from Financial Times (blog)

by Andrew MacDowall

Signs of life in the Bulgarian real estate sector should not be mistaken for a full-blooded recovery, but there are at least grounds for hope.

Recent local press reports suggest that interest and activity are picking up, and that the market may have bottomed out. Local estate agency Yavlena estimates that transactions rose by 22% in 2011; Colliers International reports that investment transactions reached ?186m, the highest level since 2008.

However, this was skewed by the sale of Mall of Sofia, one of the capital's most prominent shopping complexes, which accounted for 55 per cent of the year's investment volume. And prices continued to slide in 2011, albeit at a slower rate than in previous years, and with higher-end properties flatlining rather than declining.

Bulgarian Properties, another estate agency, has reported that prices in Q1 2012 remained at much the same level as in the last quarter of 2011, and hints that this is a fine time to pick up bargains.

Perhaps, but the fact remains that the market is a shadow of its former self. In the middle of the last decade, the real estate sector was a central driver of Bulgaria's economic growth and a magnet for FDI, with institutional investors joined by many individuals, particularly British and Irish citizens looking for holiday property as an investment or a holiday home. The property crash that arrived in 2009 in the wake of the international crisis has burned many, and caution remains the watchword.

The sluggish Bulgarian economy is one factor – this month, the IMF slashed its growth forecast to 0.7 per cent, pitifully low for the EU's poorest country formerly regarded as a buoyant emerging market.

Todor Breshkov, chairman of the Bulgarian Real Estate Fund, a Sofia-based REIT, told beyondbrics that he expected 2012 to be another poor year for property, pouring cold water on talk of rising prices, and suggesting they may fall by a further 10-20 per cent. And this despite only slowly-increasing supply.

"Banks are not keen to participate in real estate development unless they can see secure cash flow from the beginning," he said. "Demand is weak both from institutions and from individuals. The savings rate is high and rising – people with available cash are putting it in banks rather than spending it, as they are concerned about the future."

Breshkov points out that banks have still to release many foreclosed properties on their portfolios onto the market, which would further depress prices. Vacancy rates are already high, at 25.4 per cent for office and 18 per cent for "high-end and mid-plus" residential, according to Colliers, though absorption is progressing slowly, with no new large-scale projects launched in the latter category since 2010.

As for those British and Irish buyers, mid-crisis hopes that they would be replaced by Russian and Baltic buyers have proved forlorn.

"One can assume that the market is frozen," says Breshkov. "There's almost no activity."

While Breshkov expects "a pretty nasty picture for the time being", he notes that investors continue to show interest in logistics and retail property, development of which lagged behind economic growth in the past decade.

Though more pessimistic about this year than some in the sector, Breshkov agrees that the picture will be brighter in a year's time, as funds and individuals slowly return to the market once it has clearly bottomed out.

Furthermore, lessons may have been learned. Investors will now be careful to ensure that they invest in property hooked up to roads and utilities, whereas some over-enthusiastic buyers (particularly in the holiday-home segment) in the past ended up with units with virtually no infrastructure as they rushed to cash in on the boom.

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