Bulgaria holdsits breath

Bulgaria has a population of 7.8 mln and an area of 111,000 sq/km. GNI income at the end of 2005 stood at USD 3,450, growth (GDP) is expected to be as much as 6 pct for 2006, inflation is at around 6.5 pct and the amount of FDI rose by more than 12 pct last year. But the most important number for foreign investors is 2007 – the rapidly approaching date of Bulgaria’s EU accession

The prospect of thousands of foreign companies coming to the country has led to huge increases in the price of land, according to Alexander Atanasov, Bulgarian development manager for Globe Trad Centre – one of the developers poised for entry onto this market. “The problem is that the market just isn’t developed

– there is no tradition in certain places. The whole situation is a little chaotic and hard to predict. Landowners are not being realistic, and are overestimating the price of land. And sometimes real estate companies are buying over the odds.” But investors are unlikely to be deterred by this, as if we take a look at each of the main sectors, modern product is still very much lacking.

The office market

Sofia is Bulgaria’s main business centre, where the amount of class A and class B office space now stands at around 502,000 sqm, 40 pct of which is located in the city’s central business district (CBD), with the remainder in the suburbs. Despite a steady growth in the amount of stock, demand for class A office space increased sharply towards the end of last year and was reflected in rents rising for the first time in several years – averaging at EUR 12.5 per sqm (EUR 14 per sqm in the CBD). Colliers International’s ‘Office Market Overview – Sofia’ report puts this down to international companies taking advantage of the lower costs of operating in Bulgaria to offshore customer services and back office operations. The volume of offshoring is likely to continue and to put further pressure on demand in the future.

The high demand also translates into a high absorption rate for the new product, leaving the available amount of office space now at around 30,000 sqm. In the second half of 2005, class ‘A’ office space increased by 6 pct to 142,000 sqm, and class ‘B’ by 15 pct to 108,000 sqm. Office yields remain relatively high compared to other CEE countries, at between 9.5 and 10 pct reflecting the underdeveloped office market. Yield compression is occurring, however, as the current rate has fallen from 10-12 pct at the end of 2004.

As there is little land available for office developments in the city centre, most of the new stock being developed is concentrated in the suburbs of the city, in complexes such as Europark (8,000 sqm), the Porsche Business Center (5,000 sqm) and Techno Park Sofia (2,000 sqm). Business Park Sofia, being developed and constructed by Lindner, to be completed this autumn, with its 15,600 sqm of office, retail and warehouse space already 100 pct leased.

The retail market

Consumer spending throughout Bulgaria is significantly increasing, but the retail market remains very much underdeveloped. As is the case in most countries, the retail sector in Bulgaria is more regional than the market for offices. This year will see the opening of the Mall of Veliko Tarnowo (in the city of the same name), which will contain 18,000 sqm of gross rentable space. Burgas is also the location for a modern shopping centre development, which will provide 21,000 sqm of retail space. Colliers reports that demand for retail space is also high in other cities, such as Plovdiv and Varna.

The capital already has 2 shopping centres: Tzum and Central Hali. But by the end of the year, 3 new ones will have opened: Sofia City Centre (20,000 sqm) – which opened in May, the similar-sized Mall of Sofia (22,000 sqm – 100 pct of which is now leased) and Sky City (16,000 sqm). In July, Carrefour announced their first Bulgarian investment, with plans for a EUR 81.6 mln shopping mall in Sofia.

As regards high-street shopping, in Sofia the demand for retail outlets on the main boulevards is extremely high, and the supply very limited – for example on Vitosha, which has enjoyed a vacancy rate of almost nil for several years. Rental levels for high-street boutiques are significantly higher than for the other forms of retail – between EUR 50 and 100, compared to EUR 30-60 for large shopping malls. According to Colliers, annual investment yields are still impossible to calculate due to the lack of transactions so far, but they do put the indicative yield as now below 10 pct.

The residential market

In 2005, construction permits were granted in Sofia for app. 1 mln sqm of residential projects, most of which fall within the middle-class segment, with average areas of 4,000-6,000 sqm. These are generally made up of 2-3 bedroom apartments, as demand increases for larger dwellings. The southern districts of the capital are amongst the most popular residential areas, such as Lozenetz, and in particular around boulevards such as Vitosha, Bulgaria Boulevard, and Borovo. Housing development (as opposed to apartments) tends to be concentrated around Boyana, Simeonovo and Dragalevtz – the traditional villa districts.

With the large amount of new supply coming onto the capital’s market, prices for new homes stabilized in 2005 and are not expected to increase this year. In the middle-class segment, a new apartment costs between EUR 650-750 per sqm, and at the luxury end of the scale range from EUR 820 to 1,650 per sqm. Houses with floorspaces of between 250 to 450 sqm are generally priced at EUR 250,000-350,000, but in less popular districts can cost between EUR 150,000-160,000, whereas in exclusive suburbs can exceed EUR 750,000.

Yields are declining gradually, and in the H2 of 2005 ranged between 7 and 10 pct. But the returns on development are still high, sometimes more than 50 pct, as the increase in the price of homes is currently outpacing that of land prices and construction costs.

z Nathan North