Buying a Property in Romania

Why buy property in Romania?

When Communism came to an end in Eastern Europe in 1989, much of the attention was upon Romania, given the terrible conditions endured by the population at the hands of the Soviet-controlled dictatorship. Since then, the country has managed to rebuild itself following three years of severe recession, and has emerged as a full member of the European Union.

Formed in 1859 as the united independent regions of Wallachia and Moldavia which had separated from the Turkish Ottoman Empire and adding Transylvania in 1918, Romania has managed to stay complete and has not been tempted to split up as some of the countries around it did after the fall of Communism. The new regime in Romania had to adapt a manufacturing process and industrial base that was completely unsuited to the needs of the country as an independent nation. This change in the fabric of the economy of the country has brought Romania into a Europe that was in need of its exports, resulting in high growth up to and since accession in 2007.

With a coast on the Black Sea that has yet to be exploited as a holiday destination, mountain resorts in the rugged Carpathians to the north of the country, and a pretty capital in Bucharest, the interest of overseas property buyers is beginning to grow.

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Romania's capital city, Bucharest is the sixth largest city in the EU, and as with many of the ‘emerging’ markets of Central and Eastern Europe, it has been the focus of the early stages of the overseas property industry in the country. It was the first place to receive flights from low-cost airlines, which has helped to bring it along on the minds of people heading away for long weekend breaks.

The city lies on the banks of the Dombovita River and is full of beautiful belle-époque architecture and characterised by wide, tree-lined boulevards. Even with the traditional features of the old town and many of the iconic buildings, Bucharest bears the traces of the many influences that have come to the city in recent decades. Many buildings were constructed in the post-war Communist period, and are rarely remarkable for their beauty. It is these parts of the city that are being regenerated into more superior-quality housing stock, and which is attracting the overseas property investment specialists.

New buildings and modern architecture are beginning to leave their marks on districts of the city, and this gentrification of Bucharest has been particularly prominent in the northern suburbs of the city and the residential developments are providing homes for middle- and upper-class Romanians in the capital.

The cultural scene in Bucharest is significant, ranging from museums to music festivals, and there is now a thriving café culture giving the city a cosmopolitan atmosphere. Renowned artists, orchestras and jazz musicians are regular visitors to the city for performances and showings. A large apartment in the city centre can be found in one of the new developments for around £160,000, for which there should be some significant rental return.

Outside of the capital, Brasov is one of the most important cities in Romania, due to the universities there that can supply knowledge and talent to industry and business. As well as being an important centre of commerce for Romania, Brasov is the gateway to much of the tourist and leisure activity in the country. From Brasov it is easy to get to the ski resorts of Busteni, Poiana Brasov, Azuga, Predeal and Sinaia which are accessible all year and great for both summer and winter sports.

Nearby, there is also the historic and tourist town of Bran which, as well as providing equally good access to the ski resorts, is home of the famous Dracula’s Castle, which attracts huge numbers of tourists each year.

The third area of interest for potential buyers of property in Romania to consider is the Black Sea coast. While this coastline is much shorter than that of Bulgaria, for example, it is far less-developed, and retains the potential to have some fantastic resorts and, as long as building is controlled effectively, could provide long-term growth and develop a strong tourist market of its own. The main town here is Constanta – to which one of the low-cost airlines has just announced its first route. If this route is a success, more can be expected to follow, and the development of the beautiful coastline can grow and spread. At present, front line apartments with sea views can be found for under £44,000, but these prices will not last long as the area comes to the attention of more and more buyers.

In many ways, the Black Sea Coast could be the growth area that propels Romania's property market into the spotlight of the overseas property investment world. The increase in access points to the area, the stability of the current government set-up and the opportunity for developers to create manageable and sympathetic projects having learned lessons from other resorts on the Black Sea coast could give this part of Romania the impetus to drive this new sector of the domestic economy.

Legal issues

As a new entrant into the EU, the rules governing owning a property in Romania are likely to undergo changes in the coming years to make them more transparent and to increase access to the property market for foreigners. One of the conditions of EU entry is that property must be available for all EU citizens to buy, but there are currently other restrictions in place that add a caveat to the process.

While is it possible for foreign individuals to buy property in the form of buildings, the purchase of land by private foreign individuals is currently prohibited. For buyers to be allowed to own the land on which their property is built, most agents recommend that the easiest way is to form a private company through which to purchase the land.

This is a relatively simple process, and will cost no more than €1,500 to set up, including a fee to set up a company bank account. This approach also means that you will need to keep proper company accounts and pay corporation tax every year, but with the help of a good accountant well-versed in the local tax laws, this shouldn’t cause too many problems.

Buying through a company offers the advantage of VAT savings as well, though the payment of corporation tax cancels out most of this benefit.

There is one situation by which a non-Romanian national is allowed to buy the land upon which their property is built. EU citizens are allowed to buy their land as well as their property if they are intending to use it as their primary residence. This will incur some tax domicile and residency issues, and there will have to be evidence that the property in going to be used as a primary residence to support your purchase.

The process for this law regarding the private ownership of land to change has been put in place already, with provision being made for freehold ownership of land by foreigners to be allowed five years following EU accession. This means the law will come into effect in January 2012.

It is recommended that all purchases of a property in Romania are overseen by an independent, expert, English-speaking lawyer in order to make sure that the contracts are properly assembled and that the correct steps are taken to register the purchase with the authorities.

When buying an older, resale property, buyers should always make sure that they have an independent survey carried out to highlight any structural issue that may be present, or occur in the future.

The property buying process in Romania

Once you have decided on the property that you want to buy, the process for making it your own is reasonably simple and straightforward. The most important thing to get organised, if you are looking to buy the land as well as the buildings of your property, is to make sure that you have your Romanian company set up and ready to go. The documents you need to do this are easy to get hold of and the process is a short one. You will need to supply a company address, which will usually be the address of the property you are buying, so the formalities may need to wait until you have found the property you wish to buy.

Once you have found the right property, you can go ahead with agreeing the final price with the vendor. From here you need to check the land and property title ownership which, dependent on the number of owners, could take some time. This is the stage at which to get a survey done so that you are aware of any problems there may be ahead of signing any final agreements and committing to the purchase price in writing.

The initial contract commits both parties to the sale, and removes the property from the market. It also sets out the terms of the rest of the contract, as well as the payment terms. Generally, there will either be a staged-payment system in place, which is more common for new properties, or the full balance will be paid upon signing the final contract of sale, as is more often the case with resale properties.

The final sale contract for the property is drawn up by an official notary and signed in the presence of both parties, at which time the notary will also present the appropriate documents to the authorities to register the buyer officially as the new owner of the property.

At this point the stamp duty and transfer costs of the sale become due to the government authorities.

Financing your property purchase

Mortgages are now available for foreigners looking to buy property in Romania, and with the freeing up of the buying process to come in the future, the process is likely to become much easier and the variety of products on the market more varied.

Typically, finance is available up to 75 per cent of the value of the property, with a minimum deposit of 25 per cent being paid up-front by the buyer. Interest rates start from around 6.8 per cent, but are of course subject to fluctuations as much as they are here in the UK. The term of the loan can extend up to 25 years.

More common in emerging markets like Romania is the idea that people will finance their property purchase from the UK, re-mortgaging a property they already own in order to go to Romania as a cash buyer, or releasing some other form of equity to raise funds. This can be a preferable solution for buyers as they are able to keep a closer track of the markets and any possible rises in interest rates, but it does not mean that the mortgage market in Romania should be discounted out-of-hand.

Be aware that in Romania, as in many other countries overseas, that the process of applying and being approved for finance can be incredibly long and frustrating. This is true to such an extent that even local buyers find it difficult to cope with, so if you are going to use local finance in order to buy your property in Romania, make sure you are prepared for a long and frustrating wait. Again, as the country integrates further into the process of the EU, this is a system that should be streamlined.

Romanian property fees and taxes

A large proportion of the costs associated with buying property in Romania are to do with setting up a private company in order to buy the land upon which the property stands, but even with this added expense, the legal costs are unlikely to come to more than three per cent of the purchase price. This will include the searches, drawing up the preliminary and final agreements and registering the property with the authorities.

Once other fees and the cost of translators have been added in, purchase costs should not exceed five per cent of the price of the property.

On top of this, private individuals may have to pay VAT on property purchases of 19 per cent. If you set up a private company for the purchase, VAT is not payable, but corporation tax of 16 per cent is due on the asset.

VAT and Capital Gains Tax (CGT) have recently been increased to discourage too much property speculation and keep as much of the inward investment within the country as possible. For this reason, CGT is liable at a rate of 16 per cent on any gains made from the sale of property, unless the property has been owned for more than three years. In this case, CGT is waived for the seller.

Visas, residency and work permits

As part of the unilateral agreement between member states, EU citizens are permitted to travel to any other member state upon production of a valid passport without the need for a specific visa. These non-visa arrangements are valid for a period of three months, after which foreign nationals intending to stay in Romania must apply for a certificate of registration from the Romanian government.

Should buyers be hoping to purchase their property as their primary residency, and therefore avoid the need to set up a private company, it would be a good idea to apply for permanent residency through the attractively-named Romanian Authority for Aliens as a first step.

Romania's investment potential

The potential for growth in property prices in Romania is huge and can make quite exciting reading. Not only are property prices low at the moment across the country, but Romania is already an EU member state and the demand for property is increasing rapidly, a trend which looks set to continue.

Foreign companies and private investors are putting money into the country as a solid base for the future, and again, this is a trend that shows no signs of dropping off in the near future. Unlike many of its neighbours in the region, Romania has managed to emerge from the Communist system slowly and deliberately, and is beginning to reap the benefits of waiting, watching and learning from the experiences of other new states in the wider world community.

Winter sports destinations and the new resorts along the Black Sea coast are providing a good progression from the initial flush of property that became available in the capital as soon as the property market opened up, and with careful planning and regulation, durable resort growth can be reached and maintained for some years, attracting tourists and property buyers alike.

However, there is no guarantee that things will progress as intended. The property market in Romania is immature to say the least, and a wise investor should make sure that they go into buying in Romania with their eyes open and aware of the potential pitfalls. The administration systems are grindingly slow and at times their workings are a mystery for even the most experienced Romanian professional.

Romania has also had a reputation for corruption in the past, and this was the biggest potential stumbling block for the country’s EU entry. In fact, when Romania and Bulgaria were granted accession to the EU, it was with strict conditions and targets to tackle the organised crime and corruption that runs through both countries. Although there has been a good amount of progress made in this regard, there are still individuals out there who will take advantage of people who are careless in their money dealings. Therefore, anyone investing in property in Romania will need to have a trusted legal adviser who is expert in the country, and should ideally have a real estate agent they trust they can go to for advice on any deals they consider signing.

Risks are part and parcel of buying property in an emerging market like Romania, and these facts should not put off potential investors. The key is to know about risks that potentially lie in wait, and how best to deal with them. That way, the investor’s risk exposure of can be minimised, and the investment has far better chances of success.

Health and education

This is one of the areas in which Romania need to improve drastically to serve its citizens better – quality healthcare is rare, and hospitals don’t have the best reputation for caring for their patients. In fact, this is one of the areas in which a certain degree of corruption exists and is openly accepted. It is common practise for patients to tip their doctor in cash to make sure they get the proper drugs and attention appropriate to their condition.

Outside of the major hospitals in the main towns, the quality and availability of healthcare is difficult to predict, and while vaccination rates are high, malnutrition afflicts sections of the population and maternal mortality is among the highest in Europe.

Any buyers considering spending large amounts of time in Romania will want to make sure they are covered for private healthcare.

Transport

This is another area of the country’s infrastructure that needs a good deal of attention as it does not at present match up with the geographical position of Romania at the hub of an expanded Europe. The road system has suffered from a lack of maintenance since the fall of communism, and the rail system has also fallen behind in terms of technology and repair as a lack of investment has starved the system of innovation.

The government has stated that making investments in the road and rail systems is one of its top priorities for the immediate future.

Bucharest is the only city in Romania with a metro system, which opened in 1979 under the Communist government and has a total of 45 stations spread across 63km of tracks.

And finally...

While there is a huge amount of potential for investing in property in Romania, it is important that potential property portfolio-builder does not rush into a deal with no idea of what the potential pitfalls are, or where there might be a need to be cautious. In developing new areas for property companies, the authorities need to demonstrate that they are continuing to fight corruption and protect individual, private investor.

The potential gains are huge, and the gains are presently in the higher-end properties that are available, but as new resorts and new developments come online, the range of products in the market will increase, and the opportunities for investment will become ever more diverse. Without any doubts, an interesting market to watch.

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