Is the global credit crunch a deathblow or a panacea for the Bulgarian property market?
Is the property boom a bubble on the point of bursting? While Bulgarians fretted over this question for the past year, the global economic "downturn" became a "crisis." The question now is whether Bulgaria has managed to dodge the bullet, as many experts would have us believe. If this were so, why has the property market in 2008 been much less dynamic than it was a year earlier? And is the British pullback to blame?
THE FOREIGN FACTOR
Expect the unexpected
The year 2008 gave us the latest proof that life is what happens while even the most influential and experienced business people make other plans. It hasn't been the best year for the Bulgarian property market, at least compared with 2007. However, the problems originated less in the primary domestic market – characterised by oversupply – than as a result of the global economic squeeze, the credit crunch in particular. At the beginning of the year, it became clear that Europe would not escape the aftermath of the credit crisis. Yet local experts reacted with the usual denial, claiming that Bulgaria was in no danger and would remain a safe investment oasis. But only a short while later, banks announced the first interest rate hikes – marking what was only the beginning. Both foreign and domestic credit institutions repeated the drill several more times throughout the year. The most substantial increase took place in October, when some banks tacked an extra two percentage points onto existing rates. The minimal interest rate is now between 8.5 to 10 percent, the highest level in the past five years.
The expensive loans were an important change on the banking front that affected the property market. Many banks offcially discontinued extending no-income-verified mortgage loans – lending to those whose assets "on paper" appear much lower than their actual holdings and income. Since every third Bulgarian borrower had no choice but to use the no-income-verified option to buy a home, predictions were that the number of purchases would drop significantly. To make matters worse, until recently banks would lend up to 100 percent of the total property value, but now applicants should consider themselves lucky if they get 70 to 80 percent. Here's the final cold shower for those who planned property shopping with loans – many banks have stopped funding purchases of apartments in prefab concrete blocks of flats, making only new buildings eligible for mortgages. Although it has never been stated offcially, getting a loan for a holiday home is now virtually impossible.
A different profile
The "foreign factor" has led to a significant change in the property market's profile. The more stringent credit conditions have hurt two major property subsegments: holiday homes and prefab concrete blocks of flats. In the first case, the scarcity of loans is just one part of a much more complex problem. As concerns prefab concrete apartments, they were a cheaper option for a large group of lower-income buyers. Those who could afford to buy a first home without a mortgage usually preferred new buildings in better districts. Given the new lending rules, a huge number of old blocks of flats that nobody is able or willing to buy may soon flood the market. According to a rumour, it won't be due to the lower liquidity of prefab concrete apartments but to a conspiracy between developers of new residential projects who want to eliminate competition.
The silver lining?
Most experts are optimistic about the long-term effects of the global crisis on the Bulgarian property market. They believe the crisis came right in time to prevent a real bubble as a result of banks' generous lending. As another advantage, they point out the slight reduction in prices in some segments, primarily for older and low-quality residential properties. The theory that prices in Bulgaria are much higher than the properties' worth is not new, and some regard the current crisis as a natural regulatory mechanism.
Borrowers, however, are not so thrilled. In 2007 the rate of defaulted mortgages was between 0.5 to 1 percent, while it jumped to 4.5 percent in October 2008. Experts envisage that 15 to 20 percent of all credit holders will be unable to service their loans during 2009. This includes not only first-time buyers but also developing companies that may spiral into bankruptcy.
What everybody agrees on is that 2008 put an end to all out-of-control building. The runaway process that had spawned oversupply has finally stopped. Very few developers are wealthy, brave or crazy enough to start new projects in a time of crisis.
The worst news of 2008 was that a shockingly large number of foreign investors left the country. Some of them migrated to spots with warmer economic climates, but most of them have simply gone back home and hunkered down to wait more favourable times. The absence of enthusiastic Britons reduced holiday homes sales by a good 50 percent. Also Russians – the only newcomers on the market – could not fill the gap. On the business properties front, expectations that the new Eastern European EU member states would invest in Bulgarian offce buildings, shopping malls, industrial and logistic properties failed to materialise.
Despite the obvious drawbacks, the global crisis of 2008 introduced natural stopgaps for preventing oversupply and artiἀcially inflated prices – a much-needed dose of sanity that the government has systematically failed to provide in recent years. The crisis, however, is not the only factor that has slowed the Bulgarian property market down.
MEANWHILE, AT HOME
A black year for holiday home developers
On 1 January 2008 the Black Sea Coast Act came into effect. As usual, the legislation began with the best of intentions and ended up toothless. Supposedly designed to secure the integrated development and preservation of the coast, the document was later amended in accordance with big business' needs so many times that it is now almost useless. Still, thanks to this legislation and Natura 2000, the EU list of protected areas, it is no longer possible to build a hotel right on the beach or in protected territories. The government made some efforts to restrict the outrageous massacre of the Black Sea coast and mountain resorts, but they were too little too late. The free market had already said its say – by the middle of an ostensibly successful tourist season with an annualised 18 percent increase in visitors numbers, several hotels in Sunny Beach went up for sale for the bizarre price of one euro. What's the catch here? Buyers would get a mortgage along with the property. Developers who built their projects with loans reduced prices by up to 200 euros per sq m, pressured by the need to cover their debts. The Mayor of Bansko has banned new projects until further notice. Most British real estate agencies based in sea and ski resorts closed down due to lack of clients.
Domestic factors are the primary cause for troubles in this sector.
Malls have increased their value by 50 percent over the last 18 months. However, a potential threat to this subsector is the malignant pattern followed by every type of property that is subject to high demand – oversupply. A grim example is Varna, where five shopping malls are being built or have just opened in a single district alone. Hopes are that the crisis will stop the mall-ification of larger cities and will redirect developers to smaller ones, where malls are much needed.
The logistics property sector looked set to replace holiday homes as the cash cow of 2008. Demand was huge, supply next to nil – the future looked brtight for developers in this sector. Instead of beginning thousands of projects, however, most of them either postponed plans or withdrew, scared away by the high prices of land for logistical purposes.
Demand for offce buildings has been high throughout the entire year, but the question is what will happen in 2009, when thousands of square metres in new buildings flood markets in larger cities.
The end of the residential property party
In March 2008 brokers noticed the beginning of a disturbing trend: by a fraction, For Sale offers suddenly outnumbered buyers. This coincided with the onset of a panic at the possibility that the global credit crisis could strike Bulgaria. For the first time in at least three years, the demand-supply equilibrium in this subsector was upset. Paradoxically, owners reacted by increasing property prices by 10 to 20 percent. By then, however, inflation, interest rate hikes and common sense had forced people to think twice before swallowing another price jump. A large number of potential buyers decided to wait for better times, hoping that prices would drop to more realistic levels. Nobody really believed it would happen, yet even at the end of the summer, buyers were still cautious and reluctant to purchase. Finally, the cost of certain types of residential properties – mainly concrete block of flats – decreased, especially in major cities. The reduction was not substantial – five to seven percent at most – but it was symptomatic.
Competition among sellers grew severe. Some developers refused to reduce prices per square metre but found other ways to attract buyers. They offered 50 percent lower prices for so-called shared areas – in Bulgaria, staircases, elevators, corridors and entrance halls are included in the total price of an apartment and can account for up to 20 percent of the purchase price. Prices for properties in gated communities, most new buildings and in smaller cities have so far remained unchanged.
The year 2008 made clear what real estate brokers, property owners and the government grasped a year earlier – the British exodus that began in late 2006 was the least of their worries. UK investments were an accidental phenomenon that could not keep the Bulgarian property market dynamic and proἀtable for a long time. On their part, foreign companies failed to discover many investment opportunities because of systematic environmental degradation, inadequate banking policies, greedy owners setting unrealistic prices, lack of transparency and poor governmental control. All this, together with the macroeconomic climate, has shattered a market full of potential. Hopefully in 2009 Bulgaria can harness the healing effect of the global crisis to solve some purely local problems.