SPRING CLEAN

As investors' pockets around the world start thawing out, we leave behind a very mild Bulgarian winter. Spring, being the time to get your house in order, is celebrated traditionally with an annual spring clean. Likewise, it is perhaps time to have a spring clean of your property portfolio and consider the future of the Bulgarian real estate market and general investment climate.

Bulgaria's recent entry to the EU will surely have many investors speculating about the future of the real estate market. Just what can investors expect? Is capital appreciation of 30 percent per annum a myth or reality? What are the rental returns likely to be?

Any analysis of the real estate market in Bulgaria must first address the fact that there is a very small domestic market for residential property rentals. Therefore, those seeking a rental return on their residential property are predominantly looking at rentals to foreigners.

So, where are investors buying property in 2007? Putting this question to real estate companies throughout Bulgaria it is evident that investors are spreading their search more and more across the whole country, with many regions being discovered. There are always "bargain basement" investors, looking for country properties for next to nothing in the hope that a three to four month renovation will magically provide them with a 100 percent return. But is this a realistic proposition?

Whilst early investors have been able to buy country properties, close to the coast for example, and turn a tidy profit from renovation, the market prices currently make this more of a challenge, coupled with the fact that there is less demand from foreign investors for renovated country houses. Here, the market is being driven by retirees and families looking to start a new life in Bulgaria - those looking to buy to live in Bulgaria. How sustainable this market is, it is really too early to say.

If you look inland towards Veliko Tarnovo for example, many private buyers and investors are buying property in the centre of town and increasingly in the villages. You can purchase a renovated house in the country from as little as 45,000 euros. However, is this an attractive proposition for a serious investor? There is next to no demand for rental in the villages, so you are only able to consider potential capital appreciation - and beyond the first wave of foreign "settlers" where is the demand?

From the beginning of 2002 until now, the number of UK tourists visiting Bulgaria has increased by well over 200 percent. With this rise in tourism comes an increase in demand for accommodation in the key tourist locations. Therefore, those looking to buy property in Bulgaria to rent out are looking at a growth market.

Catering for tourists generally implies short-term rental - quoting a nightly or weekly rental rate. In Bulgaria, a one-bedroom apartment typically rents at 30-50 euros per night (average) on the Black Sea Coast, and 45-55 euros per night in Sofia (average).

Rental Returns in the ski Regions

In 2007, Bansko continues to be on the lips of many private investors, hopeful that the development of skiing holidays will continue to draw a healthy crowd of tourists to the many new apartment complexes being built in the region.

One-bedroom apartments in Bansko are renting out for an average of between 340 euros (low season) to 540 euros (high season) per week. Annual yields on new apartments typically vary between five and 15 percent, depending on the success of a particular apartment complex and its location, facilities, distance to the ski run, and so on.

In another popular ski resort, Pamporovo, one-bedroom apartments are renting out for an average of between 440 (low season) and 680 (high season) euros per week in the 2006/2007 season. Research and interviews with property management companies demonstrated that apartments have achieved yields of between seven and 12 percent in 2006.

Investors hope to achieve bigger rental returns in the ski regions, with the promise of income not only during the winter months, but also during the summer season.

Rental Returns on the Black Sea Coast

If we look at the Black Sea Coast, its tourist rental market starts to pick up pace in late May/early June - giving investors between four and five months of summer season rental income.

Currently, a one-bedroom apartment in one of the resorts can typically achieve 250 euros per week rental income in the low season, rising to 450 euros per week during the high season. Based on occupancy of 70-80 percent this results in average yields of 5.6-6.6 percent.

Looking at front line apartments in Sunny Beach, prices for one bedroom apartments vary from 40 euros per night (low season) to 80 euros per night (high season), with typical yields of 5.4 percent.

The growth of apartment complexes on the coast continues in 2007,with current prices now upwards of 800-1000 euros per square metre. You are now looking at an average of 70,000-80,000 euros for a one bedroom apartment, and with little variation in the rental prices, yields are inevitably lower than for those investors who were buying two to three years ago.

Long-Term Rentals

With more foreigners buying property in Bulgaria there is a growing market for longer rentals, as some foreigners seek accommodation for three, six or 12 months while they wait for their dream house to be built or renovated, for example. If considering this option, you have to understand that the monthly rental income will be lower than the short- term rates, but the major advantage you gain is a longer, secure income for your property.

On the Black Sea coast, near the major cities like Varna and Burgas, long-term rates are typically 300-450 euros per month for an average one-bedroom apartment; and 500-700 euros per month for an average two-bedroom apartment.

In Sofia, generally, you are looking at upwards of 400 euros per month for a good quality one-bedroom apartment and 700-1,000 euros per month for a good quality two-bedroom apartment in the city centre; with two/three-bedroom luxury apartments ranging between 1,200 and 2,000 euros per month.

The Future

Those alarmed by rumours of property prices decreasing in Bulgaria should not overreact and remember that corrections in the market are inevitable. Some developments may be offered at lower rates, but this may also be attributed to greater competition amongst property developers, and the need to compete lowers prices in a market economy.

Market observers will tell you to expect 15-20 percent capital appreciation, on average, in 2007 - and possibly for the next couple of years. Whilst the annual capital appreciation has decreased (on average) over the last couple of years for property investments, land has continued to prove a reliable and profitable investment for many people. Observing land prices from 2003, the last four years have clearly demonstrated appreciation of over 200-300 percent.

The amount of investment that is being poured into the ski resorts is going to attract more and more tourists. According to the statistics published by the National Statistics Institute in Bulgaria, the number of tourists continues to grow annually - and this puts greater demand on accommodation. Good quality accommodation in the ski resorts, located close to ski lifts, is therefore well positioned to provide sustainable rental income over the next few years.

Rumours of low-cost flights to Bulgaria from operators such as Ryanair and Easyjet have been floating on the grapevine for the last three or four years. While nothing concrete has surfaced yet, it is very likely they will follow in the footsteps of other low-cost airlines that are already flying to Bulgaria, like Wizz Air who operate flights to Bulgaria's capital Sofia. The advent of low-cost flights to Bulgaria will suddenly transform Bulgaria into a "city break destination" and will see more tourists visiting the country.

So, what other positive improvements are currently underway in Bulgaria? The international airports in Burgas and Varna will be undergoing significant investment to improve their capacity and facilities - with a view to opening their doors to a greater number of passengers. Fraport Twin Star Airport Management was awarded a 35-year concession to manage the operation of the coastal airports in Burgas and Varna - with an estimated 403 million euros to be invested in the two airports.

What the savvy investor must also consider are the other economic and environmental improvements in the country - and how these will help promote more foreign investment and make Bulgaria a more desirable place to visit. EU-funds are improving roads across the country, especially the highways, and are now beginning to filter into some of the villages. The construction industry is booming, with modern hotels, business centres and shopping malls being built across Bulgaria. For example, Piraeus Bank announced in December 2006 that it would finance the construction of the Pfohe Mall in Varna, at a cost of 8,000,000 euros; with the 70,000,000 euros development Orchid Mall Varna due for completion in 2009. Meanwhile, Veliko Tarnovo opened its doors to the Central Mall shopping centre in September 2006, and a large DIY hypermarket from Germany's Praktiker in November 2006 - which has already opened branches throughout Bulgaria in Sofia, Varna, Plovdiv and Pleven.

Whilst the future of the real estate market depends heavily on the continued growth of tourism, it also depends on the selection criteria that the investor uses to choose their property investment. Build quality, as the market matures, will become increasingly important for investors who seek investments that will stand the test of time.

As you put away your feather duster, and start to wrap up your spring cleaning, make way for the newest kid on the EU block as it rolls up its sleeves in anticipation of a bright future.

*Jonathan White is the author of Buying a Property in Bulgaria (HowTo Books, Oxford, 2005) and co-author of Buying in Bulgaria (Apogee Publishing, London, 2006)