Potential for Real Estate Development in Bulgaria

Real estate market in Bulgaria witnessed strong development in 2004. The apartment prices registered almost 50% increase* . However, the real increase is much greater and is not registered by official statistics because of the incentives of market participants not to report the real transaction price. Among these, the most important are avoiding paying notary fees from buyers and sellers and avoiding of paying higher corporate taxes from real estate developers and construction companies.

It is important to notice that not all parts of the country registered significant increase but rather several big cities (biggest seacoast towns, the capital, 3 – 4 large places with dynamic growth and higher employment, as well as several mountain resorts). The most important reasons for this increase are:

§ Stable economic growth for the past 3 years – 4.5% on average GDP growth

§ Increase in incomes (slight increase for certain groups of people).

§ Changes in bank’s policies toward housing finance – interest rates are falling, loans conditions are improving and the strong competition is changing overall banks’ behavior.

§ Increasing of savings – they are the basic source for investment in the economy.

§ EU forthcoming accession and expectations of equalizing Bulgarian prices with EU levels.

§ Foreign citizens’ buyers of newly built luxury summer apartments and cottages in the mountains).

§ Huge increase of foreign direct investments in 2004 increased the demand for special real estates.

§ Legislative environment – introducing of Law on Special Purpose Investment Vehicles (2003), Law on Mortgage Bonds (2000) facilitated real property development and allowed for bigger scale investments.

§ Bulgarian emigrants’ remittances – remittances are registering strong dynamics – in 2001 they represent 49% of FDI** . Many “returning” emigrants are investing their money in real estates or are sending funds to relatives for the same purpose.

§ Psychological – people’s perceptions that property is among the most secure investments and will remain profitable is predominant. Lack of many alternatives for similar risk investments is holding up interest in real estates.

§ National moods – Bulgaria is among the countries with highest ownership rate. According to official statistics approximately 91% of people do own their place of residence.

Brief review of basic real estate markets

The office market is always more sensitive to changes in economy and therefore we expect the demand for vacant plots to continue. If the current trend of economic activity in the country continues, several factors (growth of employment, increasing demand of goods and services, expansion of current businesses) will determine growth of demand for real estate. Besides foreign investors who are among the main users of newly built office spaces, Bulgarian business is starting to look for representative places and for acquiring land for their activities.

Apartment prices continue their growth since 2002 mainly because of expansion of housing and mortgage credit by banks, as well as steady demand. The combination of central bank measures to restrict credit expansion and reducing (absorption) of number solvent buyers make the competition for quality clients harder than before. An interesting phenomenon is the fact that small apartments are holding their prices steady and even registering increase in prices. This can be attributed to dominance of smaller households (up to 2 members) because of lower birth rates and emigration in recent years.

Industrial plots are one of the hits on the market. Foreign investors’ interest, as well as demand from big Bulgarian companies who want to expand their business is increasing and we expect future positive trend. Geographical location and convenience for logistical spaces presupposes higher return from building such estates.

Retail spaces, in particular malls are witnessing strong development in the last 12 months. There are several big project undergoing that are to be finished in next two years. The multiple advantages of such trade centers such as concentration of many and different services rendered in one place, as well as parking space available are among the main reasons for their attractiveness for both future renters and investors. Investment in such activity is proved to be profitable in next 5 years at least.

Hotels’ development is registering strong growth in last 4 years. Old hotels are refurbished, newly are built – several banks committed to financing at preferential conditions certain developers in mountain and sea resorts. Some of the biggest international tour operators already invested in Bulgarian hotels improvements and brand new ones. The local and foreign interest in Bulgarian tourist sector is about to be growing in the future and the investment in such types of real estates to be profitable. Infrastructure, labor force qualifications and skills, as well as business regulations are being seen as obstacles but fortunately we see improvements and the near forecast is positive if current trend of reforms remains.

Current legislative developments

At the moment there are several draft laws or proposed changes in current laws that are of special interest for real estate market development.

1. Changes in Constitution – Bulgarian parliament has to adopt changes in the main law so that to define if transition period for acquiring land by foreigners will be applied. This should be done by end April 2005 since then Bulgaria is expected to sign the EU accession treaty. Broad debates over exact conditions for acquiring land by foreigners are ongoing in Bulgaria in years. The main notions are: we should apply transitional period until 2014 (Bulgaria has negotiated 7 years transition period after accession in 2007) like most new EU members so to protect the country from “buying out” our land. The other opinion is that there should be no transition period at all and land should be free for everybody no matter nationality. Liberalizing land market in this case will give opportunities for both investors and businessmen and owners. Of course, the positive effects of full liberalization of land market is the best way and if we want to be competitive with EU-25 we should decide on this as soon as possible.

2. Draft law on introducing of bausparkasse system in Bulgaria – it introduces 5 year compulsory saving period and fixed interest rate difference on savings and loans obtained by the bauspakasse. A fixed sum will be provided by the state budget but no more than certain amount that should be approved each year. The discussion so far showed resistance from experts and the draft law is not “in the pipe”. The new Parliament however (if socialist party wins majority) can reopen the discussions on the law and thus impose additional burden on the budget without having the possibility to effectively control the system.

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* According to National Staitsics Institute.

** Constellations, Incentives and Provisional Impacts of Migration Related Policies, IME, 2005, link