High yields and rising prices on Bulgaria’s real estate market
The real estate market at present
By Ivan Vatahov Constantly rising prices, high yields and numerous opportunities have characterised Bulgaria’s real estate market in the past several years, turning it into one of the most attractive investment destinations for people from all over the world. Although experts believe that the supply of residential and commercial properties in this country, particularly in some regions, has already outrun demand, the future is looking brighter as the market is more and more open to foreign buyers. Brokers and clients have found that properties near the Black Sea coast, in the mountain resorts, in the capital Sofia and in other major cities are securing a high return on investment in the form of rental or resale. The popularity of Bulgaria among expats as a place to buy real estate is not fading away, but the signals that excessive construction at the seaside and mountain resorts will lower prices are more scaring away developers and brokers than helping demand to flourish. Throughout 2005 and in the first months of 2006, according not only to local but also to Western media, this country continued to be one of the cheapest options in Europe for foreigners looking to buy a second home abroad. Furthermore, so far, Bulgaria has been the only state accessible for the mass of buyers interested in winter resorts. While challenged by the strong competition from established destinations like Spain and Cyprus, or newly emerging ones like Turkey and Croatia in the coastal property sector, Bulgarian mountains continue to attract clients, through low prices for both vacations and real estate. Most Europeans already knew the resorts of Bansko and Borovets, and are now becoming acquainted with Pamporovo and the nearby Chepelare, where large-scale construction has been launched in the past year. Brokers selling Bulgarian property believe that although a certain slowdown is observed in the market, their sales will maintain good levels because of the competitive prices. A constantly rising supply of residential and office real estate was registered in the early months of 2006. The period is marked by a continually increasing supply of new residential developments both in the middle and in the high-end market, continuing a trend started back in 2004. A series of real estate forums held in Bulgaria last year found that investment in property transactions and development in this country reached more than a billion euro by the end of 2005. Foreign direct investment (FDI) in the real estate sector was about 25 per cent of all FDI that entered the country by the end of 2005. Some pessimistic appraisals have recently emerged in regard to the situation in Bulgaria’s real estate sector. Mainly due to the dropping return on investment level, which may drive away some potential large investors, they are also a result of the excessive construction that some of Bulgaria’s holiday resorts have seen in the past two years. The 2005 summer season was proof of how excessive construction, accompanied by noise and dirt, can force discerning holidaymakers to change their vacation destination. German tourists, a traditional segment of foreign visitors to Bulgaria, were seen switching to other countries. Fighting excessive construction on the Black Sea In its strong resolve to tame coastal construction, Bulgaria’s Cabinet approved in February 2006 a Bulgarian Black Sea Coast Development Bill. The bill envisages the introduction of two construction zones - Zone A and Zone B - along the coast. Zone A will be an area of special protection regarding permissible construction. It includes the beaches, dense forests, sand dunes, coastal lakes, lagoons, firths and wetlands as well as part of the agricultural land and forest areas bordering the beaches. In these areas construction density cannot exceed 20 per cent. The height of constructions cannot be over 7.5m. Zone B will include agricultural land and forest areas two km inland from the border with Zone A. Building waste dumps and waste treatment facilities will be forbidden, as well as discharging effluence, used plant protection materials and fertilisers and the development of new productions emitting harmful substances. The height of constructions in Zone B should not exceed 15m and construction density should not be higher than 30 per cent. The new bill, still pending approval by Parliament, gives the first-ever definition of “sea beach” and “sea shore”. This way, the Cabinet has for the first time vested in a law the statute of territories that are its exclusive property. Inadequate regulation has allowed so far the construction of tall hotel buildings even on the sea sand, with their developers showing documents for construction on agricultural land. Interest in agricultural land And, speaking of agricultural land, it appears that Bulgaria’s forthcoming accession to the European Union in 2007 or 2008 has triggered unusual interest both in and out of the country in buying such land here. The growing dynamism of farmland sales and leases in Bulgaria, which was particularly noticeable in 2005, will be sustained in 2006, specialists say. The process will almost certainly entail a price rise for farmland in the country’s least attractive part, the northwest. Last year saw more than 66 000 transactions for a total of 60 000 hectares of farm fields, 20.6 per cent up from 2004. Sold land plots averaged a little less than a single hectare. Demand was highest in the north-eastern region around Dobrich, which is in the heart of Bulgaria’s wheat-producing area. There, owners sold larger land plots, averaging 1.65ha, for which they received up to 3000 leva (1530 euro) a ha. Unlike in other parts of the country, around Dobrich, demand exceeded supply. Between 2004 and 2005, the average market price of farmland in Bulgaria grew 26 per cent to 1690 leva (864 euro) a ha. Price rates were lowest in the north-western regions around Vidin and Vratsa, and in north-eastern Turgovishte, where they ranged between 1000 and 1100 leva (511-562 euro) a ha. Land market dynamism was also in place where new owners transformed the use of the farmland they bought. Such sales increased threefold in 2005 from 2004. They involved the selling of 3525ha of land for prices averaging much higher than the above-mentioned levels: 285 000 leva (145 700 euro) a ha in 2005, compared to just 45 000 leva (23 000 euro) in 2004. In the case of land-use change, demand for farmland was highest in south-central Bulgaria, particularly in the highlands around Smolyan and Dospat (close to the ski resort of Pamporovo). In terms of number of sales, such transactions were most frequent in the north-east of Bulgaria, but there prices were lower, averaging 190 000 leva (97 000 euro) a ha. Now, Bulgaria’s land market is expected to grow in both price and the number of deals as the country heads towards EU membership and demand exceeds supply. As a whole, prices of land in Bulgaria are still low, compared to prices of land in the region that attracts investors, but this will be corrected in 2006, specialists say. In the neighbouring EU-member Greece, for instance, land prices vary between 1200 euro a ha for non-irrigated land to twice or thrice higher the price for irrigated land. Farmland prices in Bulgaria are going towards levels ineffective for farming, because if one had to invest too much in the land, that capital could not be used for other purposes. Those who buy land count on the fact that they will have a stable income in 2007, due to EU farming subsidies. The ban on purchase of land by foreigners has no material effect on the price of land, as a legal opportunity exists for joint ventures with foreign partners to buy land. About 250 000 hectares of land have been purchased in the past three to four years. But it is just a small fraction, given that total arable land in Bulgaria is estimated at over three million hectares. Yields and growth in 2005 and expectations for 2006 Bulgaria’s real estate market registered world-record-high rental yields of 12 per cent last year. Capital gains were 36.6 per cent, and total return on cash invested was 116 per cent in 2005, research data by UK-based property adviser Assetz showed in late March 2006. Foreign investors were involved in up to 20 per cent of the property deals registered in Bulgaria in 2005 as transactions totalled more than eight billion euro, according to Bulgaria’s National Real Property Association. The total cash-on-cash return of 116 per cent has put Bulgaria above Cyprus in the chart for total returns on cash invested. Return on cash invested in Cyprus is 84 per cent. The steep incline in house price increases would level off to some extent before the end of 2006, but market growth is expected to remain high. The ski resorts of Bansko and Borovets continue to draw interest from property seekers, with significant construction projects now underway to accommodate demand. It is particularly wise to invest around the ski resorts, as cheap Bulgarian ski destinations are in as much demand as quality resorts in the French Alps. According to preliminary figures, deals struck on Bulgaria’s real estate market last year amounted to a nominal 4.2 billion euro. But the real value was much higher, at about eight billion, because transactions were usually sealed at the lower tax assessment value of the property, not its real cost in the market. Property prices rose in all sectors last year with increases ranging between 12 and 40 per cent, the prices of building sites and residential property at the higher end. Prices rose most significantly in the capital Sofia, as well as in Vidin, Plovdiv, Stara Zagora, Bourgas, the Black Sea resorts and the ski resorts Bansko, Borovets and Pamporovo. Experts forecast that prices will be dynamic only in some sectors this year. Prices of regulated property in excellent locations and a good proportion of the built-up area will increase by 16 to 18 per cent and prices of luxury apartments in desirable locations will be 12 to 16 per cent higher. http://www.sofiaecho.com/(12.05.2006)