Bulgarian real estates

Numerous reports on the real estate business in Bulgaria cited by Property Wire, state that the number of sold real estates in Bulgaria for the first half of 2009 is drastically dropping. The number of newly constructed estates is also significantly lower.

The deals with real estates are 35% lower on a yearly basis, according to data from the Registry Agency. The crisis in the business affects all major cities in Bulgaria, including the Black Sea coast and the popular resorts. The collapse in Borovets for example, reaches 50%. The report of the agency also notes a significant decrease in the construction investment, mostly because of the international economic crisis.

The report of the real estate department of Raiffeisen Bank in Bulgaria reports a 42% average decrease of sales, with a peak of 58% in the capital Sofia. The negative tendencies on the Bulgarian estate market were first felt in the third quarter of 2008 and are continuing into the first half of 2009. The potential clients are still waiting. Only buyers that favor risk purchases or have serious investment intentions are still on the market.

According to the National association of the Bulgarian municipalities, the drop in the real estate deals is 50%. The data from the municipality of Sofia shows that purchases of homes shrunk to the equivalent of 30 million leva, which pales in comparison to the deals for 59 million leva during the same period in 2008. The economic crisis also brought about a wave of overdue mortgages. Their percentage has increased with 36,6% on a yearly basis, while the crediting for real estate purchases shrunk nearly three times.

Experts expect the number of newly constructed estates to decrease with another 25% by the end of the year, mostly due to the low demand. According to data from the National statistics institute, there are only 3 897 new real estates on the market during the first quarter of 2009, compared to 20 924 for the entire 2008. The construction permissions given during the first half of the year are also 50% fewer.

Sofia is the only city in Europe, where the rent prices of office grounds are growing during the third quarter of the year, according to the report of the consulting agency “King Sturge”. The average rent prices in the capital have grown with 10% to 264 euro per square meter annually. This places Sofia at the top of the office markets.

According to the company, the lack of A class office grounds is expected to keep the rent prices of the quality offices on the same level throughout the coming months. The profitability of rented offices is a constant for the period April-June – 8,5%.

Bulgaria’s Sofia is followed by Brussels, Milan, Copenhagen and Zagreb, where rent prices remained unchanged for the period. Moscow and Oslo are at the bottom of the chart with rent prices dropping by 17,7% and 16,6% respectively. The data from the consulting company however contradicts the research of “Forton international” on the Sofia real estate market. Forton reported a growing number of vacant offices in Sofia. They expect their number to grow in the following months. Unlike office grounds, the industrial grounds in the Bulgarian capital are now 10% cheaper.

Construction companies in Bulgaria maintained the trend to push and finish infrastructure projects throughout June.

According to today’s report of the National statistics agency (NSI), the registered decrease of production in the real estate construction business is 14,9%, while the civil construction (infrastructure construction of roads, bridges, pipes, electricity lines, etc.) increased with 6,0% compared to June 2008.

The finished construction in June 2009 decreased with 8,6% compared to the same month of the previous year.

Compared to the previous month however, finished real estates in Bulgaria increased by 10,6%.

The real estate construction is a relatively large share (64,9%) from the total production in the business and the registered growth is 9,6%. The civil/engineering construction increased by 12,4%, but due to it’s relatively smaller share of the total construction it does not affect the overall production significantly.

The market of business real estates in Bulgaria is a function of the economy development. During the second quarter of 2009, uncertainty is dominant over the long-term development of the economy and business in particular. This also lead to uncertainty in the development of numerous investment projects.

According to the consultants from Forton International, the tenants from all business sectors are waiting, while numerous projects are under revision. The company published it’s regular reports for the second quarter of 2009.

The market for building plots with future development as a goal is practically non-existent. Transactions are made one by one due to the lack of free money, high interest rates, restrictive behavior of banks to investments in real estates and the saturation of the market in some of the sectors.

Despite that, the prices that owners demand are far below what the solvent buyers motivated to make deals can pay. Experts predict further drop of the prices of land over the next two quarters of the year.

Office grounds

After office tenants decide on the development of their business – expansion, keeping the current positions or shrinking, we expect their follow up decisions on the best location for the respective business, commented Sergei Koinov, chief executive of Forton International.

Strategic business decisions, the need for optimization of expenses and the existing variety on the office market will probably lead to serious deals until the end of 2009. Local businessmen seek stability of the existing business and don’t think about expansion, while several international companies, mostly in the lower price segment, take up the profitable positions at new locations to ensure successful business in the long term. The demand for industrial grounds is constant, despite at lower prices, summarized Koinov.

The office ground offers for the first half of 2009 were centered around the ring road of Sofia, a location where the percentage of free grounds remains high, and the rent price levels are relatively low (9,50 euro per square meter/month).

The construction of the first wave office projects that comply to all international standards is still underway. They are expected to be finished in the second or third quarter of 2010, when an additional of 100 000 sq.m. high-quality office grounds will be available in Sofia, commented Ralf Holand, partner of Forton International.

Even though all tenants pay a lot of attention to expenses, leading local and international companies report a stable growth of personnel. At the same time, many of them realize the oversupply of offices and think over moving to a second-rate building, but at a better location for the particular business, adds Holand.

According to AT Kearney’s Global Services Location Index (GSLI) Bulgaria is 13th among the preferred outsourcing destinations in the world. This makes the country a leader among the countries from Central and Eastern Europe and creates significant opportunities for Bulgaria to attract foreign investors. This process can affect positively the office ground investors in a moment of fierce competition and comparatively lower level of consummerism.

Trade grounds

The second quarter of 2009 was a hard time for the trade grounds market in Bulgaria. The demand and rent prices in shops in the city center and the main shopping streets weren’t the only thing to lower – the income of shopkeepers also decreased, which has it’s negative impact on the expectations for the future for the main players in the business.

We can’t report a significant dynamics on that market during the last quarter, admitted Pavlina Nikova, manager of Trading grounds and partner of Forton International.

Shopkeepers remain passive and cautious. We’re seeing a decrease of sales, which is most notable in the sector for expensive goods – about 40% compared to the capitals in 2008. Brands from the low and average quality segment are among the few that are active in negotiations. The preliminary negotiations for rent prices is already a part of the daily routine of many owners and investors. The market is entering the phase of conscious demand and adequate supply, added Nikova.

Though construction of the several started shopping malls continues, some investors are slowing down their projects by 4 to 6 months. There are more and more empty shops on the main shopping streets and changing of tenants. Because of this, the levels of financial return from the main shopping streets increased to 8% from 6,75% in the end of 2008.

Industrial grounds

Despite the negative business tendencies, the levels of financial return from industrial estates remains stable – about 13%. This is due to the low level of offering of completed projects in this sector.

This is probably the only branch of the business that lacks oversupply and unjustified expectations. The sector still has potential for development of the right product on the right place, commented Alexander Tanev, manager of Industrial grounds in Forton International.

The lowering of rent levels did not pass up this sector as well, creating a vacuum between the prices of supply and demand. Under the pressure of the crisis, despite the factual lack of quality grounds, the customers are not content with paying rent on the level from the end of 2008. Investors however know about the limited competition and lack of supply and aim to keep their offers high. This way deals are made at levels 15-20% lower than the owner’s demands, adds Tanev.

Bulgaria is still the most popular country for Russians that purchase foreign real estates.

Nearly 28,7% of the Russians wanted information on the real estate market in Bulgaria, according to the research of the website Prian.ru for the month of July.

Germany is a distant second with 9,13%, and Spain is third with 6,7% of the searches.

Compared to June, the real estates in the Czech Republic have grown in popularity among Russians. At the same time, the interest in real estate markets in Finland and the US is decreasing for a second consecutive month.

Turkey and Egypt, which are favorite destinations for Russians lately, take the end of the top 10 destinations for real estate purchases abroad – 9th and 10th place respectively.

Destinations like Croatia, the United Kingdom, Hungary and Australia remain outside the top 10 of the Russian interest.

The total number of foreign real estates purchased by Russians is over 17 thousand.

The profitability of this investment in 2009 is higher in comparison with 2008. The price of real estates in Bulgaria is dropping faster than the rent prices. This means that if you purchase an real estate at a good price, the eventual profitability from letting it will be higher. The estimates come from the non-banking mortgage crediting business union CREDITEX. It’s based on up to date data from experts.

Profitability

For the experts from the union, the relation between rent prices and real estate prices is an important clue for the direction of the real estate market. The current average profitability from real estates in Sofia during the first half of this year is 4,5% on a yearly basis, while for the second half of 2008 it was 4,1%.

Return

The return of investment is measured by the so called “gross rent multiplier”. It shows the number of monthly rent payments that can pay off the investment in the real estate – the lower this index is, the higher the Return of investment of the estate, and the quicker the real estate will pay off. As a rule of thumb, indexes of over 200 months means that the estates are overvalued. The gross rent multiplier for the first six months of this year lowered to 209,4 months, compared to 237,3 months for the last six months of the last year.

Example

For example, the current profitability of the investment in a standard three rooms apartment in the district Mladost in Sofia would look something like that: the rent price for the estate varies between 320 and 380 EUR per month, or between 3,840 and 4,560 EUR per year (depending on the type and location of the estate). However, this isn’t the net profit for the owner. Usually this sum has to cover different expenses – insurance of the real estate, taxes, major repairs over periods of time and losses from eventual periods without tenants. Because of this, the net income from an real estate like this one is about 15% lower than the gross income – or an average of 3,570 EUR per year. If we divide this income to the market value of the apartment (about 75,000 EUR), we will have a 4,76% current annual profitability from the investment – a number that’s higher than last year’s.

Reasons

The explanation for the growing profitability of the real estates lies in two reasons; first, the crediting institutions don’t finance the purchase of estates adequately, which lowers the prices; second, the inability to purchase a new home through crediting forces a percentage of the potential buyers to rent estates, which sustains the level of the rent prices, despite the growing supply.

Over the last five years, we’ve seen a decrease of profitability from investments in real estates in Bulgaria – which was no surprise to specialists in the conditions of high-speed crediting and large supply on the market. Since the beginning of this year, there have been signs of an increase of income from the real estates – an indication for the stabilizing of the estate market, commented CREDITEX.

At the moment, the supply of business areas in Bulgaria is larger than the demand, and this will definitely lead to lower rent prices, prognosticated Marin Zgurev – manager of the project “Varna Towers”. The financial situation is normal, since bigger cities with at least one major trade center have several new centers on the way. A new awakening of the demand in the sector can be expected when banks begin crediting smaller businesses properly. This will happen within 3 to 5 years, stated he.

The average rent price in malls in Sofia will decrease to levels of 20-25 euro per square meter, prognosticated Zgurev. For the trade centers in Varna, the price levels will be about 20 euro per square meter, and in the smaller cities like Ruse and Stara Zagora the price will be about 18 euro per sq.m., added the businessman.

The prognosis for the price of business grounds in Bulgaria of Ozgur Yavuz, board member of the International Council of Shopping Centers (ICSC) in Europe and representative of Bulgaria in the organization, was more optimistic. According to him, the market of Europe is lively once again, and this will be beneficial to Bulgaria.

During the second quarter of 2009, the registered profits in this business sector is 13 billion EUR,marking a 12% growth in comparison to the 11,6 billion in the first quarter of the year. It is no coincidence that shopping centers with a total area of 660 000 square meters are constructed in Bulgaria right now, and are expected to open within two years. It should be noted that for each 1000 Bulgarian citizens there’s only 30 sq.m. of mall ground, which is ten times less than the ratio in Western Europe, added Yavuz.

According to ICSC, the Bulgarian economic will have a minimal, and in the worst case – negative growth, but despite that the market for rent space will continue to develop in a positive direction due to the stable supply and demand of high quality business grounds. The international organization states that both investors and leaseholders can only benefit from well-planned and executed investments.

By the end of the year, one of the biggest trade center projects in Bulgaria – “Varna towers” – should be completed in the the seaside capital of the country. 30 000 square meters will be dedicated to shopping grounds and 17 000 sq.m. – to “A” class offices. The owners of the mall will offer flexible plans to attract the highest possible number of leaseholders. For the first year of the contract, the rent will be a percentage of the income. For the food stores it will be 2-3%, for tech stores – 3,5 – 4%, for fashion stores – 7-8%, and for shops with more expensive goods – 12-15%. These plans will not be offered to restaurants, mobile centers, etc. – they are reserved for respectable foreign companies.

The investment and consultation company Arco Real Estate prognosticated that if the temp of construction from the first quarter of 2009 is kept, the average decrease of newly built real estates in Bulgaria for this year compared to 2008 will be 25%. Precisely, the decrease in Sofia will be 38%, in Varna – 32%, in Burgas – 14%, and in Plovdiv – 31%.

Compared to the quick rise of permissions for construction in the period 2005 – 2007 and their gradual decrease in 2008, the number of permissions for construction in 2009 is drastically lower. The biggest decrease was reported in Burgas, where the number of permissions for the first quarter of 2009 were only 896. Many of the construction companies are intentionally stalling the construction of new estates they have permission for, because the return of investment is not guaranteed. Their stalling can lead to a vacuum and lack of constructed estates in 2010, predicts the agency. According to data from Arco Real Estate, the demand for new homes isn’t slowing down significantly, especially ones with permissions for use. Their number at the moment is insufficient to cover the needs of candidate-buyers.

There is no risk when purchasing real estates in Bulgaria like these, and their purchase is fit for crediting by banks. Because of this, the prices of newly finished apartments with permission for use haven’t dropped significantly, as was expected early this year. Another reason for the stable prices is the client withdrawal from estates finished before 2002, mainly because of the lack of strict quality control. The latter, of course, lead to natural drop of prices of these estates and the re-orientation of customers.

Russians are currently the major buyers of apartments in the villa zone “Santa Marina” near Bulgaria’s Sozopol, announced the company-investor “Fairplay Properties” ADSIC. During the first half of the year, the union with special investment goal (ADSIC) has signed preliminary sale contracts worth 13,8 million leva, 10,6 million leva of which came from the period between April and June. Just within June, the signed contracts were worth 6 million leva.

“The growth is due to our success in the Russian market”, stated Maneu Moravenov, chief executive of the union. The profits and income of “Fairplay properties” for the first half of the year, however, suffered. The income from sales is 11,67 million leva, which is 36% less on a yearly basis, and the profit is 1,4 million leva, which is 67% less in comparison to the same period of 2008.

According to Moravenov, the sales of apartments that are still under construction guarantee stable income for the next few years. Until the end of this year, the company expects another 6,6 million leva profits from sales of contracts that are not yet concluded. The prognosis for the upcoming periods is for 4,6 million leva income from sales.

“Fairplay properties” also noted that in late June, “Santa Marina” won the award for the “Best seaside project” of the international competition “Best project 2009″, organized by the company “Euro design” EOOD and “Corporation BEST” as part of the Year of Bulgaria in Russia.

A mere 8,5% or 313 983 estates in Bulgaria are insured against earthquakes, and a little over 10% – from floods. The data comes from the analysis of the Commission for financial supervision. “These levels are extremely low. In the rest of the European Union, 60% of the real estates are insured from similar risks, and in the US – 87%”, commented Krasimir Stankov, insurer and member of the union for management of catastrophe risks.

Insurance against natural disasters is not mandatory in Bulgaria, despite the attempts of the insurance business to make people purchase such policies every year. “In mid September we will present this matter to the financial minister once again”, said Stankov.

The real estate insurance are among the cheapest products on the market, insist insurers. The financial supervision compared the premium that the client pays on a yearly basis for flood and earthquake protection of an insured property worth 60 000 leva. The insurance against earthquakes depends mostly on the location of the real estate in relation to the four earthquake zones. Usually this risk is not included in the main insurance against disasters and it’s paid for separately.

An apartment worth 60 000 leva in the riskiest zone, which includes Pazardzhik, Stara Zagora and Ihtiman, can be insured for the significant sum of 114 – 240 leva. The furniture insurance costs between 57 and 137 leva. A home in Sofia can be protected for a price between 49 and 132 leva per year. The insurance in Varna, Burgas, Dobrich and Kardzhali is the cheapest – between 6 and 18 leva per year, with additional 3-12 leva for furniture. Usually the older and taller buildings require additional payment. If the apartment is above the 6th floor, the sum increases by 5-10%. If the building is over 20 years old, the additional payment is between 5 and 15%.

The price of the basic insurance “Fire and natural disasters”, which also includes floods, varies between 12 and 24 leva per year in the various companies. Only one of the companies offers the package for 143 leva. If the flood is not included in the main risks, it usually requires an additional payment between 3 and 48 leva. If a citizen wants to insure his furniture as well, he has to pay another sum, ranging between 4 and 66 leva.