Romania aims to join the European Union in 2007 and is trying hard to attract foreign investment – but there are few large black bats still flapping around

Romania's hopes of accession to the European Union have been much improved by its progress away from its communist legacy and near economic collapse in the 1990s and now with the EU’s formal recognition of the country’s “functioning market economy”. To ensure Romania meets its target of joining the EU in 2007, the government has made great effort to encourage investment and speed up reform.

Until recently, the number of large property transactions in Romania were thin on the ground. However, real potential within the embryonic Romanian property sector, improving forecasts for the wider economy and important regulatory changes have encouraged a growth in interest from foreign developers. These investors were previously scared away by a great deal of uncertainty surrounding land ownership rights, which the government has attempted, with some success, to address.

In the past, one of the main concerns for foreign investors was confusion within the land ownership system. Before 1990, most land in Romania was either “communally owned” or owned by state entities. Since the fall of Ceausescu, the former Romanian dictator, reform has taken place, and private ownership of land is now allowed. Owners of land confiscated by the post-war communist governments were, under new laws, able to reclaim it.

This allowed a number of families and individuals to reclaim substantial properties, which some owners have said they intend to sell or redevelop as hotels or office space.

This move to restore property rights at first presented a problem to foreign investors and developers, especially as, despite reforms to the Romanian land law, it was difficult to verify the ownership history of a property and assess whether land should be subject to a restitution claim by a former owner.

However, the laws allowing the restitution of confiscated land required that all claims be lodged by February 2002 and that following the claim, evidence of past title be produced before July 2003. As such, if there is no claim in place for restitution now, a claim cannot be made in the future, thereby removing what was thought to be one of the greatest risks of investing in Romania. Unfortunately, certain foreign property developers have experienced instances of sellers trying to hide restitution claims for land that developers have been looking to purchase.

Other discouragements to investment were laws preventing foreigners owning land other than through a Romanian company, the incorporation of which could be difficult. An associated problem, which still remains, is the high transfer and profit taxes when a property is sold from one company to another. However, new laws make it quicker and simpler to incorporate a company. In addition, a consensus has emerged across the main political coalitions to reduce profit taxes on land, possibly to 10%.

A remaining disincentive to outside investors and developers is the highly complicated set of regulations surrounding planning and building permission. A variety of permits and approvals are required from bodies before any project can be initiated. Although it is functional, the approvals process is slow and cumbersome.

What is worse is the Romanian court system, which is at best slow, and at worst, corrupt. More generally, corruption within Romania is a factor cited as possible cause for delay in joining the EU.

These difficulties may be only teething problems – the legacy of the huge changes required after the fall of communism. Although there are concerns as to whether Romania will meet its target of accession to the EU in 2007, the economic and regulatory situation does seem to be improving and there appears to be a genuine commitment on the part of the Romanian government to attracting foreign investment. An example of this is the recent introduction of large incentives, by way of breaks from land transfer levies and corporation tax, to developers and operators of industrial or technology parks.

The Romanian government appears to realise that building modern infrastructure will add further impetus to its strengthening economy. Opportunities for foreign investors and developers are likely to increase accordingly.

Mark Ellis-Jones is a lawyer at Linklaters and formerly a member of the Linklaters Balkan Practice Group