms of demographic factors, Moldova is expected to experience a negative natural
growth balance over the next decade
●
Permanent emigration of Moldova citizens in EU countries and Russia is expected to
accelerate once fears and suspicions of another crisis in these regions will vanish, as
well as when Moldova will get visa-free regime with EU countries
12
13. Market Outlook
Moldova’s recovery is underway, but it is hard to feel confident about the economic picture in the
near future, as a result of political uncertainties, fragile macroeconomic environment, etc
In addition, internal business climate is still very sensitive to opportunistic factors, like remittances
and weather conditions. A sustainable economic growth in Moldova in the future could be
achieved through the transition from growth based mainly on consumption and imports to an
economy based on production and exports. In the near future it looks unlikely that there will be
achieved sustainable progress in this direction.
Moldova has always been and will remain an agro-industrial country. The secondary sector of the
economy is almost entirely linked to agriculture. Food processing, leather, and tobacco related
industries are the main in terms of added value and exports, and with agriculture these officially
employ nearly half of the country’s labor force.
During the Soviet era, Moldova had been developed as one of the major food and beverage
providers. Its related industries had been built up based on access to cheap energy, lack of
competition, and emphasis on quantity rather than quality. Currently, local companies have to
learn how to perform in an environment governed by high energy costs, quality standards and
fierce competition. Local farm sector and agriculture-linked industries are barely able to compete
with imports on the local market.
As a result of the transition from labor intensive economy to current realities unemployment and
emigration skyrocketed. Estimating the number of Moldovans abroad is a difficult exercise.
According to many sources, estimates range between 500,000 and 1,000,000 people.
13
14. Market Outlook
The future potential of the local residential sector is strongly correlated with the future evolution of
migration processes and economic development in Moldova.
Concerning emigration, it has all the potential to increase further. Improvement in Russian and EU
business climate will generate new opportunities for local population.
Regarding future economic perspective of Moldova, all development plans are focused mainly on
agriculture and agriculture-linked industries revival. Taking into account that these are mostly
deployed in rural areas and regional towns, it is most probably that in the future the lion share of
new jobs will be created outside Chisinau, thus, it is unlikely that the demand for residential
properties in Chisinau will boom in the future.
Caught in a climate of uncertainty, confusion, fear, mistrust, and difficult fundraising Moldova’s
residential real estate sector is in the process of redefining itself.
Currently, even though price movements downward appear to reach the bottom, limited number of
newly launched projects on the market and an increased stock of completed and unsold units will
tend to maintain prices at current levels with a limited potential upward during 2011.
Worsened access to construction loans, restricted own equity and a wait-and-see attitude of
residential developers are expected to limit the amount of new housing developing in the short
run, at least.
Limiting factors, like permanent emigration, population's weak purchasing power, underdeveloped
mortgage financing system, rising energy and food prices, as well as painful lessons of the crisis,
all these will delay the residential market recovery in Moldova.
14
15. Market Outlook
Lack of interest from banks promises to keep most developers unemployed for the near future.
The recent crisis have changed significantly financial requirements demanded by banks from real
estate developers. More equity and collaterals are required. If a leverage of more than 60% has
been something usual in the sector, currently local developers have to be prepared to go with
50%, at best.
Real estate developers will have to redefine their return profiles as well. Accustomed with strong
double-digit returns (at least 30%), most local construction companies hardly accept that the era of
easy made profits has gone. The average rate of return in light of new realities has decreased
significantly.
In the near term, the local residential real estate market will be driven almost entirely by local
demand, as foreign investors appear to be more interested in other CEE markets potential.
Reasons because over the next 3-5 years foreign investors will be reluctant to deploy large-scale
projects in Moldova, stand mostly on political issues. Local politicians will have to convince foreign
partners that changes on the local political landscape will have limited repercussions on business
environment.
Improving political and economic relations and visa-free regime with EU will increase confidence in
both domestic and foreign demand.
The theory of the property cycle and its history support the idea that housing booms precede
recessions only to be followed by another boom. However, recent crisis outcomes are more
difficult to forecast. As a result, the question is when will the next upward trend start.
15
16. Market Outlook
As a comparison, at the end of 2010, according to Ober-Haus Real Estate Advisors, the sale prices
of standard, Soviet-era apartments in Vilnius, depending on their size and fit-out, range from 600 to
1250 EUR/m2, in Tallinn most of the similar transaction were conducted at a price range of 640 –
830 EUR/m2, in Riga these varied from 575 to 650 EUR/m2. These prices are similar to those
practiced in Chisinau.
Concerning prices for new apartments in residential districts, these range from 800 to 1,500 EUR/m2
in Vilnius, 1,150 – 1,600 EUR/m2 in Tallinn, and 800 to 1,600 EUR/m2 in Riga. Comparing to prices
for new apartments in Chisinau, in Baltic states these are higher by 50% on average.
hComparing the purchasing power of Moldova and Baltic states population, for current
macroeconomic parameters, Baltic region offer more promising opportunities for real estate
investments over the short run.
For medium to long term period, Moldova is expected to become a priority market for foreign
investors, and construction is expected to be one of the most demanded sector. However, major
question over the near term will be the population emigration dynamics after Moldova will get visa-
free regime with EU.
Other major issue over the last 5 years has been the permanent emigration of Moldova citizens,
mostly young people, to EU countries and Russia. This trend is expected to continue over the next
3-5 years, at least.
It is unquestionable that the economy is entwined with shifts in the housing market. In the same
time, the development of the housing market could not be achieved without a decent support from
the banking sector.
16
17. Market Outlook
In Moldova, the banking sector has been reluctant to support real estate investments, primarily as
a result of still weak purchasing power of population. Without a stable economic environment, with
low inflation and steady economic growth, there is highly difficult to offer affordable, long-term
mortgage debt. Significant improvements regarding this situation are unlikely in the near term. As
a result, over the short term, prices on the residential market in Moldova will hover mostly around
current levels.
Easy access to mortgage loans played a major role in overheating global economy and generating
recent economic and financial turmoil. Local banking sector has learned this painful lesson, thus
mortgage financing is unlikely to boom over the near term.
For the medium to long term period the development of the sector will accelerate, however it is
unlikely that the market will achieve a growing pace similar to that during the pre-crisis period.
It is clear that while the economy will continue to grow, prices on the real estate market will
maintain upside potential. A gradual increase appears more realistic than a rapid rebound.
Even though Moldova is a developing country, with promising prospects for future growth of
disposable incomes, it is questionable if the local market is sufficient in size to support solid
growth prospects of the residential sector in the future.
During the pre-crisis period prices on the real estate market in Moldova have been strongly
correlated with the evolution of money transfers from abroad, reaching yearly double-digit growth.
In the future, these will be mostly correlated with the performance of the GDP.
17
18. Summary
vProspects of economic fundamentals still remain uncertain.
The expectation gap between buyers and sellers will maintain the market at current price levels for
a while.
The era of exponential growth in the local housing market is over. Real estate developers will have
to follow a more realistic approach.
The demand for new apartments will not vanish in the near future, it has a real potential to grow,
supported by increasing disposable incomes and by the fact that large share of apartment
buildings from the legacy of the Soviet past are in poor conditions.
One and two-room apartments will be the most demanded residential properties, as most of future
buyers will be newlyweds, single persons, and investors acquiring apartments for rent, which
currently is a highly rewarding business in Chisinau.
Apartments with three and more rooms are more expensive, in addition these have to compete
with the single-family housing market.
Chisinau is a relatively compact city, lying within an area of about 130 km2. As a result, the
distance from home, and even from the suburban area, to work or city center is less time-
consuming that in most European capital cities or other regions.
On the edge of these issues, families with two and more children with limited financial resources,
will continue to be tempted to invest in single-family houses in the suburban area, which in most
cases is a less expensive option than purchasing a three room apartment in Chisinau city.
18
19. Summary
In addition, improving transport services as well as increasing need for healthier environment will
only support this option.
Even though the demand for new dwellings exists, without financial support this demand will hardly
be satisfied.
According to recent surveys on the market, more than 80% of the respondents have mentioned
that without an external financing they will not be able to purchase a dwelling.
Taking into account that the mortgage financing system in Moldova is low developed, residential
real estate developers which will be able to provide similar financial support options as mortgage
financing, will take the lion’s share of the market.
Until recently, almost all developers demanded upfront payments, not being able or not willing to
deploy their projects with own financial resources.
Many of these projects have been “frozen”, and many clients are tempted to believe that
developers have defrauded them. As a result, this practice will hardly be accepted by potential
residential real estate investors in the future.
19
25. Average useful dwelling stock per resident in major EU cities
Source: Housing Statistics in the European Union 2010
26. * Data includes outstanding debt for residential, construction and development projects, including mortgage financing, offered by local
banks to local companies and population. According to estimates, the amount of residential mortgage debt is less than 10% of total
outstanding residential, construction and development debt in Moldova.
Source: National Bank of Moldova, National Bureau of Statistics
28. * Data includes outstanding debt for residential, construction and development projects, including mortgage financing, offered by local
banks to local companies and population. According to estimates, the amount of residential mortgage debt is less than 10% of total
outstanding residential, construction and development debt in Moldova.
Source: National Bank of Moldova, National Bureau of Statistics
34. $ million €/person
Source: National Bank of Moldova, National Bureau of Statistics
35. * Data includes only remittances via formal channels. The official calculations of remittances inflows are underestimated, because of a
sizeable share of informal inflows, which are misreported and are difficult to measure.
Source: National Bank of Moldova, National Bureau of Statistics