Bulgaria's Office Market - Out of the Doldrums?
Bargain prices and a good choice of supply are poised to help lift the office property market in Bulgaria out of the doldrums, according to analysts.
Right before its accession to the European Union in 2007 Bulgaria emerged as the new shining star for investors in office facilities development. Three and a half years later, the country is going through its first recession in more than a decade and the office market has been hit by a period of relatively low activity. The first signs of recovery however are already here.
“Although companies tend to be more selective in choosing the best office solution, there are actually transactions that are indicative that this market has started to pick up,” says Anton Slavtchev, Manager Offices and Business Parks at Colliers International.
The most active companies are mainly from the telecom, outsourcing and IT sectors and the majority of the current activity on the market is driven by relocations. Companies choose to optimize their office space, take advantage of the better market conditions or opt for a quality office in a better location or lease conditions, thus being able to reduce their operational costs.
“Total care” rules
“Completely mad”. This is how Mark Dixon, the father of the “instant office”, once described the way in which companies have to deal with the old problem of office space. In Bulgaria, the answer to this issue has been changing from the ad hoc arrangements of offices from the recent past to the “total care concept” of flexible twenty-first century business parks and centers.
“Recent research conducted among 900 major employers shows that the key priorities for choosing a new office are quality, location, parking, easy access and attractive rents,” says Slavtchev.
The market remains focused exclusively in the capital Sofia, which is at a stage when any client might be able to find suitable premises or expect those to appear at a suitable time.
Demand is no longer concentrated in the capital central business district, but along the main boulevards with easy access to the main parts of the city, business parks and business buildings. This is where companies, looking for office space in an environment that helps their business to grow and feel secure, continue to find drivers.
Business Park Sofia, the capital first such venture, is a case in point.
“The drivers are the location of companies’ clients or partners there; the amenities and park environment that add value to employees comfort and productivity – food and leisure facilities, bank branches and other facilities; and not least, but rather very important factor – the availability of parking spaces,” points out Slavtchev.
Yet with the increase in office supply on more communicative locations with better infrastructure, the demand from companies to be located in the business park, has decreased compared to that three years ago.
“In Business Park Sofia, the vacancy is reaching 5 % already and at this stage is lower than the average of the market,” says the expert.
Strong supply, weak demand
A few years ago the office market witnessed the opposite situation it is facing now. With a steady economic growth, upcoming accession to the European Union and more businesses due to step on its market, demand for contemporary office space in Bulgaria was high, while the supply of new, quality office buildings – scarce.
“Many office projects were started then; some of them were constructed to meet the highest standards, offer a great location and access; others were made without any long-term thought and currently suffer negative net absorption,” remembers Slavtchev.
The global financial downturn shifted what used to be the most stable and predictable market to a new phase and in the beginning there was almost complete stagnation in demand, followed by an increasing gap between new supply and the absorption, which pushed up the vacancy on all submarkets.
According to the latest office research from Colliers International, 106,000 sqm of new, contemporary office space was added to the total stock in Sofia during the first six months of the year, reaching a total stock of 1,168,000 sqm. 21% of the new offices are located in the broad center and 64% in the suburban areas.
The majority of the new supply is delivered by the European Trade Center, Doverie Business Center, DSK Bank Headquarters and Krystal Business Center, which added a total of 66,500 sqm to the office market in the capital.
The overall vacancy in Sofia (245,000 sqm or 21% of the total stock) continues to increase. Colliers’ research shows that as of June 2010, the vacancy level in Sofia was higher in Class A than Class B buildings, a testament to the price sensitivity of the market. In terms of location, the highest overall vacancy level in Sofia can be found in the Suburban areas.
Asking rental rates in Sofia have dropped approximately 25% since the first half of 2008, driven by the large supply and the weaker demand.
“On paper, this appears to be a relatively moderate reduction, given the oversupply and the soft demand. Reality is that few, if any, leasing transactions are signed at asking rental rates,” says Slavtchev.
Assessed in comparison with other countries in the region of Eastern and Southeastern Europe, Bulgaria’s office market is keeping its edge. Yields have been rapidly declining in the old hotspots of Central and Eastern Europe for the last few years and investors have been pushed further east to countries, including Bulgaria. What the country offers them are lower prices, higher returns and relative security.
Yields vary in Sofia between 9 and 10%, while in Hungary and Czech it is 7.75-8.25%. The champion in investment interest – Poland, is already striking yields at flat 7%, which for prime properties is almost at pre-recession levels. Romania is priced relatively similar to Bulgaria, though to its advantage there is less vacancy and larger depth of the market compared to Sofia.
According to Slavtchev a few factors contribute to the lower prices in Bulgaria, most of which are driven by the lack of favorable lending, as well as high vacancy rates and relatively large development pipeline.
“The positive prospect for Bulgaria is that rents have already corrected downwards and there is shortage of income-generating assets,” he says.
“Recently a global client visited several cities in Eastern Europe to set a service center. They were impressed with the quality and availability of office in Sofia and Bulgaria, so I think that we are going in the right direction.”
Even though investors and their lenders are cherry-picking, which is the greatest factor for the lower investment volumes in Central and Eastern Europe, Slavtchev remains upbeat and says the tendency for the region is to increase gradually the investment volumes.
- » Lost in Lack of Translation: Svetlana, Bulgaria and the Conflict in Ukraine
- » Hurghada, El Gouna and Soma Bay, Three Faces of Egypt’s Red Sea
- » Meet Pepi, a Bulgarian Robot for Which Crossing Mazes Is a Piece of Cake
- » Ten Blunders of Bulgarian Politicians Worth Remembering in 2014
- » Top 7 Visual Moments of Bulgaria's 2014 Election Campaign
- » Who Will Take Over from Sergey Stanishev as Socialist Party Chief?
I am sure the imposition of a property tax would not increase the value of real estate in BG, but it could eventually make the market stronger. Too many people sitting on property with no incentive to sell gives the illusion of a value higher than it is.
I know of families with pre-commie holdings that they got back, that are sitting on many parcels of land that they are doing nothing with.
Everyone says it is the Bulgarian ego and/or the failure to admit real estate is worth less than they are asking is the reason property is not sold.
I say it is because they do not have to sell, so why sell.
You are right, foreign investors will shy away from buying.
The real upside would be funds to improve the infrastructure of the whole country.
For the whole thing to work, the money (tax revenue) would have to get in the right hands and that may not be possible.
I'm not sure imposition of a property tax would have the results you predict. Firstly, you have to assume that the owners of these empty properties have invested huge capital sums in the development of these projects which implies that an additional tax on the property would not be such a huge burden. Secondly the tax itself would clearly need to be linked to occupancy and if the property is empty then it would likely qualify for a tax credit. Thirdly, imposition of a property tax would likely scare off potential investors, particularly those from abroad who may be considering BG as an option and who want to contain their operating costs.
I think the lack of demand in the BG market has several fundamental causes, including the massive oversupply in the market, the failure of successive governments to attract overseas businesses to establish bases in BG, the poor infrastructure, the corruption, bureaucracy and red-tape associated with trying to do business in the country, the poorly trained and unprofessional property brokers (and I include the 'international' brokers) who employ local staff with no international experience, who just continue to talk up a non-existent market instead of embracing reality and looking for solutions, and who quite simply give their clients the wrong advice when it comes to realistic rental yield.
I hat to give anyone ideas, but the only way the Bulgarian real estate economy will become strong is for the government to charge a property tax. A lesser amount on places where people live and higher in commercial and empty buildings.
This will create income for the government AND more important create an expense that will force owners to sell or pay the additional costs.
Now a person can sit on multiple properties with almost no incentive to sell as they have no expenses.
This keeps the prices artificially high and that does not reflect on the true value of real estate.
What do you think? Bad idea?
''The overall vacancy in Sofia (245,000 sqm or 21% of the total stock) continues to increase. ''
That says it all - empty office space sufficient to accommodate 25,000 workers and rising. The market in Sofia will remain depressed for some time, particularly as there is more and more prime space coming onto the market. The winners will be the landlords with property in the best locations, and eventually the tenants when the penny finally drops and agents have to accept that rents will have to go down substantially.