Boom Turned Bust
A mix of global slow-down, restricted financing and withdrawing investors have brought Bulgaria's real estate market to a stalemate
Just a year ago Bulgaria, a confident European Union new member, was celebrated as a property hotspot with healthy growth in all segments. These days, frozen projects and bankrupt investors paint a gloomy picture and there is growing alarm that the big boom is on the brink of becoming the big bust.
"The construction business is moving at a snail's pace now," says Ilia Hristov, one of the many owners of construction companies, who has been hit by the crisis in the sector. Delay or cancellation of tenders for major projects has forced businessmen like him to heavily cut down on expenses and lay off workers.
"Agony is too harsh a word to describe what we are experiencing, but the crisis has definitely affected all construction companies in Bulgaria."
The slow-down has hit worst the residential property, considered only until recently an island of serenity amidst the stormy seas of the market, and the holiday homes, whose extolled virtues drove hordes of British buyers to Bulgaria a few years ago only to see their hopes of easy profits turn to dust.
Demand for residential property has been affected by the lack of financing - people have either given up their plans to buy a new home or are just waiting for prices to fall further down.
"Residential prices in Sofia in the second half of last year dropped by 2-8 percent and we expect the decrease to continue in 2009. In Sofia it will be about 10-12 percent by the end of 2009, which is not a drastic decrease for an immature market such as Bulgaria" argues Atanas Garov, Managing Director at Colliers International Bulgaria.
He joins a chorus of other experts, who claim this is not the bursting of a speculative bubble, but the logical development of the market.
"Residential property prices did not go as high as to make possible a speculative bubble," says Olga Stoichkova from real estate consultant Elta Consult. "Should the interest of enthusiastic buyers and easy access to financing have continued unabated, the burst would have been really spectacular."
Entrepreneurs say residential property prices in the country fell by an average of 30% over the last 4-5 months, while official data sets the drop at 20%. The forecast is that the residential market will enter 2010 with a feeling similar to a cold bath on Jordan's day. It is not necessarily a pleasant experience, but afterwards you truly appreciate the cleansing effects of it.
The sector that was worst-hit by the crisis and will not recover any time soon is the holiday homes market.
"During the boom years property abroad became too accessible for Britons. It was a no-brainer: you just put down a deposit, sat back and waited for the profits to roll in, " says Olga Stoichkova from Elta Consult.
The UK buyers, who fuelled the holiday homes market in Bulgaria, started to withdraw in 2008 due to the slow-down in markets outside Bulgaria, finding it harder and harder to finance their purchases. Meanwhile lack of planning completely destroyed a lot of beautiful spots along the Black Sea coast and the ski resorts.
"Most of the projects were not conceived properly - says Atanas Garov. - The services to be provided, the infrastructure and the environment were not taken into consideration. This affected negatively the projects that came out. Holiday homes destinations need to have proper master planning for the whole area and this is a big lesson to be learned."
In the second half of 2008, a modest 6,000 apartment units were added to the total supply of holiday homes. The growth of 6% is equally distributed between mountain and coastal areas. Thus, the total inventory of holiday homes reached 103,000 units.
Buyers and developers have both been hit by the downturn - the first saw their capital gains turn into losses, the second ran out of money, leaving properties unbuilt. There is oversupply in all resorts of the country and.official data shows that prices have fallen in the range of 12-20%.
Entrepreneurs however say there are only sporadic deals at EUR 500 per sq/m, about two times lower than last year's levels British and Irish owners have started to sell up to vulture funds, who are scouring the resorts, buying property, whose financing is half way through. In other cases there are even doubts as to whether the developer ever intended to stick to the contracts.
Disillusionment is what describes best the experience of Mary Kelly, a Briton, one of hundreds of non national owners who have bought holiday apartments in the resort of Sunny Beach.
The apartment complex, where she bought a flat, is currently without electricity and water. EVN electric company cut off supplies to these complexes, because they claimed the developer Eurobuild4 owed them thousands of leva for unpaid electricity bills. They are not providing security or maintaining the complexes.
Kelly says Bulgaria cares very little about the consumer rights of thousands of non national, fellow European citizens, who have invested heavily in Bulgaria by buying holiday apartments, spending thousands of leva to purchase them and also spending thousands of more leva on Bulgarian goods and services.
"Today I am sad. Today I regret my decision. I hoped to spend Easter in my apartment.But there is no electricity, no water, no security, no essential repairs done."
"I bought an apartment in Bulgaria, because I loved the Bulgarian people that I had met, while on holiday there. I also loved the beautiful scenery and climate. Would I encourage or recommend my fellow countrymen to invest in Bulgaria? What do you think?"
Cash Is King
It is not an easy time for sellers of any property. Bulgaria is not any more a very active destination for real estate and it will always going to be a marginal market.
"With a drop in investment transactions worldwide, selling is not easy unless you have something valuable," says Atanas Garov.
Is now the time for bargain hunting? Yes, if you pay cash. In a market with contracted demand and severe restrictions in financing, cash is king and more deals are and will be a result of cash payments. Local brokers say buyers lower prices by 15-20 percent when they have the money at hand.
The potential buyers are the same as before only with different buying appetite. The so-called distressed and opportunistic funds have appeared quickly on the back of the downturn.
"We haven't hit the bottom as long as we have a few indicative investment transactions on the market and I believe we will see such transactions this year," Garov hopes.
"It is a wait and see time for everybody - Velri Leviev, Elta Consult Executive Director says. - I am positive that the interests of buyers and sellers will meet at the end of the year when both will have made some compromises."
The real estate slump has no quick fix and it will be difficult to replace it as the driving force behind Bulgaria's economic growth. Investors will continue to withdraw, the number of construction companies will get reduced.
"It is difficult to say how long it will take for the real estate market and the construction sector to pick up, forecasts ranging from one to four years - says construction company owner Ilia Hristov. - What's certain is that we'll hardly see a repeat of the boom from the last couple of years."
The good news is that Bulgaria benefited from being an immature market, starting a little bit later than in Central European countries.
"The slow-down happened at exactly the right time - claims Atanas Garov. - A very large pipeline of potential projects in every sector, in particular retail, residential and holiday homes, were not fuelled by the fundamentals of demand, but rather by easy access to relatively inexpensive funding."
A case in point is Romania, whose market is ahead in its development and now just about everybody is suffering from the projects that were already in the pipeline.
"In Bulgaria the projects that continued were already started, funded and with good concepts. The projects that would have been too much never had the chance to get started. Should they have appeared, this would have made the situation much worse," Garov concludes.
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