Bulgaria Real Estate Market – Exciting Past And Steady Future

Development of the real estate market is of great importance to Bulgaria. The construction industry in the country employs a significant number of people, adds value to the economy and thus contributes to the steady GDP increase. On the other hand, the banking industry is more than ever involved in the real estate sector by facilitating mortgage credits to individuals and companies and by offering more flexible conditions, lower interest rates and longer terms. Last but not least, rapid real estate market development attracted huge foreign investments in the country, both speculative and green-field, that accelerated growth of the economy.

What are the main factors for that?

1)      The economic environment in the country improved significantly in last 5 years – we have one of the lower corporate rates in Europe, inflation is lower, incomes are rising, predictability improved, economic freedom increased.

2)      New legislation was passed that facilitated secondary mortgage market and real-estate related investments – introduction of a law on mortgage bonds in 2000 (banks can find additional money for their credit activities), a law on special purpose vehicles in 2003 (companies that can invest in real estate and thus provide opportunity for small investors to put their money in big investment projects), and improvement of Central credit registry within the national bank and start of operation of the first private credit bureau that would allow for greater transparency.

3)      EU accession is anticipated as a trusted measure for an economy that heads to more stabile and secure business environment for investors.

The state's role should be to guarantee private property rights and contract enforcement. Unfortunately, we are witnessing some negative draft laws and intentions in this field that can have contradictory results. Such examples are a draft law on registering construction companies, a draft act on the seacoast, the idea to tax all agricultural land in the country, etc. If these are to be implemented we can expect adverse effects on the real estate market.

Transparency and security are very important for this market. The government has received financing from World Bank to create a property register and cadastre. Nevertheless, they are in the process of creation and delays cause problems and leading to a less liquid market. The obstacle for a more transparent market is misreporting of the transfer price in real estate deals. The incentives of hiding are two – due transfer tax (2%) and informal economy (all deals above 30 000 BGN should be reported before the Financial Intelligence Agency for origin of money and this is hard in case you misreported your income because of high social security contributions for example).

Despite all of these circumstances, the property market in Bulgaria has accumulated enormous foreign flows in real estate – starting from 4.7 mln. euro in 2000 and reaching 335.8 mln. euro in 2005. These developments have made people wealthier and provided good investment opportunities.

Major real estate market developments in 2005 and future prospects

Housing market – after the most successful year (2004), 2005 was characterized by steady housing construction, higher prices, friendly banks and willing customers. Although, price inflation was less aggressive, we witnessed increased prices in several secondary markets in the country (Stara Zagora, Pleven, Blagoevgrad, etc.) as a result of catching up with business development. 2006 will be less profitable for construction entrepreneurs (more time to sell finished apartments, demand for more flexible payment schemes so to be competitive, higher quality demanded by customers, increased land price).

Vacation (apartment) buildings – the boom in construction of such buildings was dominant in 2004 – 2005 with major destinations summer resorts (Sunny Beach, Golden Sands), as well as winter destinations (Bansko, Pamporovo). Bad infrastructure, lack of commitment and control from local municipalities is on its way to turn these places into overbuilt cities where no decent return from investment can be achieved. That is why, one should be careful when considering investing money into this. Anyway, other destinations inside the country gather momentum and are likely to be very profitable and attractive.

Land – one of the major characteristics of land market in Bulgaria is the existing ban of foreigners to acquire land in the country. However, this is not considered as an obstacle but increases transaction cost, time for concluding a deal and involves intermediaries. In any case, this gives the chance for many low class families to sell their land at higher price. We can hardly say that there is a dynamic land market in Bulgaria except for big cities and resorts where major construction activity is concentrated. Agricultural land is still less attractive. Despite this, several specialized land investment funds were created so we believe that this market is just starting its real development. Still, land investment will require long-term commitment and is less liquid.

Office market – starting to be very dynamic in the capital and expected to be of greater attention for investors. “Specialized” in such investments are special purpose investment companies that accumulate funds from smaller investors, invest them in big projects and manage the property for number of years. Since demand for specialized, high-quality office buildings with additional services is accelerating we can expect that many entrepreneurs will be attracted in this segment. Since more and more companies are willing to build their own offices and then sell and lease back we can expect future development.

Industrial market – it is concentrated in several areas in the country (Sofia, Plovdiv, Sevlievo, Bourgas) but more cities are making efforts to attract big companies. Accelerating the decentralization process in Bulgaria will give powers to local municipalities to offer competitive business environment and stimulate new investments. The process however is slower than desired. Land prices, the urbanization process and local authorities willingness to assist business are deemed as incentives for big foreign companies to invest.

Trade market – every time an economy is growing trade properties are on the edge of investors' interest. With rising incomes, the consumer confidence and purchasing power are increasing and this inevitably rises spending. 2005 was the year when several big trade centers were started and expected to be completed in 2006. The so-called malls are registering huge investors interest and all units are pre-sold entirely. Sofia, Varna, Stara Zagora are the cities that attracted such projects.

Property as an investment – price inflation of all types of property (except for land) turned real estate investment into a very profitable endeavor. Bulgaria was among the few countries in Europe that secured a property investment return of above 9% – 10% in 2005. The picture is changing slowly in downward direction but is still attractive for investors. Lower levels of European interest rates attract less speculative investors as ordinary foreign citizens and companies. The trend however is for steady flattening of Bulgaria's property returns with European levels in next 3-4 years.

Sofia – capital property market should be analyzed separately from other locations since it differs in many ways. First, housing demand is more dynamic and constant that is due to in-country migration, higher incomes, headquarters' location of almost all international companies, good investment prospects, etc. That is why housing prices rose permanently with the changing of preferred districts in time. Central locations are still of interest but high-quality residential complexes with restricted access in the outskirts of the city are attracting customers. They offer European quality construction, additional services, property management, security and comfort to its buyers. At the moment, wealthy people are among the major customers but we are witnessing a change in customers profile since middle-class buyers are supported by banks in such transactions. Office buildings in Sofia are soon to become the most attractive type of construction. EU accession and positive expectations of business facilitate investment in real estate for their activities. Although rents lagged behind in 2004 and 2005, we see an increase of their levels that should continue in 2006 if no major political downturns happen. Construction of two malls and a lack of free trade space are no surprise.

As a summary we expect that the real estate market will further develop with less intensity in its housing and vacation apartments sectors, and with a future focus in office and land segments.