This paper presents the evolution of construction and real estate sectors in Romania in the context of current financial crisis, highlighting the internal and international economic climate. The evolutions of the main macroeconomic indicators and sectoral factors of influence on them are presented. Construction and real estate sectors are particularly affected by the worsening perception of the risk, of financing difficulties, doubling the risk of liquidity with the solvency one.financial crisis, construction sector, gross domestic product, added value, liquidity

Florina Mocanu

English

Research Papers in Economics

Romanian Economic and Business Review – Vol. 4, No. 3 
 
127 
FINANCIAL CRISIS IMPACT ON CONSTRUCTION AND REAL 
ESTATE SECTORS IN ROMANIA 
 
Florina Mocanu
* 
 
 
Abstract  
This paper presents the evolution of construction and real estate sectors in Romania in the 
context of current financial crisis, highlighting the internal and international economic climate. The 
evolutions  of  the  main  macroeconomic  indicators  and  sectoral  factors  of  influence  on  them  are 
presented. Construction and real estate sectors are particularly affected by the worsening perception of 
the risk, of financing difficulties, doubling the risk of liquidity with the solvency one. 
 
Keywords: financial crisis, construction sector, gross domestic product, added 
value, liquidity 
 
JEL Classification: G01, E01, L74 
 
1. Introduction 
 
World economy is in crisis. The shock is even more brutal as this crisis succeeds 
a  powerful  growth  registered  in  recent  years  (4%  between  2001  and  2007), 
encouraged by the development of international trade. Today the world economy is 
destabilised by major phenomena : real estate crisis (which has generated the most 
serious  financial  crisis  since  1929  in  the  United  States,  quickly  sent  to  Europe), 
accelerated growth of the raw materials prices, which involves a food crisis and oil 
shock, unprecedented pollution of the environment etc..  
Financial crisis, which started in July 2007, has its roots in the search of an ever 
increasing profitability, most investors always wanting more. Thus, real estate loans 
were  granted  to  people  becoming  less  responsible,  considering  that  a  possible 
reimbursement could be effectuated by resealing of the respective building, whose 
price could be only increasing. But the reality was different... 
If we can speak of an inseparable couple in finance, that concerns risk and 
profitability.  The  growing  profitability  can  be  achieved  only  with  the  price  of  a 
growing risk. And if the risk is at growth, also the probability for it to materialise is 
also amplified.  
 
                                                            
*  Florina  Mocanu  teaches  Capital  Markets  at  the  Valahia  University  in  Târgovi te.  E mail: 
florinamocanu26@yahoo.com Financial crisis impact on construction and real estate sectors in Romania 
 
 
128 
2. International context  
 
The cost of financial crisis was estimated by the International Monetary Fond to 
4000 billion dollars. The worldwide economic progress forecasted for 2008 of 3.2% 
is expected to be replaced by a decrease of 1.3% in 2009
67. 
At first, the crisis affected particularly the developed countries. Aversion to risk 
in these countries transmitted rapidly to emerging areas. Countries of Central an 
Eastern Europe have entered a zone of high risk, forecasts for the region being 
pessimistic:  economic  decline  are  generalized,  companies  disinvest  and 
unemployment increases, current account deficits adjust, even brutally in some cases, 
fiscal deficits increase significantly (chart 1). 
 
Chart1. Forecast of percentage change in 2009 of main economic indicators of countries in the 
region  
GDP Gross Fixed
Capital
Formation
Unemployment  Inflation Current
account
deficit/GDP
Public
debt/GDP
Fiscal
deficit/GDP
-40
-20
0
20
40
60
80
100
GDP Gross Fixed
Capital
Formation
Unemployment  Inflation Current
account
deficit/GDP
Public
debt/GDP
Fiscal
deficit/GDP
BG
LV
HU
PL
RO
HR
TR
  Source: European Commission, Spring forecasts, May 2009 
 
According to Eurostat estimations, in the first quarter of 2009, GDP in the euro 
area decreased by 2.5% compared to previous quarter, and in the EU27 one by 2.4%. 
In rapport of the first quarter of 2008, the reduction registered by the GDP was 
4.9% for the euro area and 4.7% for the EU27. The first quarter of 2009 has meant 
also a reduction of investments of 4.1% in the euro area and of 4.5% in the EU27. 
Household final consumption decreased by 0.5% in the euro area and by 0.6% in the 
EU27. Exports registered a rebound of 8.8% for the euro area and 8.3% for the 
EU27, while imports decrease was 7.6% for the euro area and 7.8% for the EU27. In 
the United States and Japan, the decline GDP recorded in the first quarter of 2009, 
compared to the same period of 2008, was of 2.5% and respectively 8.4% (Chart 2). 
                                                            
67 FMI, Crisis and Recovery, World Economic Outlook, April 2009 Romanian Economic and Business Review – Vol. 4, No. 3 
 
129 
Chart 2. Growth rates of GDP in volume (grownth over the same quarter of the 
previous year, seasonally adjusted) 
 
Source: Eurostat 
 
Regarding  the  constructions  sector,  output  adjusted  with  seasonal  variations 
recorded in May 2009 a reduction of 2% in the euro area and of 2.7% for the EU27, 
compared to the previous month. Following May 2008 rapport, production fell in 
May  2009  by  8%  in  the  euro  area  and  by  9.6%  in  the EU27.  Most  emphasized 
decreases were registered in Romania     ( 23.7%), Slovenia ( 21.1%) and UK ( 
17.9%). 
 
3. Perspective of overall situation of the Romanian economy  
 
At the beginning of the crisis, the Romanian economy had crossed a period of 
several  years  of  economic  growth,  but  accompanied  by  the  accumulation  of  a 
significant external deficit and external debt increase in short term. 
The current external climate imprints on the economic environment in Romania 
through
68:  
a)by  worsening  perception  of  risk,  including  through  association  with  regional 
developments;  
b) contraction of the external market outlets;  
c) difficulties in external financing;  
d) doubling of liquidity risk with the solvency one at microeconomic level. 
The  Romanian  economy  declined  in  the  first  quarter  of  2009  with  6.7% 
compared to the first quarter of 2008, over the value in the euro area ( 4.9%), this 
slowdown being even more problematic following the low level of GDP / inhabitant 
in Romania (chart 3). 
Chart 3. GDP and expediture components (grownth over the same quarter of 
the previous year, seasonally adjusted, chain linked volumes)   Romania  
                                                            
68 Rapport on the financial stability, BNR (Romanian National Bank), 2009 Financial crisis impact on construction and real estate sectors in Romania 
 
 
130 
 
Source: Eurostat 
 
The risk is that this reduction of economic activity to determine disinvestments 
and the increasing of unemployment, endangering the real convergence process on 
medium and long term.  
Once triggered financial crisis, the capital market in Romania has followed a 
downward trend of foreign markets. Capital market in Romania registered, similar to 
other  stock  exchanges  in  the  region  an  increased volatility,  a  reduction  in  equity 
market capitalization, but relatively constant exchange liquidity. 
BET index recorded in 2008 a decrease by approximately 70% and the stock 
exchange capitalization reduced by 47%, reaching by end of year the value of 57.8 
billion lei. Traded value on the Bucharest Stock Exchange has fallen significantly, the 
daily transactions average in the last quarter being of 22 million lei compared with 72 
million  lei,  the  recorded  value  in  the  same  period  of  2007.  However,  exchange 
liquidity remained relatively constant with a value of about 8%.  
Romania's trade deficit in the first four months of 2009, of 2.9 billion euros, 
reduced 2.5 times more than compared to the same period of 2008, after the fall of 
imports by 36%, and while exports have decreased by 20%. 
Perception of risk for Romania is judged differently by the rating agencies: since 
October 2008, S&P and Fitch, since November 2008 considered that Romania has a 
higher risk, above the threshold of investment grade (BB+, negative perspective); 
agencies Moody's (Baa3, stable perspective, since of October 2006) and JCRA (BBB  
since December 2008) considers that the risk is similar to the level of the investment 
grade. 
 Romanian Economic and Business Review – Vol. 4, No. 3 
 
131 
4.  Manifestation  of  financial  crisis  in  the  construction  and  real  estate 
sectors 
 
In  terms  of  increase  of  construction  and  real  estate  sectors’  role  for  the 
Romanian economy, the financial crisis hits, maybe with priority, these activity fields.  
The development of the construction sector can be assessed on the basis of its 
contribution to the formation of value added in economy, with approximately 12% 
in 2008 compared to 6% in 2004, above the average of European Union (chart 4).  
Chart 4. Contribution of construction sector to GDP formation, average 2000 2007 (Euro 
zone, EU27, some EU countries)  
 
Source: Eurostat 
 
Even against the backdrop of financial crisis, the construction sector creates, in 
the first quarter of 2009, an added value of 3366.6 million euro, higher by 8.9% 
compared to the one created in the same quarter of previous year (chart 5). The 
construction sector succeeds thereby to generate in the first quarter of 2009, 12.17% 
of total value added of the Romanian economy (chart 6). 
 
Chart 5. Gross value added by Construction (grownth over previous quarter, 
seasonally adjusted, chain linked volumes)   Romania Financial crisis impact on construction and real estate sectors in Romania 
 
 
132 
 
Source: Eurostat 
 
Chart 6. Gross value added by industry   Romania 
 
Source: Eurostat 
 
At  the  level  of  June  2008,  the  number  of  employees  in  constructions 
represented 13% of the total employees in economy, and companies in the field 
owned 8% of total assets.  
The real estate sector has a small share, of 1% in total turnover, but holds 12% 
of total assets in the economy (at June 2008). 
  In recent years, one have built more and more, investors staking on demand 
increment,  but  the  economic  crisis  caused  a  radical  change  of  attitude  from  the 
customers, these now being more reluctant in buying before prices stabilize. Even if 
demand is low, one continues to build, the number of completed dwellings in the 
first quarter of 2009 being only 2.8% below the same period of the last year. The Romanian Economic and Business Review – Vol. 4, No. 3 
 
133 
main  explanation  of  this  situation  relates  to  the  large  number  of  buildings  in 
progress. 
However,  Romania  presented  in  May  2009  the  most  drastic  decrease  in 
production of the construction sector in the EU, of 23.7% (chart 7). The status of 
the construction sector is reflected also by the development of the quarterly index of 
production, which, in first quarter of 2009 decreased to the value of 116.8 (chart 8).  
 
Chart 7. Construction output – annual variation (% change compared with same 
month of the previous year) 
-30
-25
-20
-15
-10
-5
0
5
10
15
20
dec-08 jan-09 feb-09 mar-09 apr-09 may-09
 
Source: Eurostat 
 
Chart  8.  Quarterly  production  indices  for  total  construction,  working  day 
adjusted (base year 2005) 
0
50
100
150
200
250
300
Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09
 
Source: Eurostat Financial crisis impact on construction and real estate sectors in Romania 
 
 
134 
 
Financial situation of enterprises in the construction industry was relatively good 
in 2008, as well as their ability to absorb moderate shocks. Deterioration of economic 
activity in the latter part of 2008, which is manifested also in the first quarter of 2009, 
however, aggravates service to banks, the situation being more difficult since these 
enterprises require to an increasingly large extent short term financing.  
Access  to  finance  of  these  companies  has  become  more  difficult  and  more 
expensive,  following  the  bank’s  reluctance  to  provide  liquidity  and  to  attract 
resources towards the government to the detriment of the private sector. A special 
issue of the construction firms in the construction and real estate domain is raised by 
level of external debt, of 40% of medium and long term debts and belonging to the 
non financial companies; also 38% of outputs and 46% of the entries scheduled for 
2009 from the external debt in short term residual belong to these enterprises. 
In recent years the construction cost of new houses recorded an upward trend, 
well above the European average, which now enables companies from the sector to 
improve the costs in order to be maintained on the market. The number of building 
permits granted has not decreased significantly until March 2009 when there was a 
reduction of 17.7% compared to March 2008. Intentions to purchase a house in the 
next 12 months, though have deteriorated, are situated at the beginning of 2009 
above the EU average. Under these circumstances, there are conditions that this 
crisis in the construction sector to be managed more easily.  
 
5. Conclusions  
 
Before triggering the crisis, investors’ aversion to risk had fallen and preliminary 
analysis had become superficial. Thus, ABN Amro could create, in August 2006, a 
new financial product, CPDO (Constant Proportion Debt Obligation), considered by 
rating agencies as an asset without risk (AAA), with a rate of return greater with 2% 
than the state loans. This product currently worths between 40% and 70% from its 
issue price, which shows that it is not an asset without risk ...  
Currently, access to liquidity and financial flexibility are clearly more important 
notions than the hypothetical reduction of capital cost resulted from indebtedness. 
Moreover, Almeida and H. Th. Philippon, established late 2007 that the value of 
bankruptcy related costs connected to debt is relatively equal to the tax economy due 
to  the  deductibility  of  interest,  practicably  neutralizing  the  leverage  effect  of 
indebtedness.  
The EU believes that addressing the crisis at national or European level is not 
sufficient,  requiring  global  coordination.  Thus,  during  the  G20  Summit,  held  in 
London in early April, the EU has advocated for the purpose of: 
-  implementation of measures of economic stimulation in sustainable way;  
-  determining what concrete steps should be taken to strengthen the financial 
markets’ supervision;  Romanian Economic and Business Review – Vol. 4, No. 3 
 
135 
-  strengthening the mandate and capacity of international financial institutions, 
as  guardian  of  global  economy  stability,  but  also  as  a  forum  for  equitable 
representation of emerging and developing economies.  
Currently,  the  resumption  of  economic  growth  in  Romania  can  not  be 
accurately anticipated by specialists, international comparisons suggesting that, in the 
conditions of the global crisis, countries with high growth rates will suffer important 
decreases. A sustainable growth should be based on increasing public investments 
and of competitiveness of Romanian enterprises, a significant role, at sectoral level, 
reverting  to  the  construction  and  real  estate  sector,  due  to  the  dynamics,  to  the 
weight  in  the  economy  and  to  the  dependence  of  their  internal  and  external 
financing. 
 
References 
 
Almeida,  H.  and  Philippon,  Th.  2007.  “The  risk adjusted  cost  of  financial 
distress”. Journal of Finance 62 (6): 2557 2586. 
Jamet,  J.  F.  2008.  “L’Europe  face  à  la  crise  financière”.  Fondation  Robert 
Schuman. Questions d’Europe, nr. 89.  
Sapir, J. 2008. “Une decade prodigieuse. La crise financière entre temps court et 
terms long”. Revue de la régulation, nr. 3. 
Vernimmen, P. 2009. Finance d’entreprise,   edition. Paris: Dalloz. 
BNR. 2009. Raport asupra stabilităŃii financiare 
FMI. 2009. Crisis and Recovery, World Economic Outlook 
 
 

Finance d’entreprise, edition.

L’Europe face à la crise financière”. Fondation Robert Schuman. Questions d’Europe,

Raport asupra stabilităŃii financiare FMI.

The risk adjusted cost of financial distress”.

Une decade prodigieuse. La crise financière entre temps court et terms long”. Revue de la régulation,

FINANCIAL CRISIS IMPACT ON CONSTRUCTION AND REAL ESTATE SECTORS IN ROMANIA

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FINANCIAL CRISIS IMPACT ON CONSTRUCTION AND REAL ESTATE SECTORS IN ROMANIA

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