A new set of measurement indices for the Romanian residential market could lead the way for other emerging south-eastern European markets, says Fotis Mouzakis
Limited information about market prices is one of the fundamental considerations facing real estate investors. Even when indices based on a sound methodology are available, their usefulness is compromised when based on limited geographical coverage, inevitably leaving an information gap between assets and wider market trends. Obscured market pricing is a problem experienced by both domestic and overseas investors, imposing limitations to market efficiency. In the extreme case that effective measurements are not available, investors have to rely on professional services, expert views and anecdotal information. This appears to be the case with several European residential markets.
Balkan, or south-eastern European, residential markets are some the least transparent, with little variation between them. Occasionally, prices based on limited data surveys of questionable quality can be found in market reports.
According to the RICS Housing Review, Greece is the only Balkan country where institutional time series of residential price indices are available. Aside from an asking-price index for Athens, launched in 2004, a set of indices for main cities based on a systematic collection of mortgage collateral valuations only became available on subscription in 2007. Also, in 2009, the Bank of Greece launched two broad aggregate indices (Athens and other urban areas) using a minor extension of the same data set. However, this improvement in measurements seen in Greece has some way to go before it reaches the higher standards of more developed markets.
The Greek indices are simple geographical averages of prices per square meter with limited geographical coverage and decomposition. They are unadjusted for residential characteristics and present limited volatility, arguably due to a combination of missing qualitative corrections and valuation smoothing. Due to valuation smoothing and the method of calculation, or possibly additional reasons, the Greek indices appear to reflect the actual market price movements with significant delays (lags).
The lack of trustworthy records of transaction prices is another reason that has stalled the development of a higher standard of indices in Europe's emerging residential markets, while high transaction tax rates encourage the understatement of the actual transaction prices. On the other hand, mortgage lenders rely on professional valuations of the collaterals for a realistic approximation of the asset value. Experts tend to agree that such valuations offer a reasonably accurate approximation of the actual prices, free of major concerns for systematic distortions.
The steep rise in mortgage lending volumes during the last decade in the Balkan markets opened the possibility of creating a broad database of residential transaction prices using lender records. The only remaining obstacle for creating qualifiedly adjusted indices, ie, by employing ‘hedonic' or ‘mix adjustment' models, remained the absence of systematic measurement of residential characteristics.
Recently, the property arm of EFG Eurobank Ergasias, in collaboration with the local branch of the bank's international group Bankpost and with the advice of the author of this article, who designed the methodology and supervised the development process, undertook the creation of a nationwide set of residential price indices for Romania.
The initial database of several thousand measurements was put together by surveying the bank's records of collaterals for a wide range of qualitative characteristics. A total of 21 indices were calculated for eight divisions of the national map, 11 main cities, two segments of the capital and a number of overall aggregates, using the hedonic methodology. The outcome presented satisfactory statistical results and met the expectations of market experts involved in the project. The outcome of the inaugural estimation of historical series includes annual and quarterly indices from the second quarter of 2005 to the end of 2009. The graph shows the first methodologically robust estimation of residential indices for all of Romania and the sample city of Braila.
The CEO of Eurobank EFG Property Services, Dimitrios Andritsos, provided the following statement regarding the motivations that led the bank group's property arm to undertake this initiative. He said: "Developing the indices was mainly a product of complying with the national bank's requirements to provide an updated estimate regarding the value of the bank's portfolio of assets.
Additionally, it was also apparent that such indices would assist us greatly to gain a better insight into the current situation in the property market and to monitor value fluctuations to assist with extracting statistics and actual value estimates; when the index is applied to a group of assets it allows for immediate results and understanding of value fluctuations. Undoubtedly, an index is a valuable tool that will significantly reduce costs and delivery times when compared to traditional alternative approaches, such as desktop or full appraisals."
In future, it is planned that indices for the Romanian markets will be calculated on a quarterly basis, starting this autumn when the development phase of the indices has been completed. The bank's plans include creating similar indices for the majority of Balkan markets where the bank is in a position to provide a substantial stream of appropriate valuation data.
With the data collection and index estimation process in place, the steady and increasing stream of data will keep improving the statistical quality of the indices. In other words, this new insight to residential market transparency in south-eastern Europe appears to be the start of an evolutionary process and should raise the market standards, establish them in everyday use and trigger a wider participation in the efforts for transparency by a variety of market players.
At the same time, the financial pressures faced by Greece and other European emerging economies have suppressed property transaction volumes, slowing down the flow of data. In practice, the outcome of this and any subsequent developments will conclusively be evaluated by the markets themselves.
Fotis Mouzakis, lecturer, RE finance and investments, Cass Business School, SPR committe member
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