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Last update - 02:25 02/02/2009 Romanic depression By Raz Smolsky Tags: real estate, israel news  The walls of the Bucharest airport terminal are cheerful with ads, touting election candidates, all-terrain vehicles, banks - and real estate. These are remnants of Romania's glittering but short era as the great promise of Eastern Europe. Romania seemed like the total package - a partner in the European Union, which it joined in 2001, abundant in land for development, zero bureaucracy, a developing economy, and local demand for goodies from jewelry to cars to better housing. But Bucharest isn't like Western cities. Just look at the pattern of airline tickets and hotel rooms - they rise mid-week and drop during the weekend, the opposite of the situation in Western Europe's capitals. Stores with leading Western and designer brands abound, but ask Israelis who live here where to shop and they answer dryly, "In Israel." Nor is there some local Soho of cafes. But you will find flamboyant consumerism at outlets for expensive sports cars and executive sedans, not that the fancy cars can move in Bucharest's congestion, which eases only over the weekend. Among the first Israelis to seek their fortunes in Romania were white-collar criminals. There was no extradition agreement between the two countries. Gamblers hoping for jackpots in Romania's casinos also swarmed. Advertisement Later, this decade, Romania became a destination for proper Israeli companies, usually firms with executives of Romanian origin. Some of these companies sold bonds to Israeli investors to finance their Romanian ventures. Romania's real estate sector developed more slowly than that of other Eastern European countries such as Hungary. The underdevelopment implied that huge profits were to be made. Businessmen quickly discovered that regulation was feeble, local officials were corrupt and zoning processes were a cinch compared with Israel. Conversations with Israelis living in Romania reveal that back then, during the short boom years, every real estate deal was a coup. They all felt like geniuses. Back then, from minnow to megacompany, the developers made a killing - Lev Leviev's Africa Israel, Moti Zisser's Elbit Imaging, the Kardan group, BSR Projects, Olimpia, Beny Steinmetz, the Ichakis, Mario Leznick - the list goes on. They rushed in, bought land without end using money borrowed from banks and bondholders and brought in architects, designers, overseers and lawyers. They miss those days. "You didn't have to advertise. You could sell all the apartments in a project without trying," one says. Come the bust, the banks stopped lending, whether to companies or homebuyers. With nobody buying apartments, foreign investment dried up and the Romanian housing market collapsed. There are no sales. Projects are suspended. Cranes are rusting. The market didn't slow, it died. There's nothing the Israeli developers can do about it. They're stuck with thousands of apartments to sell. The problem isn't demand; Romanians loathe their communist-era dwellings and too many crowd into small apartments - granny and auntie living with the kids and their kids. The problem isn't supply; 4,500 apartments hit the Bucharest market in 2008. The problem is credit. "Developers typically build only after having secured a critical mass of sales. The problem is that they can't sell so they won't start building," says Daniel Weisman, manager of the Task consultancy's Romanian branch. Instead of covering the costs of building from sales, the developers could cover the costs themselves but naturally they don't want to do that, he says. And when credit does become available, it will probably be prohibitively expensive. The Romanian press reports that building has halted on thousands of apartments. The Norwegian company RomReal planned to invest 14 billion euros in Romania by 2014 and has suspended several projects. Cooper Beech of Britain planned to build 17,000 homes at an investment of 2.5 billion euros: it started one and put the rest on hold. "There's no demand. We have to control costs," says a Cooper Beech manager. The Israeli company NeoCity, controlled by Ehud Ben-Shach, hasn't frozen its building in Romania yet, but it's thinking about it, while keeping an eye out for opportunities created by the crisis. In December the real estate services giant Colliers canceled marketing agreements for five projects with 5,000 apartments, including two projects under construction by the Israeli group GTC - Garden of Eden and Felicity - which together had 2,50 apartments. GTC's spokesman admits that 2009 should be a "tough year." The crisis in Romania's real estate sector began before Lehman Brothers' collapse last September, which marked the turning point elsewhere. New regulation coming into effect at the start of 2008, to adapt Romanian rules to those of the European Union, made it much harder to get a mortgage. Beforehand mortgage lenders had relied on a homebuyer's total income - salary and other income, too. Today mortgages are based solely on salary. As of September, the average monthly wage in Romania was 340 euros, net. While a mortgage may be hard to get, consumer credit wasn't and Romanians built up tremendous debt - half a billion euros, says an Israeli investor, adding that the central bank even called on people to stop spending and start saving. The Romanian press is predicting unemployment of 10% to 12% this year, also because Romanians working abroad - mainly in Italy, Britain and Spain - are returning because the markets are imploding there, too, and there's no work. Many Israeli companies building in Romania financed themselves mainly by borrowing, from the banks and bondholders, and now find themselves in trouble. Don't assume that bondholders, mainly institutional investors, are more forbearing than the banks. All want their money back but the developers are stuck: They can't sell what projects they built and there's little point in building new ones. BSR Europe, run by Nachshon Kivity and Kalman Sufrin, is building two projects in Brasov, north of Bucharest. It's in the process of obtaining permits for one of the projects and says it will decide whether to proceed based on the terms of mortgages and financing. It couldn't get financing for the other project, with 650 apartments, and has suspended it until the markets wake up. Profit Building Industries, run by father and son Zvi and Guy Ichaki, is a smallcap that has warned bondholders of potential default. It has to repay NIS 96 million in bank and bond debt this year and has just NIS 34 million cash. But Ichaki is still a name held in the greatest esteem. "Brilliant, modest people who did everything right, great projects with good geographic diversification - but the market froze," says one market player. Guy Ichaki says Profit is trying to sell assets to return debt, given that, like other companies, it can't borrow. Boaz Misholi's company Aura Investments has eight housing projects in Romania with 4,000 apartments - two are being built with bank money and six await financing, the company says. And then there's Mordechay Zisser, who stormed Romania in 2001. His first acquisition was a hotel that had served the communist elite, which he converted into the Radisson SAS Bucharest Hotel, plus restaurants and stores. Back then Bucharest was a lot less developed. It hadn't started its trek westward. There were no office buildings or multi-lane roads or shopping centers. The designer stores now around the hotel weren't there, nor was a paved road. People thought Zisser mad. Later they applauded his acumen, but these days not only the smallcaps are hurting. The banks are also clammy to Zisser's current flagship project, Casa Radio in Bucharest's Eroilor district, though it's hard to grasp the sheer loftiness of the Casa Radio vision in mere numbers. Leave square meters out of it: It takes long minutes to drive around the block on which it's supposed to arise and will be the third-biggest building in the world (after the Pentagon in Washington and the megalomaniac Romanian parliament building). The Casa Radio is to have a hotel, mall, office towers, apartments, "dancing fountains" and a giant London-Eye-type Ferris wheel. Just building the foundations is costing $125 million, which Elbit Imaging is financing. Elbit Imaging said the European banks it works with want to lend, but they're having difficulty coming up with the agreed-on 800 million euros. So the banks asked that the company do the project in two phases (with the Ferris wheel in the first phase). The company says it believes funding will be forthcoming and adds that it isn't committed to a specific timetable. Lev Leviev, meanwhile, erected the Cotroceni Park mall, four times the size of the Ramat Aviv mall. Building is far along and loans are in place. While 80% of the mall is already rented out, plans to build office towers and a hotel await financing. Leviev's company AFI Europe is confident that Romania, as a developing economy, has great potential. But it's become a market for big developers able to weather the downturn, says AFI manager Tal Roma. As said, the demand is there. Romania has 22 million people, 2.3 million in Bucharest, many crammed into communist-era chicken-coop housing. And it has a growing middle class that's realized that life can offer more. They've learned consumerist habits: "Bankers tell of people living in hovels who drive cars costing 50,000 euros," says Daniel Weisman of Task. But they aren't buying housing now: Only 20 apartments changed hands in the last quarter in Bucharest, while in 2007, the monthly pace of sales averaged 600. The bottleneck is the banks and the question is which companies can hold their breath long enough. Meanwhile, some companies find solutions not from homebuyers but from speculators. Israel's Adama Holdings sold two buildings to a Norwegian fund called RomaniaInvest. Colliers says that half of the 7,300 new apartments sold in Romania last year went to foreign investors, and among Romanian buyers, 21% are purchasing for investment purposes. In short, foreign speculators smelling opportunity in the underdeveloped Romanian market had stormed the market and inflated prices, but now they're gone and the market is readjusting. Despite the unlimited land for development and the desire of the people to improve their living conditions, the decade of easy riches in Romania is over. "You had to be a compete fool not to succeed in Romania then," says one Israeli. Even Boaz Yona, now doing time for embezzlement after his Israeli building company Heftsiba collapsed, made a killing in Romania. In March 2007, Heftsiba Global bought land in Pipera for 11 million euros and sold it eight months later for 20 million euros. Even if not incarcerated, he couldn't do that now. According to Elad Kofler, general manager of the Bucharest-based consultancy Liad, the land was the base of a pyramid. "That underlying base wasn't worth much," he explains. "But it was the base for a series of transactions, one building on the next until the balloon burst and the last one is left holding the baby." Bookmark to del.icio.us   Military in denial IDF chief Ashkenazi refuses to believe IDF troops harmed Gaza civilians in cold blood. Coalitional contention Labor demands chairmanship of key Knesset committee promised to Lieberman.   1.   romanic depression 16:43  |  boaz weinfeld 24/03/09

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