BUBBLE TROUBLE

by Stanislava Ciurinskiene

Ups & downs in the Bulgarian real estate market

An intriguing fact appeared in The Guinness Book of Records 2004. Bulgaria featured as the country with the fastest rising real estate prices in the world, with an annual rate of increase of 47 percent. Some believed that it was just a one-day wonder, a bubble which would burst very soon. Others, who knew better, rushed to buy real estate properties in Bulgaria. In 2006 "the bubble" is growing bigger and bigger. Some Western European experts have even compared the developments in the Bulgarian market to the early days of the Spanish property boom in the 1980s.

The "Bulgarian real estate phenomenon" may seem surprising even to most Bulgarians, but it did not come out of the blue. Those who have been following the macroeconomic developments in Bulgaria over the past 10 years know that parameters like gross internal product, average income, inflation, stability of the national currency, and so on have improved significantly. Bulgaria joined NATO in 2004 and will soon become a member of the EU. This factor alone cannot be seen as the reason for the increase in property prices, but it more or less guarantees a secure investment. We should not forget that the banking system in Bulgaria has improved dramatically and interest rates have been constantly falling since 1997. In 2006 every second apartment sold in the country was purchased with a bank loan.

All these factors, together with low property prices and high investment return, have prompted a large number of foreign investors to purchase land, apartments, offi ces and even hotels in Bulgaria. These investments have paid off well, as prices continued to increase by 35 percent in 2005.

So why are some foreign investors still afraid that "the bubble will burst", that prices will drop and the whole Bulgarian property boom will turn out to have been just a frustrating economic illusion? The key word here is "oversupply".

Long before 2004, international and Bulgarian investment companies perceived a profit opportunity and started to build houses, luxury hotels, huge holiday complexes and office buildings. Hotels and apartments mushroomed along the Black Sea coast and in most mountain resorts. This has recently forced the Bulgarian government to focus on measures to slow down growth. In short, some investors are becoming afraid that they may build or purchase properties which they will not be able to rent or sell later.

Is this really the case? What now seems like "oversupply" may temporarily prevent Bulgaria from repeating the record of 2004 and restrain growth within the "reasonable" 35 percent annually, but soon enough prices will rise again. This is because more and more Western European companies and private individuals are investing in Bulgarian properties, seeing Bulgaria as one of the "last havens" in Europe of the substantial and secure investment return. Many Bulgarians who went to work abroad after 1989 have invested their savings in Bulgarian property, too. The amount invested by this group of buyers alone in 2004 was 430 million euros.

There is another reason, more psychological than economic, that contributes to the "bubble" myth. Although Bulgaria has come a long way in the process of political democratisation and economic reform, it is still an unknown quantity to many Western Europeans. The Western world is afraid of the corruption which Bulgaria is still struggling to overcome.

Potential investors are wary of fraud, dishonest deals and unreliable local partners and real estate agencies. But most of all they fear the unknown.

The truth is that the Bulgarian real estate market is not unpredictable at all because it has a familiar pattern to follow. New EU members like the Czech Republic, Hungary and the Baltic states have already trodden the path which Bulgaria is taking now. For example, in Lithuania, property prices started ballooning at the beginning of the 21st Century. Sceptics expected that prices would drop long before Lithuania joined the EU. Instead, prices kept rising and just when experts said they had reached their peak, they jumped again this September. Lithuanian and Estonian investors, who made good capital gains during the Baltic property boom, are now turning to Bulgaria. They have firsthand experience of how the real estate market in pre-accession countries works. If you want to buy an apartment in the centre of the Lithuanian capital, Vilnius, you will have to pay about 4000 euros per sq. m. A top-location property in Sofia costs from 900 to 1400 euro per sq. m. So far, it seems that "the bubble" is actually a hot air balloon - many investors have jumped onboard without regrets.


Five reasons to purchase property in Bulgaria
1. Very low property prices
2. Prices are expected to rise by up to 35 percent in the next 12 months
3. Warm, sunny beaches and cool alpine mountains just a few hours' drive from one another
4. The cost of living is among the lowest in Europe
5. Excellent rental potential of properties

Location, Location, Location
The four most desirable regions to buy real estate in Bulgaria are:
1. The Black Sea coast - a well-developed tourist destination, popular with both foreigners and Bulgarians
2. The capital Sofia - most apartments in new buildings are sold at least a year before they are built
3. Ski resorts like Bansko and Pamporovo
4. Spa-resorts like Velingrad. Spa tourism has become popular again after a slight decline during the past 10 years

Be a Landlord
Foreigners can purchase land in Bulgaria. The only thing they have to do is register a local company. Ownership through a company entitles the buyer to a substantial degree of legal protection

High Returns
Most hotels on the Black Sea and in ski resorts work in collaboration with international tour-operators. This provides up to eight percent annual investment return to owners of apartments and residences in Bulgarian resorts.

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