Why residential developers will try to stick to their rate cards and who will sell at distressed prices | Ilias Papageorgiadis’ blog for Real Estate in Romania (and not only)

Why residential developers will try to stick to their
rate cards and who will sell at distressed prices

Monday, July 19th, 2010

Part 6
of the post “Do you like “role games”? Let us play the… residential developer
To read part 1, please press here
To read part 2, please press here
To read part 3, please press here
To read part 4, please press here
To read part 5, please press here

Mr X is a serious successful medium size developer in his country. After having heard so many people talking about Romania, he decided to come over here and invest as well, targeting bigger profits than what he could earn at his place (do you know anyone who would leave his country in order to earn less than back home?). More or less his project reached a budget of 15 million Euro. About 10 million was the bank’s participation and he also invested another 5 million Euro cash, without taking into consideration the 400+ working days he invested.

But things didn’t turn out to be how he expected. After a good start, he got blocked in low sales, higher costs than his initial budget and “not too many solutions” by his Real Estate consultant. The official beginning of the world economic crisis was the kickstart of his new “Odyssey”. He had to fight with many new problems in his “Romanian adventure”… Now, in 2010, he has to decide upon his project’s future. And this is not easy at all…

The situation in which many developers are stuck into…
Mr X is not the only residential developer in trouble. There are plenty of them who have reached into the same situation:

They have invested more than they expected to.
They have invested some million Euro cash, plus some hundreds (or thousands) of hours of work for something which nowadays seems to be “a wrong idea”.
Almost all their strategies, decisions and marketing plans proved to be wrong, usually due to wrong estimations or false data, provided by their consultants.
They have very few finalized sales, too many empty apartments and high monthly costs.
The banks “kill” them with interest rates which keep on growing (but the banks simply have to protect themselves too, they are also exposed… it is a vicious circle).
Most of them failed to deliver the project on time, or at the level of finishings that they promised to their clients (for 100 different reasons, but today we check the result itself).
“Prima Casa” set the prices in the market at levels which are too low for most of the projects built during 2007 - 2008.
The project of “selling apartments of ANL for almost nothing” caused to them bigger problems. Even if there are very few transactions like this, thousands of people confused themselves and thought that this is the right price for an apartment.
The future looks “uncertain” (at least).
Everyone tells them that they should liquidate their apartments at a very low price, losing money.

A difficult dilemma awaits them…
Don’t be so eager to say “yeah, let them lose money, let them die”. You, my dear readers, if you would have been in their shoes… assuming that you would have made the same mistakes they did… what would you choose today?

Would you sacrifice your money, time and efforts, selling at a price that does not even cover the cost of the bank loan you have?
Or try to sell at the prices which pay your debts and solve all your problems, hoping for better days?

Why no developer will accept easily to sell with losses

Mr X owes to the bank about 10 million Euro.
Having built 10.000 sq.m., this is approximately about 1.000 Euro / sq.m.
Let us decide for him and say that he will lose his own money, his cash participation. So, he will give up to his 5 million Euro.
But can he also give up to the money he owes to the bank?
Why should he sell with 500 Euro / sq.m.? He will get 5 million Euro and he will still owe another 5 million.
Do you think that the bank will approve such a transaction? (Especially if this project is their only guarantee for the money they gave and they don’t have any personal guarantees by Mr X, or they don’t hope to get something by him).

Who can sell at “distressed” prices
Of course not everyone belongs to the category above. There are developers who will sell with lower prices indeed. “But who are they?” you may ask. I can easily identify some categories. So they are the ones who…

Had many sales and almost paid back the whole loan to the bank. Some of them even took back their own investment. So now they can accept a lower profit in order to exit this unhealthy situation.
Have developed very bad projects, with awful quality of construction. Their costs are much less than the normal ones and it is easier for them to cover them, even by selling at low levels.
Don’t owe too much to the bank, but they are still out of cash and the bank (or other suppliers) stresses them to pay back their debts.
Gave to the bank more properties as guarantee and they don’t want to lose them too.
Already fought with their bank and it took their properties, which will be sold by auction in the near future. An auction which will probably lead to a foreclosure…

Probably exception: the “smecheri”…
Talking above about developers, I forgot to clarify something: I always refer to serious (more or less) people, foreigners or Romanians, who approach their business with respect. There are also plenty of “smecheri” out there, who will simply disappear and leave the bank fighting with their clients, or they will try to trick someone, in order to offload their projects to the “next stupid”. If any of these people will be very stressed by all problems around him and he can not escape, he will sell at a low price and then he will curse the whole universe, promising to himself that he will steal much more in the future, in order to recover the loss of today.

Today the cost of a residential project is still 800 - 1.000 Euro / sq.m.
Today, July 2010, the lands still have quite high price, despite their 40 - 70% deduction compared to 2008 prices. If today one will start developing a new residential project in an area attractive to people, with the standards that people want (small surfaces etc), he will still have to invest almost 800 - 1.000 Euro / sq.m. built. This is ofcourse the case if he wants to deliver something respectable, where his clients can live decently. I always refer to the whole project, not just land and construction.

Think before you answer…
Before you accuse the developers for “keeping their prices too high”, try to think… what would you do in their place?

On Tuesday 20.07.2010

The 10 lethal mistakes that many residential developers did in Romania

(Necessary clarification
Please allow me to clarify something: I strongly believe that a big part (maybe half) of the residential developers being active in Romania today are people who either were tricked while chasing easy money or they developed on purpose bad constructions, in order for them to cash in more money in shorter time. But for every developer who behaved like this, I also meet one more serious, professional, with strategy and plans. A person or company who tried to develop something good, with respectable quality, civilized, aiming to build a strong brand name and to achieve his clients to be happy for buying his property).

Why residential developers will try to stick to their
rate cards and who will sell at distressed prices

Leave a Reply

All time classics

Real estate news