Vesey Crichton, Partner at UK Property Developer Cleves Ltd: Bulgaria Needs PR to Build on Its Good Fundamentals
Interview with Vesey Crichton, one of the partners at Cleves - a Sofia-based UK owned property development company focusing on rental services for expatriates. Crichton is a former VP of Palm Europe, Middle East and Africa.
When did your company start working in Bulgaria? What have been your impressions of the country and its economy so far?
We started about 5 years ago. We focus only on Sofia, and it has struck us that Sofia is different from the rest of Bulgaria in that the greater majority of foreign investment comes to Sofia, probably in the order of 70% of the incoming investment comes to Sofia, and the unemployment is lower here than it is in the rest of the country. If you take the country's GDP as a whole, we think Sofia is performing better. It is a very tough year financially but we think the GDP of Sofia, if you could measure it, is not struggling as much as that of the rest of Bulgaria.
We are very buoyant about Bulgaria's medium and long-term prospects. It is obvious that there is a global economic crisis, and our view is that Bulgaria is a victim rather than a contributor to that in that it is easy to see that the banking system in places like America and the UK has caused the global crisis, and credit getting out of control, and so forth.
That was not the case here, and Bulgaria is suffering only because its trading partners are suffering not because of anything innate to Bulgaria or Bulgaria's economy. So we are buoyant. There is a recovery in Germany, France, the UK, the USA, already underway, and this year will be tough but we think that from next year onwards the economy will recover.
What sort of services does your company provide? Is it just rental services?
We have a portfolio of apartments. A total of 150 apartments in nine developments around Sofia. Of those, 40 are already being rented out, and the others are being built at the moment, and will come on stream in the next year and a half. We built them really beautifully, and we rent them out predominantly to expatriates.
What countries do you tenants come from mostly?
It is a huge spread. Our tenants are from the USA - the American Embassy is a client of ours, the UK, Germany, Russia - Lukoil is a tenant of ours, Austria, Poland, Greece - quite a lot of Greek tenants, Turkey, and Bulgaria.
How would you characterize the rental market in Bulgaria? What are the expats that you target first and foremost looking for, what does Bulgaria have to offer?
We are focused on Sofia, we are not involved in the Black Sea coast, we target working people. There are of the order of 10 000 expatriates in Sofia. The majority of those are international business people. The next biggest group are diplomats, and people working for NGOs.
And then there are surprisingly quite a lot of Bulgarians who now rent. Mainly, these are highly-qualified Bulgarians returning home. A good proportion of our tenants are Bulgarians - which we haven't expected, and are very pleased.
The things that matter most for people are to be close to where they work because you don't want to spend too much time traveling; to have really good service - it takes quite a lot of effort to do the basic household stuff, to line up your broadband, to deal with the electricity company, to get repairs fixed.
For a foreigner working here, they have their jobs, they really don't want to have to spend a lot of time doing these things so we think service is really, really important. And then simple things like making sure everything is working when they move in - the broadband, the washing machine, the cable TV. There must be parking there because parking is so difficult here. There must be 24-hour security.
Actually, we think Sofia is a very safe city compared to cities in England or America. But the perception of a foreigner arriving is they are in a foreign place so they feel anxious and therefore security is important. And our tenants include embassies so for them it is quite natural that security is important.
I think that covers the things that matter for foreigners. Of all of those, at the end of the day, it is service that really matters. When people start to rent they may not realize that. But after they've been here for a year or two, they would want to make sure that service is really good.
One final thing we think is important is the common parts. Because of the regulations on property ownership, common parts in Bulgaria can be a challenge. So we always buy whole blocks, and that way we can make sure that the common parts - the corridors, the elevators, the lobby - are always beautiful. We think that's important.
Sofia is a post-socialist city that doesn't really fit in the Western/Anglo-Saxon patterns in which residential areas are located in the city suburbs. What sort of spots - I mean geographically, within the city - have you been developing? How do you go about dealing with Sofia's landscape?
We start with figuring out where people work. We think there are about five main areas of working in Sofia. Obviously, there is the center where the government ministries are, embassies, and most of the big banks, so that's obvious.
Secondly, around the Tsarigradsko Shose Blvd - that is already developing but in the future it is going to be a very important business area. Whether or not the government moves there, it is going to be a very important business area.
Thirdly, the Iztok Quarter - embassies and companies are based in Iztok. Fourthly, the Sofia Business Park (located in the Mladost 4 Quarter - editor's note), which is a finite area but a lot of people are working down there.
The fifth area that is important for work is the Manastirski Livadi Quarter ("Monastery Loans") where there are already some banks, insurance, and property companies but we know more companies are moving there including TV studios.
So those are the five working areas. Having established that to our minds, our projects are all in or around those areas. So they are in the center, in the Boyana Quarter, in Manastirski Livadi - we have two projects there, one in Iztok, one in the Izgrev Quarter nearby, and then we have one in Madrid Blvd, and one in Cherkovna Str. They are all designed for people to get to work easily. Anyone who thinks the traffic in Sofia is bad, they should come live in Paris or London, or somewhere! But it is still an issue.
You already mentioned some things but if you have to answer - what sort of challenges does Sofia pose to you as a business, and to your tenants living here?
In order of challenge, the biggest one is day-to-day housing hassles. People who are born here know how to work their way around the system. But if you are a foreigner arriving, it is quite a challenge. Therefore we make sure, for example, to pay all the bills so that people don't have to deal with the water bill, and the local tax, and the rubbish bill, and the electricity bill. These are quite complicated things to do for a foreigner, actually.
So we do all that, and give the final bill to the tenants so we take away that hassle. And organizing cable TV, you telephone lines, and electricity - all these things are quite complicated so that's the main focus for us.
And then secondly, Bulgarian construction is really good but the quality of the internal finishing of most of the apartments available for rent in Sofia is not high, and foreigners do struggle with that.
We do all the finishing work to our own standards. We take delivery of the projects when they are at concrete stage, we do everything else to really high Western standards. And that means that when the tenants are there, things will work, and work really well so they feel comfortable. It's quite simple things such as layout.
For example, it's not usual at the moment for apartments in Sofia to have en-suite bathrooms for the main bedrooms. It is just normally not thought about. We always have en-suite bathrooms for the bedrooms. Just little things like that.
What are the prospects for your investment projects in Sofia? Are you investing more even though there is a crisis going on?
We have three projects now open, and we will open another 5 or 6 in the next 18 months. At the moment our investment is about EUR 35 M. And we are actually extremely pleased with the developers who are doing the projects. There are no problems with the projects that are coming on stream so we are buoyant. We will end with about 150 apartments plus some offices and shops.
We think the fundamentals of Bulgaria are good. It is not widely understood that Bulgaria has such a good tax rate - it's the most attractive tax rate in Europe - 10% flat; it also has a very stable banking system with much higher capital ratios than anywhere else that I know of. EU membership will bring the subsidies that we are expecting.
The new government is going through a honeymoon period but it is the best honeymoon period that you could hope for, frankly. The sorts of things they have said they would do like cracking down on corruption are absolutely key, and it is great that they have already made those changes in the Customs Agency.
We think that Sofia has the potential to be a regional hub but the government will have to continue to crack down on corruption, it will need to continue to do a good job on Bulgaria's PR. In the last few weeks there were two very big articles about Bulgaria - one in the Financial Times and one in the Wall Street Journal.
That sort of PR is really important because investors base their decisions on whether to move their companies here or whether to set up regional headquarters here on that sort of publicity. It is great to see positive PR coming from the government.
Property is not like speculating in currencies or stocks and shares. Property is a long-term business, and with a 10-20-year horizon, we think Sofia's fundamentals are really good.
The property market in Bulgaria was the sector that actually fueled the growth of the Bulgarian economy in the last 3-4 years. Now it's been hit hard by the crisis. Do you think there is a chance of the Bulgarian real estate boom coming back?
I think one needs to differentiate here. In residential properties, there is what we call the second homes or holiday homes market, which obviously is the Black Sea and ski resorts. And then then Sofia residential market.
Now those are quite different residential markets because second homes or holiday homes are something that people don't have to have, they are not a mandatory thing. There's definitely been a bubble there which has burst, and people who have bought needing to sell within a few months or a year have clearly lost money. But long term that holiday market is a valid property market.
There are infrastructure problems as we know, and planning problems but if you can blink and imagine Bansko and the Black Sea in ten year's time, those problems are going to get resolved, and they will be good places to live and good places to have a holiday home.
The Sofia market is quite different because it is a year-round market, people need to live here in order to work here. There is a year-round renting. We think that will come back - it hasn't declined that much anyway but we think it will come back a little faster. So that's residential, I am not going to comment on the commercial properties because I don't have much observations on those.
The majority of the foreign buyers of Bulgarian properties have been from the UK and Ireland. Do you think they've got what they paid for in Bulgaria?
No, I think the majority of the people who speculated in the holiday home market will be struggling if they need to sell now. Although, for the English, the pound sterling has declined in value, so some English people will find that because the euro stayed up, and the pound has fallen, if they are having to sell now, it's OK, and they may even make a profit. But that's a profit caused by the decline in sterling. So the pain would not be as great for them.
But I think two other things are happening. One is, the Russians and to a lesser extent Romanians and fewer Ukrainians - but mainly Russians - are much more active in the whole Bulgarian property market. And we have also seen evidence of a small number of British firms coming back but it is not the kind of bubble of the last four years.
What would you say Bulgaria or Sofia need in order to become more welcoming?
It's a very good question. And it's one that we think about a lot. First of all, for foreign investors, Sofia has a great deal that's positive. Labor costs are relatively low, and we've talked about low tax rates.
Skills here are very strong. Especially in technology. And a lot of companies such as HP, IBM, SAP, Melexis, very hardcore technology firms - Siemens, Sony - have big presences here because the skills are so good. So it is a really good place to base your business.
But we know many instances of foreign investors, firms wishing to set up here, who have been put off by the lack of an official welcome. The past government did not do a very job at hosting foreign investors, answering their questions, and making life easy for them when they were considering setting up here.
For example, we know of one American financial institution which wanted to move part of its back office from India to Sofia which is good news, it was a big, big project. But they got no traction at all from the previous government, and therefore they've looked elsewhere. I know of several examples like that, and it's that sort of infrastructural welcome that is needed for foreign institutions thinking of setting up here.
Like all selling, it is selling, and in this case, it is selling Bulgaria as a place to invest - you've got to do a good job looking after the customer, and the last government was not doing that, in our opinion. To our mind, it is critical that that's done well.
The second thing that would be really helpful, we've already touched upon it a little bit, is to do a better job getting across the good things about Bulgaria. And that's basically doing good PR on Bulgaria's economy because actually the economy is in a quite good condition; the fundamentals are good.
We feel that that's not widely understood outside Bulgaria, and therefore investors are not as attracted to coming here as they should be if they knew the facts. Now, doing PR is actually not so complicated and expensive thing to do, it's just focusing on it. We think it's really important the government do that.
Cleves Ltd focuses on offering rental services to working expats in the Bulgarian capital Sofia. Photo by cleves.bg
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