Romania’s growth ranks 5th in the world in the 2000-2020 period, outpacing most regional economies and China / The country has enough resources to remain among world’s leaders in the next decade

glob, harta lumii Sursa foto: Unsplash / Kyle Glenn

In the past two decades, Romania’s GDP per capita increased from a level of 28% relative to the advanced economies to 58.6% in 2020. This increase means it ranks 5th in the world in the 2000-2020 period, outpacing most regional economies and China. The next decade could bring a significant economic boom in most countries in the world, Romania included, according to the 2021 Annual Report released by Colliers.

While Romania is still behind the regional countries in terms of rule of law, transport infrastructure, healthcare, efficacy of public administration or stability in general, with regards to laws and policies, should any improvements take place on these fronts, the growth potential that would be unlocked would be significant, Colliers consultants predict. With good potential to generate steady, long-term income, capital appreciation and significant diversification benefits, the real estate segment still offers attractive long-term investment opportunities, especially for investors that can cope with lower liquidity.

In the past two decades, Romania’s GDP per capita increased from a level of 28% relative to the advanced economies to 58.6% in 2020. This c. 30 percentage points increase means it ranks 5th in the world in the 2000-2020 period, outpacing most regional economies and China, for instance, with Lithuania being the only other country in the CEE a bit ahead. Ireland, Singapore and Taiwan are also ahead. Furthermore, based on IMF predictions, Romania is also set to see one of the fastest recoveries post-COVID in Europe, extending the overperformance from the last decades.

A first advantage of Romania would be the labor market, which still offers productive employees at lower costs compared to other countries. In manufacturing, Romania’s labour costs are comparable to China’s and several times smaller than in Western European countries, while in the high-value added sectors things also look good; though IT&C wages can be half of the levels seen in Western European countries, living costs in Romania (particularly real estate-related) suggest that the purchasing power of the average IT employee may actually look better here.

A second major advantage is the position and with geopolitics mattering more and more, as Romania is in an important region for its Western allies. Somewhat elevated corruption and a historically low drive for reforms constitute major drawbacks but, then again, Romania did score the 5th best economic performance in the world even with these factors around.

“There are also a few major trends that can move things around quite a lot in the Romanian economy, creating both opportunities for those with foresight and issues for those not prepared. Slightly more than half of Romania’s inhabitants live in urban areas, as per the UN’s definitions. Compare this to 80% in high-income countries and an average of nearly 70% in Eastern Europe and you get the prospect of a lot of fast-rising urban hubs in the next decades. This will create a lot of opportunities for various companies, including construction and real estate”, says Silviu Pop, Head of Research at Colliers.

Automation (both in production and in commercial service) is another important trend. Over 40% of jobs in Romania, much more than in other EU countries, could be exposed to the risk of automation (including in services), which will come somewhat gradually, as wages continue to rise in Romania. Statistics from a few years ago show that Romania had about 20 robots per 10,000 workers in manufacturing, half of Poland’s level and several times smaller than Czechia’s. If the state policies can arrest the negative externalities from automation, this process will prove a very positive dynamic as it will likely support Romania climbing even more the economic complexity ladder in terms of its output.

A fourth point that Colliers consultants believe will shape the next decade is related to globalization, in the way that things may start becoming less global and more regional. This ought to open quite a lot of opportunities for countries like Romania, which can serve as re-shoring destinations for advanced European economies. Brexit and the reshuffling of relations between advanced economies and China should lead to some positives for Romania and the CEE region as a whole.

A major opportunity which Romania should take advantage of relates to EU funds: the coronavirus aid package plus the normal allocation for the 2021-2027 period for Romania is around EUR 80bn or one third of the country’s GDP. After a decade and a half as a member of the European Union, Romania should be able to absorb all of these funds. As Romania has grown so well despite the lack of infrastructure, such investments would lead to major improvements, and this would unlock a significant and sustainable GDP growth. That said, some changes to taxation may be necessary in this context.

“Considering high pressure on public finances and gaping budget deficits in the years to come due to COVID-19, it is increasingly possible that for a longer-term, the legislator may consider increasing the effective tax cost on properties. So, the favorable tax gap with more expensive countries may shrink over time”, explains Alex Milcev, Tax & Law Leader, EY Romania.

The modern office stock will start growing again in a few years and it could close in on 4 million sqm by the end of the decade

This decade will see the office market changing drastically after the integration of remote work in the work model of most service companies. Still, the positive factors that propelled Bucharest into becoming one of the most interesting and dynamic service centers in Europe will remain in place –  relatively low wages (versus Western Europe) paired with good technical and language skills. Consequently, we would expect the city to grow not just on a quantitative basis, but on a qualitative one as well, with many more global blue-chip companies (tech-oriented, but not limited to this) to set up shop here. Growth will also come from the lively start-up scene which has already delivered one of the fastest growing tech companies in the world (UiPath). Meanwhile, offices will transform to focus less on actual work and more on fostering aspects like collaboration and corporate culture.

Furthermore, we see the undersupply of modern offices in Bucharest as an insulating factor over the longer term and we would rather expect the modern office stock to start growing again in a few years; consequently, it could touch 4 million sqm by the end of the new decade. Meanwhile, regional cities will remain behind Bucharest in terms of development, but they will grow faster than the Capital and prosper nevertheless.

Until the end of the decade, Romania’s real individual consumption could approach 90% of the EU average from below 80% today

With a total modern retail stock of around 4 million sqm currently, we could be moving past 5.5 million by the turn of this decade, which would still likely be lower on a per capita basis than what some regional peers have, such as Poland or the Czech Republic. The vast majority of the new schemes will be in towns with limited retail presence, while in more competitive submarkets, developers will be ever more cautious as the rise in e-commerce is more than a fad; omnichannel sales will make or break a retailers position in the coming years, as the integration of personal preferences and added flexibility will push forward a mix of offline-online commerce.

A change in generations could also define a lot of things, as millennials and ‘zoomers’ (gen Z) tend to have a more conscious attitude towards consumerism and topics such as ecology or spending ethically. Generation Z, which consists of the first individuals truly raised in the digital world, will start mattering more in the workplace in the next decade, making them more relevant as consumers. Also, Romania’s wages will continue climbing much faster than the EU average in the next decade, which would likely lead to both higher consumption and to an increased predilection for more upscale goods.

The overall stock of modern industrial and logistic facilities in Romania will close in on 10 million square meters this decade

The next 10 years are likely to bring a continued acceleration of growth as the modern I&L stock is underwhelming compared to the fast pace of the economic development in the past decade, let alone future growth. Consequently, even nearing Poland’s current per capita level of modern warehouses would mean surpassing the 10 million sqm threshold, which is certainly attainable. The next decade will also bring some major trends which will have a deep impact on the industry. As e-commerce will become a staple of everyday life and deliveries will need to take place in short duration (sometimes, same day delivery), retailers will need a heavier warehouse presence, including last mile logistics, as well as in other parts of the country. Automation will also be featured much more frequently as companies will try to circumvent higher labour costs and lower availability of labour altogether. The next frontier will consist of integrating even newer technologies into logistics, such as driverless cars, robot or drone deliveries and so on.

The internal shift of population will keep the residential markets attractive

The residential sector is a major driver of land market deals, and Colliers consultants believe that in a decade’s time, the residential scene in Bucharest and some of the few lively cities in the country will thrive, as more and more people will move here for economic opportunities. Taking into account also the need to replace the very old stock, these towns should absorb a decent amount of deliveries each year. On the flipside, smaller towns and those with limited economic opportunities, as well as rural areas not closely connected to large cities, ought to see a good supply of older apartments/ houses, lowering appeal for new projects. In the context of ongoing internal migration towards cities, with Romania greatly lagging urbanization rates seen in Western Europe, the population of towns in Romania will gradually increase over the next decades even as the country’s population decreases.

Sursa foto: Unsplash / Kyle Glenn

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