Real Estate Review, Mid-Year 2009 - Land market

by Colliers International

The land market remained in a standstill in the first half of 2009. Although the supply increased considerably as compared to the previous years, there were still not enough distressed land plots on the market to stir the interest of the opportunistic buyers.

Land supply increases

There was no shortage of land supply in the first half of 2009. The number and diversity of land plots offered for sale, in terms of both location and size, has increased to a level that was hard to imagine in 2006 and 2007. As opposed to the last three years, a larger number of properties in central and ultracentral locations were put up for sale.

Many of the developers that starting with 2005 had pursued aggressive land purchasing strategies - mostly Israeli and Spanish - have now switched to the supply side. The acquisition fever was replaced by increased focus on project financing and completing projects already started. Having acquired large land plots for residential and retail developments in the past, these developers are now trying to sell parts of their portfolios with the view of collecting enough cash to continue the projects that are already under construction or pay back their outstanding loans.

Scarce and risk adverse buyers

As with all real estate, the land segment remains a buyersa�� market, being characterized by a limited, risk adverse and price sensitive demand. Most of the buyers are companies belonging to industries less affected by the economic crisis a�" food, discount retail and the medical sector a�" which are looking to develop projects for their own use. As they are planning to expand their networks at national level, a large portion of the demand that they generate is for secondary and tertiary cities with more than 30,000 inhabitants. The retailers are targeting land plots of sizes from 3,000 sqm (supermarkets) to 30,000 sqm (do-it-yourself ) and even 50,000 a�" 60,000 sqm (large format hypermarkets) located in densely populated areas that have good access and wide openings to a high trafficked road.

There are also a number of high net worth private persons looking for opportunities on the market, but they perceive the prices as still too high to purchase. Indeed, the supply of distressed properties is still very scarce, as banks prefer to restructure loans rather than execute them, for fear of seeing their finances blocked in devaluing assets for an indefinite period.

Due to the lack of liquidity and financing on the market, buyers are trying to obtain special transaction structures in the form of flexible payment terms, postponing as much as possible the cash outflows. Moreover, in order to minimize the risk, buyers, especially retailers, are introducing stricter conditions regarding the building permits of the land plot they are looking to purchase. Some retailers connect the completion of a buying agreement to the issuance of the building authorization for their project, which can increase the transaction time by 6 to 12 months.

The very few transactions that were actually finalized in the first half of the year were either low size low value plots sold to private individuals, or acquisitions made by retailers such as bauMax and Plus Discount, that were initiated and negotiated last year.

Gap in price expectations

Asking prices continued the downward trend started in H2 2008. The sellersa�� willingness to reduce the price was correlated to the location, the size of the plot and the existing building permits, but mostly to the pressure of the landowners to sell. Small and central locations seemed more resistant to the downward price tendency.

On average, the decrease in asking prices stood at 25% - 30% as compared to H1 2008. As there are very few transactions on the market, the current asking prices are still reflecting a significant gap between the expectations of the sellers and those of the buyers and therefore they are not indicative of the real market value of the land plots. The few transactions that did occur were closed at discount of 50% or higher as compared to last yeara��s peak.

No significant changes ahead

We do not expect any significant changes on the market in the second half of 2009. As ever, the evolution of the land market will remain strongly correlated to the general economic situation and the activity on the other real estate segments. An increase in transactions will occur only if more distressed properties appear on the market or if we start seeing signs of recovery on the residential, retail, office and/or industrial segments. When the market unblocks, we expect the buyers to remain risk adverse and focus on small size land plots in good locations.

Source: http://realestate.doingbusiness.ro