Risks and Rewards of Leverage in Romanian Real Estate Investment

Abstract Emerging markets real estate performance is nowadays heavily affected by lack of investor confidence, risk perceptions, increasing cost of finance and finally market fundamentals. In turn, banks have looked away from real estate as their balance sheets are loaded with non-performing commercial real estate loans. While the blame for debt excesses is being placed on one party (banks) or another (investors) we take an in depth look at a real estate development company active in Romania in order to understand the effects of leverage. We are trying to answer basic questions in real estate investment, in a Romanian context: is there an intrinsic need for debt financing in real estate? What should be considered a sustainable level of debt in an emerging market such as Romania? What are the risks stemming from too much debt and how should they be managed? The conclusions are limited by the focus on a single company but the company is what could be called a representative case for the Romanian investment market.