REAL ESTATE INVESTMENTS VALUATION IN ROMANIA
THROUGH INTERNATIONAL & EUROPEAN
CONSULTING METHODOLOGIES
University Professor PhD Cristian Silviu BANACU
ASE Bucharest
[email protected], [email protected]
Abstract:
The purpose of the paper titled REAL ESTATE INVESTMENTS VALUATION IN
ROMANIA
THROUGH
INTERNATIONAL
&
EUROPEAN
CONSULTING
METHODOLOGIES is to underline the importance of the using of international consulting
and appraisal methodologies into the practice of real estate and investment consultants
from Romania. Case studies are presented.
Introduction
The investments in real estate market from Romania has decreased first smoothly and then
sharply in the period 2008-2012 due to the influence of economic crise that affected
Romania as well as the other countries from Europe or the world.
The land market was significant different from town to town, county to county, region to
region in what it concerns the transaction values for investments.
In some cases as the lands in small cities or the lands in the close neibourhoud from
metropolitan areas, the lost of land value was between 50-60 % comparing with 2008 land
values. For example the land values for real estate investments. In other cases as the lands
for commercial constructions investments has smaller decrease.
If we look at the land marke from a Romanian big city as it is Bucharest, we could notice
that the most wanted lands for residential developments were the plots with small as
surfaces 500-700 sqm because of the low power of investments due to the low power of
consumption.
The values of such lands has reached the miminum for areas as Baneasa Sisesti (70-200
euros/sqm), Rahova, Oltenitei, Iuliu Maniu , Pantelimon, Colentina (150-250 euros/sqm),
Titan, Drumul Taberei, Basarabia Boulevard (200-350 euros/sqm), Iancului, Mosilor,
Bucur Obor (300-500 euros/sqm) and has higher values for areas as Piata Unirii, Piata
Dorobanti, Piata Aviatorilor, (700-2000 euros/sqm).
In what it concerns the residential market, the values of flats and housing has the similar
evollution as the land values reaching to a 45 % fall down in prices comparing the values
from 2012 comparing with 2009. The average price was 1050 euros/sqm. The Colliers
Report from 2011 show this evollution.
40
The evollution of the commercial investments was less affected by the economic crise.
For this reason, the number of new investments were higher than in other fields in
Romania.
The study case:
The valuation of a large surface land for investment in Bucharest, Romania
In order to estimate the open market value of the plot of land with a total area of 13000
square meters located on a semicentral area from, Bucharest, the valuator analyst used
the following three methods:
1. THE COMPARISON APPROACH  Comparison method
2. THE INCOME APPROACH  Capitalization method
3. THE COST APPROACH  Residual method
VALUATION USING THE COMPARISON APPROACH
The estimate of the value of land using this method is made by analyzing, comparing and
correcting similar plots of land for which information about prices are available.
The following plots of land have been used as comparable properties:
A. Land on Militari area, with a total area of 2900 s qm and a frontage of 120 meters,
with all services, presently offered at 140 Euro/sqm.
B. Land on Militari area, with a total area of 2800 s qm and a frontage of 43 meters,
with all services, presently offered at 250 Euro/sq m.
C. Land on Basarabia Street with a total area of 2750 sq m and a frontage of
30 meters, with all services, sold in 2011 at 300 Euro/sqm;
D. Land on Titan Area. with a total area of 3,500 s qm and a frontage of 45 metres, all
services included, presently offered at 350 Euro/sqm.
41
Forecasts shows1 an increasing value estimated at 160 euros/sqm (696 LEI/sqm at a rate of
1 euro = 4,35 LEI) of the land because of its near proximity to the Militari Shopping
Centre and the center of Bucharest, and its access to Iuliu Maniu Blvd and Lujerului Bvld.
Taking into account the actual costs of necessary demolishing works and site preparation
works we could estimate about 160-600 euros/sqm.
The land for which the total adjustments are the lowest is the one located on Militari area,
position B and we consider that the land price for the subject plot of land is of 160 Euro/sqm.
For the entire area of 13000 sqm we have a value of 2080000 Euro.
The value for the land obtained by comparison approach is of 2080000 Euro.
Land Value
By Comparison Method = 2080000 Euro
Comparision
elements
Price
(euro/sqm)
Area (sqm)
Offers/
Transactions
Adjustments
Adjusted Price
Location
Adjustments
Adjusted Price
Frontage (m)
Adjustments
Adjusted Price
Planning
constraints
Adjustments
Adjusted Price
semicentral
Utilities
water, gas,
electric
Adjustments
Adjusted Price
total
Adjustments
Final value
160 euro/sqm
Valuated
property
13000
288
PUZ
approved
Militari Blv
Militari Blv
140
2900
250
2800
offers
offer
0
140
semicentral
0
140
120
20%
144
POT 70 %
CUT 3,5
10%
158.4
water, gas,
electric
0
158.4
0
250
semicentral
0
250
43
30%
325
POT 75%
CUT 3,5
10%
357.5
water, gas,
electric
0
357.5
30%
40%
42
Basarabia
Blvd
300
2750
offer
Titan
350
3500
transaction
0
20%
300
420
semicentral semicentral
0
0
300
420
30
45
40%
30%
420
546
POT 40%
POT 40%
CUT 4
CUT 4
10%
10%
462
600.6
water, gas, water, gas,
electric
electric
0
0
462
600.6
50%
60%
VALUATION USING THE INCOME CAPITALIZATION APPROACH
The capitalization rate applied to the earnings has been calculated after a review of the
capitalization rates for several investment properties as hotels, office buildings, residential
and malls.
We use de formula: Value= Expected Income/ Capitalization rate
We determine the capitalization rate for projected investment on land
offices
comparative offers
north zone
floreasca
surface sqm
20000
4370
rent offer/month/sqm
18
22,61
rent offer/year/sqm
216
271,32
total rent/year
4320000
1185668,4
selling value
40000000
8740000
capitalization rate
0,108
0,13566
avarage capitalization rate
0,12122
source ziarul financiar
baneasa
4500
20
240
1080000
9000000
0,12
Table Determining the capitalization rate for offices: 12.21 %
malls
comparative offers
surface sqm
rent offer/month/sqm
rent offer/year/sqm
total rent/year
selling value
capitalization rate
avarage capitalization rate
source ziarul financiar
craiova mall
54000
10
120
6480000
108000000
0,06
0,075
cluj napoca
31500
14
168
5292000
63000000
0,084
bacau
40000
13,5
162
6480000
80000000
0,081
Table Determining the capitalization rate for malls: 7.5 %
residential
comparative offers
nordului-herastrau
surface sqm
135
rent offer/month
1500
rent offer/year
18000
total rent/year
18000
selling value
350000
capitalization rate
0,051428571
avarage capitalization rate
0,05529222
source ziarul financiar
primaverii
185
2700
32400
32400
67000
0,053114754
aviatiei
120
2300
27600
27600
450000
0,061333333
Table determining the capitalization rate for residential housing (apartment flats): 5.5 %
43
hotel
comparative offers
surface sqm/ room
rent offer/month
rent offer/year
total rent/year
selling value
capitalization rate
avarage capitalization rate
source ziarul financiar
bucuresti
58
31,3
375,6
375,6
350000
0,001073143
0,000897459
hilton
75
43
516
516
67000
0,000845902
central
48
29
348
348
450000
0,000773333
Table determining the capitalization rate for hotels (at an occupancy rate of 70 %)
euro
hotel
room sqm
100
fee/ room/night
150
residential
apart sqm
rent/ month
170
1500
nr nights occupation fee/ month rent/sqm/n
30
0,7
3150
31,5
occupation rent/sqm
0,7
6,176471
Table Data used for the capitalization rate for hotels (at an occupancy rate of 70 %) based
on comparisons hotel and residential in order to find the price per sqm for hotels for a
better equivalance with other construction investments
If we suppose the following scenario in which the destination for the land best using will be:
scenario 1
surface
euro
Land for:
office
mall/
commercial
Residential
appartaments
hotel
total
130000
sqm
price/sqm rents/sqm
Total selling
value
Total rent
value
30%
39.000
560
20
37440000
780000
30%
39.000
560
12
37440000
468000
30% 39.000
10% 13.000
100% 130.000
560
560
560
6,17
31,5
17,4175
37440000
12480000
124800000
240630
402500
6968130
Simulating the land renting (scenario1)
If the land will be sell or rent that will be used for the building of offices, mall, apartments
flats and hotel in equal proportions (30%, offices, 30 % mall, 30% residential apartaments
and 10 % hotel): the total selling value of the land will be 124800000 euro and total rent
value per year will be 6968130 euro.
Building nr
on land levels
12
office
5
mall
12
resid
12
hotel
total
price/sqm rents/sqm
surface
468000
1500
20
125000
3500
12
468000
1900
6,17
156000
2800
31,5
1287000 2425
17,4175
total selling
702000000
682500000
889200000
436800000
2710500000
total
rent/month
9360000
2340000
2887560
4914000
12501560
total
amortiz
rent/year
(years)
112320000
6,25
28080000 24,30555556
34650720 25,66180443
58968000 7,407407407
234018720 11,58240674
Table 5.2.7 Simulating using of the land in the case that constructions will be erected
44
Building on land total rent/month total rent/year
9360000
112320000
office
2340000
28080000
mall
2887560
34650720
resid
4914000
58968000
hotel
12501560
234018720
capitalization rate capitalized value
0,12122
926579772,3
374400000
0,075
626683464,7
0,05529222
65705508552
0,000897459
0,06310242
703361451
Simulating using of the land in the case that constructions will be erected using the
capitalization rates of the market with the average rate of capitalization of 6.31 %
scenario 2
Land for:
office
mall/
commercial
hotel
resid
total
euro
Total selling
130000 sqm price/sqm rents/sqm
value
30%
39.000
560
20
37440000
40%
52.000
20%
26.000
10%
13.000
100% 130.000
560
560
560
560
12
31,5
6,17
69,67
49920000
24560000
12480000
124800000
scenario 3
Total rent value
780000
624000
819000
80210
2303210
euro
Total selling
sqm price/sqm rents/sqm
value
26000
560
20
24560000
52000
560
31,5
49920000
Land for: 130000
office
20%
hotel
40%
mall/
commercial 20%
26000
residential
20%
26000
total
100% 130000
560
560
560
12
6,17
69,67
24560000
24560000
124800000
Total rent value
520000
1638000
312000
160420
2630420
Simulating the land renting (scenario2 and 3)
Building nr
on land levels
office
12
mall
5
residential 12
hotel
12
total
surface
468000
260000
312000
156000
nr
Building
levels
on land
office
12
mall
5
residential 12
hotel
12
total
surface
312000
260000
312000
312000
price/sqm rents/sqm total selling
1500
3500
1900
2800
2425
total
amortiz
rent/year (years)
112320000
6,25
37440000
24,30
117936000
5,02
11550240
37,81
279246240
9,45
702000000
97000000
592800000
436800000
2641600000
9360000
3120000
9828000
962520
23270520
price/sqm rents/sqm total selling
total rent
total
rent/year
amortiz
(years)
6240000
8190000
3744000
1925040
20099040
74880000
98280000
44928000
23100480
241188480
6,25
7,4
24,3
25,66
11,94
1500
2800
3500
1900
2425
20
12
31,5
6,17
17,4175
total rent
20
31,5
12
6,17
17,4175
468000000
728000000
1092000000
592800000
2880800000
Table 5.2.7 Simulating the land using for constructions (scenario2 and 3)
45
Var 1
Var 2
land rent
value/year/variant
125015,60 232705,20
capitalization rate
0,0631024 0,06310242
capitalized value (euro) 3090461 3687738
Var 3
200990,40
0,06310242
3185145
The land value through the capitalization method is 3090000 euro if is developed
according to scenarios 1, 2, 3.
COST APPROACH-RESIDUAL METHOD
Method description
a) By this method we are estimating what part from the prospective future incomes can be
attributed to the land taking into account the investment costs:
b) The formula used for Residual Method is as follows:
Project Value  Building Costs  Developer’s Profit = Land Value
c) The Project Value it is obtained by annual income capitalization, with a market
capitalization rate.
d) To find the land value by Residual Method we have to establish the Land Best Use and
then to estimate the incomes generated by the premises.
Considering the location and the town planning parameters we have considered the best
use for the subject plot of land the development of a multifunctional complex comprising
residential and retail facilities.
Considering the fact that the area is an old industrial area we have considered the footprint
of the constructions will be up to 50% from the total area of the plot.
For the residential development we have considered 3 towers of 33,000 s qm each, with a
total area of 1,000 sq m per floor. The number of underground parking places is of 700 and
another 100 places are available outside.
The shopping mall has a total area of 200,000 sq m gross area, excluding underground
parking of 61,513 sq m. The total Gross Letable Area of the mall is of 68,268 sq m,
divided on four floors.
The total number of car parking places for the shopping mall is of 4,000 units, located
underground.
For the office building we have considered 1 tower of 80.000 sq m, with a total lettable
area of 1,600 sq m per floor. The number of underground parking places is of 2,500 and
another 200 places available outside.
The hotel sector will be represented by one tower of 30.000 sq m, with a lettable area of
1,000 sq m per floor. The number of underground parking places is of 300 and another
100 outside.
To determine the land value the following steps are necessary:
a) To determine the construction costs for the development considered as the best use,
including the cost for landscaping.
b) Income estimates for the project.
46
c) Estimating the Project Value by income capitalization with a market capitalization rate.
d) Finally, finding the land value as difference between the project value and the costs of
development.
From the discussions with architects, contractors and other sources, the average
construction costs where considered as following:
 325 Euro/sqm for the underground parking;
 150 Euro/sqm for the landscaping and outside parking, access ways, green areas, etc.;
 The cost for residential buildings, considering also the height of the buildings is of 750
Euro/sqm;
 The cost for the shopping mall was considered at 850 Euro/sqm;
 The cost for hotel was considered at 1000 euro/sqm
Note: excluding VAT and design costs
The costs for professional services were considered as follows: 2% architects fees, 1.5 %
legal fees and surveyor’s fees, 1% fees for technical experts and 3% the Project
Management fees.
The financing cost was considered at 5.75 % per year.
The developer’s profit was considered at 18 % from the total investment.
The estimated rental incomes from the shopping mall are of 17,62900 Euro per year,
excluding VAT.
The Project Value has been obtained dividing the annual incomes from rents to the
capitalization rate. Considering the existing market capitalization rates, we have used a
capitalization rate of 7.50 %.
For the residential part of the project we have estimated an average price of 1,300 Euro/sq
m of gross area and a price of 12,500 for underground car parking place and 7,500 for
outside car parking place.
The calculations are presented bellow.
By Residual Method we have obtained a land value of 1629812,49 Euro, which means
125,3 Euro/sq m for the plot of land of 13000 sq m. The rounded value for land by
Residual Method is 1630000 Euro.
Land Value
By Residual Method = 1630000 Euro
RESULTS OF THE LAND VALUATION
The three market values obtaines for the plot of land of 130000 sqm located on Land
located in Bucharest on 355-357, Militari area, sector 1, are:
VcM = 2080000 Euro rounded 2080000 Euro
Vcap= 3090000 Euro
VRM = 162,981,249 Euro rounded 1630000 Euro
47
The Comparison Method used transactions with plots of land free of buildings located in
areas which are not very close to the subject plot of land and which are worst located.
The Residual Method determines the open market value considering the development for
the best use of the land.
Because by Residual Method we have considered the best use for the development as a
mixed use development of a residential and shopping mall project, two of the most
dynamic sectors of real estate market in Romania, with increasing demand, we consider the
Residual Method value as being the value for the subject plot of land.
The land value 13000 sqm on Militari area, Sector 5 = 2080000 EUR
REFERENCES
 Cicea C.  Consideraţii privind eficienţa investiţiilor internaţionale în condiţii de risc
valutar, Revista de Management Comparat nr 6, 2006, ISSN 1582-3458
 Cicea C.  Concurenţa proiectelor de investiţii în economia de piaţă. Articol în
Proceedings of 19th scientific conference NAVMAREDU,
Academia
navală
Mircea
cel
Bătrân,
pag.
155-160,
ISBN 973-8303-54-0 2005
 Vasilescu I., Românu I.  Cicea C., Investitii, 2000, Isbn 73-590-368-7, Ed. Economică
 www.coliers.ro  Coliers Report 2011, mid term, ANEVAR Standardele Internationale
de evaluare 2011
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