Romania Rebounding: A CEELM Round Table

Bryan Jardine, Managing Partner, Wolf Theiss Bucharest

Horea Popescu, Managing Partner, CMS Bucharest

Perry Zizzi, Managing Partner, Dentons Bucharest

Razvan Gheorghiu-Testa, Founding Partner, Tuca Zbarcea & Asociatii

CEELM: Last year ended up being better than expected in terms of GDP and the overall economy in Romania. How are things going right now in the country?

Bryan: It’s interesting. Business Insider just had an article this morning mentioning that the IMF has improved its forecast for Romania from where they were projecting from last year in October to where they are expecting now. I don’t like to use the term “V-shape recovery,” because there are still a lot of unknowns on the horizon, but certainly the recovery seems to be going better than one would have predicted a year ago. Even taking it at the micro-level, speaking as the Managing Partner of the office, we were looking at contingency plans at this time last year for significant revenue downturns as a result of a general economic downturn, similar to what we saw in 2008/9. Those fortunately didn’t materialize, so we didn’t have to implement those contingency plans. Quite the contrary, we had a very good year. Some of it is attributable to cost-savings because we can’t travel to various events – or just in general. But on the other hand, the top-line revenues also look pretty good, so I think we are looking now at the macro-picture and, with more vaccine shots in more arms, the economy will start to open up and more people will get out. There is a lot of pent-up demand for consumer products, hospitality, travel, leisure, so I’m hopeful that once people feel safer, we’ll see that reflected in more positive macro-numbers being posted for the Romanian economy.

CEELM: In the meantime, investors are still showing interest, you’re all staying busy, and there’s still work being done?

Bryan: Yes. There were a number of deals from last year that were suspended or were on pause, simple because there was so much uncertainty. We’ve seen some of these deals re-engage, which is encouraging. I think Romania before the Covid crisis was becoming an increasingly attractive market, and we were seeing a lot of activity, and I think a lot of that interest, which was sort of sidelined or paused during the crisis, did not go away. It was simply waiting to find out how things would shake out. So, I think a lot of the fundamentals that were underlying why Romania was a good destination for investors prior to Covid still remain.

Generally speaking, I think the Romanian government handled [the Covid crisis] well. They locked down quickly – I think they recognized that this was a serious problem.

Horea: For a year, we all expected it to be really bad. In fact, there were some highlights, in terms of M&A especially. We had the largest energy deal in Romania last year (the sale of CEZ assets), we had the largest office real estate deal ever in Romania last year (AFI Europe’s acquisition of NEPI Rockcastle’s office portfolio), and I think we had one of the largest renewable deals in Romania last year (Hidroelectrica’s acquisition of a 108 MW wind farm from STEAG group). I mean, for a year that was so bad, which we all expected to be dramatic, there were some good things happening. That kept us all relatively positive and busy, and that’s just kind of an introduction hopefully to what this year will be – even better than last year. There’s enough demand waiting at the door, at the borders, to just be allowed to come in without a quarantine, and once that happens our activity will increase even further. We’re quite positive about that.

And I just wanted to add to that Romania was lucky, in a way, that the country doesn’t have sectors as developed as those in some other countries that were worst hit, like tourism and leisure. I mean, we’re always complaining that the tourism sector in Romania is terrible, but for once that really helped, because it’s such a small part of the Romanian economy that we did not even notice a lack of foreign tourists – as that’s kind of the rule rather than the exception in Romania. So from this point of view, and as we kind of concentrate on those sectors that were less hit, like tech or agriculture, we were more fortunate than other countries.

Perry: I would agree with Horea – certainly tech, agriculture, and green energy [stayed strong]. In some ways, this was certainly the strangest downturn I’ve ever experienced – and maybe the strangest in hundreds of years. It was a self-inflicted gunshot wound that came all of a sudden, and nobody really knew what was going to happen. We all expected that the year would be challenging – but we also did better in 2020 than we did in 2019. And I think a year ago we thought this year would be problematic, but there are some big winners that nobody really anticipated.

I think tech took off in a big way, particularly with those companies that were able to facilitate working from home. Of course, logistics is another sector that has grown. Logistics and industrial real estate were always the ugly stepchild compared to office and retail, but now it’s reversed, and logistics and industrial real estate are the star children.

We’ve been waiting, also, for a lot of insolvencies to kick in, particularly in some of the companies in tourism and leisure. But it hasn’t happened yet, and we’re kicking the can down the road just like we did during the Great Recession. Although perhaps this time, maybe because of the expectation of state aid and a dramatic V-shaped recovery, lenders won’t need to default quite so many borrowers.

CEELM: Is there a reason some kinds of deals were able to go forward and some were paused? Or is it just that some investors had cold feet and others didn’t?

Razvan: As Horea said, the real estate sector is doing well, and the energy sector is as well. Most of the transactions that started before the pandemic, ended up closing last year. From a real estate perspective, there were some deals that were put on hold, but for obvious reasons, as, in the early stages of the pandemic – in the period between March and summer last year, with all the travel restrictions – people could not move. I mean, doing a virtual legal due diligence is good, but doing the technical due diligence – physically inspecting an asset – was impossible. So many due diligence exercises were put on hold and some transactions were delayed. Also, everything depends on how long the seller is able to wait; in some cases, it is difficult to wait, and you have to divest. 

In terms of real estate, the office sector is really challenging. As opposed to last year, nobody is wondering if their offices have to shut down completely – there is less fear of the unknown. Firms have experienced Covid and have come back to work, so it is, more or less, business as usual now. There is a saying in Romanian that does not, maybe, translate that well into English: “It’s better to jump in front with one foot than to fall back.” So, folks are going forward, buildings are looking for tenants, and there are lease negotiations going on. So, in the long run, for sure, it will come back to normal. Not tomorrow, not next month, but in a few months, people will definitely come back to the office.

Even for us, right now, we are close to 50-60% at our firm with people coming into the office.

Perry: We’re at around 60% now – and we’ve actually been at around 50% since last June.

Horea: In terms of law firms, I think everyone’s different. We are at about 30-40% at the office, but we try to be as agile as possible and not force people in the office, to the extent that they have proven that they can work from home. It would appear that a lot of people prefer working from home. And, the signs I’m getting, especially from our meetings with London and regional management in the past few weeks, is that the situation is much better - we’re all considering returning to the office relatively soon.

Perry: You know, Horea, it’s interesting that you should mention London, as the offices in Dentons’ UK region just announced that they will allow people to permanently work from home as long as they are able to get their work done. So, nobody needs to come in at all, which is quite a statement! We are not there yet for the Europe region, but there are similar policies. Here, in Bucharest, anybody that wants to come in can come in, and anybody who wants to stay home can stay home. We have complete flexibility, except for obvious cases, like reception or someone who works in the kitchen who needs to be physically here.

Bryan: I look at this as sort of an age division. If you look at Vienna, the old-school guys, they are very much sure that coming in – putting on a suit and tie and coming into the office – is important. They think of home office as sort of an aberration they had to implement for health and safety. But I think that we have recognized that the numbers did not get worse and that, in fact, in some ways, they have even gotten better – there was more efficiency, no lost time in traffic, etc. So, we prepared a policy on home office. We did a survey by demographics, age, those that have families with small kids at home. When you break it down you can see that older lawyers, those that have been practicing for 20 years or those in management, they tend to be more traditional. It’s a big concession for them to not even be wearing a tie.

But if you look at the way the younger folks are doing it – if you want to be attractive to them, you have to have the ability to offer flexible working hours and conditions, and that is a really important HR consideration, and I think that it will be becoming increasingly so to stay competitive in some of these markets. I don’t personally like home office all the time. I may have difficulties managing the team – there is often more discipline with time sheets and daily work at the office – but generally the numbers even out. I really think it’s a paradigm shift, I don’t think that we will be going back to the old ways.

CEELM: For many years people in Romania have complained about a brain drain, but recent reports suggest that, perhaps, with Brexit and other economic changes in the region, it’s starting to reverse a little bit. Do you see any sign of that?

Perry: Yes. Romanians have been returning home. We have interviewed probably half a dozen folks from London. Some of them have dual qualifications – both Romania and UK – and some are just UK. Yes, absolutely we’ve seen it.

Horea: I think that, since the pandemic hit, a lot of Romanians have returned home. I’m not sure if this trend is going to last long – I’m not sure if it is a returning of the brains or a returning of a workforce that could not find work elsewhere. My gut feeling is that many of the people that have returned will try and go back to where they were – it might take them longer, and if they don’t find any new work in those countries they may decide to stay here and open businesses. These are not the cutting-edge people from Romanian society; doctors are still wholeheartedly welcome into France, and many of the people who are very educated will still find better lives elsewhere. And I think life in general –not necessarily salaries.

I think in places like Bucharest or the others larger cities in Romania, even though the average salaries are significantly lower than in the West, probably the quality of life, generally, comes closer. However, as public services are still much worse than in the West, people have difficulty determining whether to leave or not – not to have more money, but to have secure and clean hospitals, have a good education system for their kids, have good infrastructure generally … things that will take longer to improve in Romania. I think that the reason so many people left for the past five to ten years is not to have significantly higher salaries, but to have a future for their kids, and more security when they grow old. Although we haven’t built a hospital or a new school in I-don’t-know-how-many years, there are some signs that this is changing in Romania.

CEELM: In Romania, transportation infrastructure is famously lacking. Still, recent signs suggest that the EU and local governments are planning to seriously address this in the near future. Are you all optimistic about prospects for the country’s infrastructure over the next five or ten years?

Horea: I am definitely more optimistic than I was a couple of years ago. I think we see things moving. For instance, the long-awaited motorway from Pitesti to Sibiu is starting to shape up. They have finally started working on it. The motorway from Pitesti to Craiova that people have talked about for ten years is starting to shape up as well, and some work is being done this year. Additional EU funds are being made available for infrastructure at levels we have never seen before – it’s just a question of the Romanian bureaucracy’s ability to deliver and put the money into action. You know, personally, I’m more positive about some people in the government right now, in comparison to former governments, especially when we talk about infrastructure and transportation, because we see people that are looking at this with an objective eye, are interested, and are putting their heart and soul into trying to fix things. This is something that I have not seen for the past ten years, so I’m more upbeat and positive.

Perry: I’m also optimistic, in part because I think we have the right government at the right time, and the people in the government, are people who are just like us – people we can talk to and ask questions to and for guidance for once. We think that there is a great opportunity to advance – probably the best since the revolution, in a lot of respects, not only to build infrastructure but to make other changes to make Romania a more investor-friendly place.

CEELM: In the year before COVID-19, tourism was at an all-time high. Maybe that is a sector that has some real potential as well?

Horea: I think that Romanian tourism was focused on Romanians, because Romanians accept whatever quality is offered. It’s starting to change a little bit, with folks having more money than they did ten years ago, but our level of international tourism is, and has always been, three or four times lower than it has been for our friends from the south, in Bulgaria. We have so much to catch up on there. We have fewer than two million tourists a year, while Bulgaria has around ten million – and they are a third of our size in terms of population.

Bryan: I think it’s been about the marketing, Romania has been notoriously bad at marketing for tourism. If you go to some of these fairs there would be this one little booth, at an expo or some international conference – there was this clear inability to positively promote Romania as a tourist or a business destination. But what we have seen, as a result of Covid, last year, is small B&Bs in the country exploded, partially because, I believe, Romanians did not want to leave, and they are discovering their own country. There are some really amazing places in Transylvania, for example, where they are not focusing on the high volume, free buffet, one-price all-inclusive model that was predominant some 20 years ago. My wife and I run a small B&B in the Dealu Mare wine region, and it’s not just Romanians who come – it’s about 40% expats, non-Romanians. And there is a more quality product coming – and these are not the big chain hotels, these are small boutique hotels which can, maybe, accommodate 25 people max, but are really high-end, with good food. There is one in Transylvania where they have a Michelin-starred chef. So, there is a growing appreciation for it all.

A lot of it is marketing, getting the word out, and having the infrastructure to the point where it doesn’t take you an entire day – you should be able to get from Bucharest to Banat in some five hours, I’d say, for example. There are practical considerations and barriers that would have to be tackled. Still, you have to balance the remoteness with the unique beauty that it carries with it and that these places still retain.

Razvan: Well, the potential is huge. It’s the mentality that’s the problem. We actually had to wait for an amazing English chap named Charlie Ottley to come to Romania and make a movie – Flavours of Romania (which appeared on Netflix) – about Romania’s eight historic regions. The potential is huge, but then it comes to the mentality – our own mentality, to promote ourselves. But it’s true what Horea says, from Bucharest to, I don’t know, to Cluj, for example, it should not have to be so long. Right now, parts of the motorway are available, but last time I went to Cluj it took seven hours.

On the other hand, we were not able to travel for a number of years before 1989, so after 1989, nobody wanted to spend holidays in Romania, and everybody wanted to go abroad – to Bulgaria, Greece, Turkey, or wherever. We were not able – and it is a pity – to attract incoming tourists, get folks from abroad to come on over. The brain drain we have mentioned might be able to help – we have people who have spent their past 10/15 years abroad, working in the hospitality industry, and they came back. They are not opening 200-room hotels, but in terms of what they do –  they open B&Bs and the like – there is a terrific potential to grow this.

Perry: I would just add my two cents on the topic. Definitely, most of it is attitude. And also, the success of the government in putting in place a proper strategy for promoting Romania. I always think of this: In Tel Aviv, there is a protected UNESCO world heritage site, Rothschild Boulevard, because of the Art Deco buildings. Bucharest has, easily, ten times the number of those buildings. But few people notice them or want to protect them. There is a lot of untapped potential.

Horea: On a slightly positive note, I don’t think there is a future in mass tourism – in the kind of tourism that brings millions of people to the country – but we do have a future in targeted tourism: cultural tours, adventure tours, things like that. But this will never bring five million people. It could bring in 500,000, though.

Bryan: The first time I was up in the Dealu Mare region, on my motorcycle, many years ago, exploring the wine route, following very nice new signage, when suddenly the road just stopped. I saw an old farmer and asked him what happened with the road, with the wine route – where it continued. And the old guy just said, “well the problem is that Nastase [the Prime Minister at the time] spent all the money on the signs.” A foreigner coming in sees something amazing, possibly reminiscent of Chile, or Napa Valley, or New Zealand, he sees the signs … but there is nothing behind them, there is no infrastructure. This remains, often times, the problem.

CEELM: Before we close, can you each summarize your sense of the last year, and on your optimism or pessimism going forward for Romania?

Perry: I’m very optimistic. I guess I’d say I’m an eternal optimist, but I think this time rightfully so. We have the right government in place; we have, maybe, the Brexit dividend, maybe the dividend of near-shoring from China; and it looks like we are finally going to be able to deploy a lot of EU funding for building infrastructure, which was really holding back a lot of the regional developments. Of course, now, with the ability to work remotely, with folks moving to smaller towns and cities, you see more development in places like, for example, Cluj, or Timisoara. This balances out the overcrowded Bucharest and that’s interesting. So, I’m very optimistic. In some ways, I think it’s the best that it’s ever been in terms of potential in Romania.

CEELM: Do you see that in your work as well?

Perry: Indeed, we were approached a couple of months ago by a client who wants to open a factory and make it the regional headquarters, with a hundred employees. And we’re getting a lot of inquiries of this sort – it is not unusual. I really do think, now, Romania is what Poland was in 2005 and we’re finally, really, going to catch up – maybe not immediately – to a lot of the developments that we missed out on.

Razvan: It’s a fact that we were expecting the worst possible scenario last year – worse than it actually turned out to be. Once this whole pandemic-related anxiety passes, I don’t think that we will get better in the short run, but next year or so we will see more people looking to invest in Romania. What we need, in terms of politics – what we have been lacking, and not only recently – is a long-term plan. For a couple of years, not just for a couple of months or the next quarter. With the right plan in place, and with the large amounts of EU funding that is available – primarily for infrastructure, I think that the future cannot be other than great.

Horea: I think our profession usually follows the economy as a whole. I was very pleasantly surprised by the IMF’s growth prediction of 6% for this year in Romania, and of 4.4% for next year. This year, we will overtake 2019 by a couple of percentage points. Next year, we’ll do significantly better. You can feel that there is a lot of money people have been saving and are now looking to spend – buying houses, buying consumer goods, and so on. There is a lot of optimism in the market because things were not as bad as people thought they would be. Of course, the current health situation is not great, but we are starting to see the light at the end of the tunnel and that is making people more hopeful. The fact that there are more listings on the Romanian stock exchange being considered, even now, than in the past five years, is a sign that the people are starting to feel more positive and optimistic. They are starting to look forward, and that is a great sign, overall, for the economy.

Bryan: I tend to be an optimist as well. I think that Romania can thrive if it makes intelligent choices, because I think we’re competing for inbound investments, typically against our neighbors, and if you look what has happened in the way of Covid in Europe, many of these countries adopted restrictions that affect direct investments – how you screen them, and things like that. We’ve seen this play out recently in a cross-border transaction which we, at the firm, handled in many countries. Interestingly, in Hungary, they moved to block the transaction because of the recent FDI restrictions.

And here is where I think having a solid government is important. Last year, following a very convoluted election cycle, with three rounds of elections, was tough. Now that the dust has settled we can, I hope, look forward to a stable government. Hopefully, this government will realize the benefits of stable legislation. I think that that’s going to be an important factor to attract investment and to attract funds and to really battle the corruption and the absorption of EU funds.

Fortunately, it seems that we have weathered this most recent crisis, economically, better than other countries. I agree with what Horea said about pent-up consumer demand, so in my mind the government simply needs to make rational decisions and not do something crazy like using revenue shortfalls as an excuse to hike the income tax rate. The low tax rate is one of the attractive incentives here, at 10% and 16%. The government should leave that be and instead focus on tax collection, not tax increases. I think that we have to compete against the Hungaries, the Bulgarias, the Serbias, and even the Ukraines in terms of attracting investments. As long as we can leverage those, inherent competitive advantages that Romania enjoys vis a vis our neighbors and not make gung-ho short-term decisions, politically, then I think that Romania has a lot of potential.

Perry: And, if I could also just add, the fact that Romania weathered the worst period, when we nearly turned towards the kind of authoritarian system that Hungary has, or that Poland has – and we stayed the course and ended up with a pro-Western, center-right, government. I think that this says a lot about the strength of civil society in Romania. We very easily could have ended up on the wrong track. And that sends a powerful signal to investors as well - we are not going to be going down the road of authoritarianism.

CEELM: Romania has certainly been making different decisions than Poland.

Perry: The mobilization of people in the streets and pressuring the government was impressive. I know that, if you live in a different city, mobs of people in the streets can be perceived as a bad thing, but it really was a good thing! It showed how strong civil society was in the moment it had to be.

Bryan: That’s an absolutely valid point: Look what came out of Poland. The last election cycle we had in Romania a warning sign in having an extremist, anti-EU party come out of the woodwork, and have them go above the 5% bar. They are still not that significant, but they are there. I always boasted that Romania, unlike Hungary or Poland, has never really had an extremist candidate. Even the parties on the right generally agree that they want to be part of the EU, they want to be part of NATO, but now – it is a little troubling to have this small party cropping up, especially because of the lockdowns. But I agree with Perry, it is a huge plus for investors – that in Romania we fortunately have Ludovic Orban instead of Viktor Orban (smiles).

This Article was originally published in Issue 8.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.