The Bulgarian property market, which has seen property prices double since 2002, is continuing to attract local and foreign investors. In 2004, more than 194,000 properties were sold, which was an increase of 32 per cent from 2003.

Foreign interest

Deterred by soaring property prices in large European capitals, more and more investors and European citizens are turning to Bulgaria to purchase property as an investment or simply as a comfortable holiday or retirement home in beautiful countryside. The benefits of owning such a property include a reasonable price and a location in a country with a stable economy and sustainable political development. In addition, with residential property prices in the region of €450- 1,200 per square metre (the average price is approximately €600 per square metre), Sofia’s property prices are lower than those offered by market leaders such as London, New York, Dublin and Paris, and other European cities such as Budapest, Prague, Bucharest, Athens and Thessaloniki.

The expansion of seaside resorts and skiing centres which attract increasing numbers of tourists (during the first nine months of 2004 the number of tourists had increased by 14.25 per cent in comparison with the same period in 2003), the favourable climate, the rich cultural and historical heritage, the improving infrastructure and the quality of the tourism industry encourage many foreign visitors to purchase a second home in Bulgaria. According to brokers, up to 20 per cent of residential and holiday properties in certain areas are owned by foreign citizens, the majority of which are British and Irish. It is no surprise therefore that the number of British and Irish visitors has increased in comparison with 2003 - 60.63 per cent and 93.71 per cent respectively.

Corporate investors are also interested in Bulgaria. The Bulgarian Foreign Investment Agency forecasts a 100 per cent increase in foreign direct investment (FDI) in 2004 (up to €2.5 billion). Real estate deals are expected to comprise 11.4 per cent of these investments. Bulgaria’s first high-level foreign investor in the real estate sector is Lindner - the developer of Sofia Business Park. Lindner has already invested €40 million of the budgeted €130 million for this project.

Prices

Between 2002 and 2004, there has been an unprecedented rise in property prices in Bulgaria. The REMI index, which records the movement of prices within all segments of the property market, reveals that between September 2002 and December 2004, prices in general increased by 52.8 per cent.This is due to the increase in the price of residential properties and regulated land. Some of the land available for the development of holiday resorts and seaside summer homes, at skiing centres such as Bansko and in the wealthy residential districts in Sofia, as well as the residential properties in these areas, have more than doubled in price, which has led to increases in other sectors of the property market.

The main reasons for this rise are macroeconomic - the political and economic stability of the country, the accelerated economic growth (in 2004), the low inflation level, Bulgaria’s improved credit rating, the increased volume of FDI and, more specifically, the improved availability of mortgages. By expanding their lending policy, banks encourage individuals to look for alternatives to meet their increased housing requirements. In 2004, mortgages doubled and reached a total value of €516 million. As of 31 December 2004, the total amount of credit available for the acquisition and construction of properties was €1.86 billion.

Figure 1. Expected construction activity

At the same time, banks operating in a highly competitive environment gradually reduced their mortgage interest rates to 7.5 per cent per annum. Mortgage expansion continued despite the warnings of the IMF and the attempts of the Central Bank to slow its pace. Expansion will continue due to the fact that mortgages represent only 7.3 per cent of banks’ portfolios and the total number of mortgages lent to individuals is only 20,000.

The rising cost of buying residential properties encourages investment activity and guarantees a good capital return. Analysts and brokers, however, are concerned that prices have reached their peak. At the beginning of 2005, prices stabilised and have started to increase gradually, helped by improved purchasing power, stable investment interest and the improved quality of property. However, expecting price levels in Bulgaria to match prices in other parts of Europe is economically unjustifiable. The banking environment is stable and, although mortgage lending is rising rapidly, it has not increased the relatively low default credit rate of 2.2 per cent.

The only potential economic problem in the property market is the gap between rising prices and household income. With an average annual household income of €3,450 and a typical price of €30,000 for a one bedroom flat, the average Bulgarian household would need approximately 8.5 gross annual salaries to acquire a flat.This figure is even higher for Sofia and other popular cities.The statistics for rented accommodation reveal similar trends. The average household needs half its income to rent a one bedroom flat. Cities do not have enough living space to accommodate low-income families, nor are they planning new projects. Within current Bulgarian market conditions, the housing requirement is met by solvent demand in only 8-10 per cent of all bought properties and in no more than 10 per cent of rented properties.

Forecasts

What can all players on the property market - analysts, evaluators, brokers, buyers and investors - expect? There are positive signals: the level of the complex index, which measures the business climate in construction, increased by 16.0 points in January 2005; developers’ high expectations for the first half of 2005; and the favourable economic environment in the country. Expectations for the development of the sector in the short term are also optimistic. The number of contracted projects has increased from 6.1 in October 2004 to 9.4 in January 2005. Furthermore, the number of late credit repayments is decreasing.

The total number of issued construction permissions for residential properties for the first nine months of 2004 was 3,300, which represents an increase of 34.6 per cent from the same period in 2003, with the highest numbers being recorded in Sofia and Varna.The number of investment projects in residential accommodation almost doubled and the total built-up area at design phase reached 340,000m2. Buyers tend to purchase their properties at the design stage and are encouraged by the availability of mortgage lending and increased confidence in the developers.

Another reason for the stable development of the residential property market is the demand for a better quality of life, which should stimulate the demand for better housing. Even though shared private ownership in Bulgaria is high - 96.5 per cent, that is, there are 474 residential properties per 1,000 people - the structure of the properties, their physical condition and location imply that there is potential for an increase in demand. The majority of residences - 38 per cent - are one-bedroom flats with an average floor space of 60m2. Of the rest, 18 per cent are undersized properties. Although developers have made some serious efforts in overcoming this shortfall by concentrating on constructing flats with two or more bedrooms, the reality of undersized housing in cities such as Varna, Bourgas and some holiday resorts has not changed because of the demand generated by tourists and short-term residents.

Another reason to expect an increasing demand in property is the change in the average number of people who live in one residence, the number of properties inhabited by one family and the number of residents per room. Of all Bulgarian residences, 69.3 per cent are occupied by one family. There are three or more people per room in more than 130,000 properties and four or more people per room in 55,000 properties.

Despite a booming property market, there are also challenges - the decreased availability of housing due to the increasing gap between property prices and household income, and the increased number of abandoned properties.

Legal framework

However, a number of events are expected to stimulate the market, ensuring a stable growth in real estate FDI: the accession of Bulgaria to the European Union and changes in the constitution, making it easier for foreign investors to acquire land.

New legislation since 2003 introduced a new player in the property market - real estate investment trusts (REITs) - which allow small investors to participate in diversified property portfolios. There are four licensed REITs. Two have been listed on the stock exchange and have enjoyed a 71 per cent increase in their share prices since being listed.

Biography

Eli Moneva is the executive director of BBF OOD, one of the first private companies in Bulgaria that specialise in property management and renting. She is also a vice president of the Central European Real Estate Network (CEREAN, www.cerean.com) from 2004 to 2006, and is a member of the Board of Directors of the National Real Property Association a non-governmental organisation, which works with companies operating in the property market in Bulgaria.