Ready for a bumpy ride?

Mladen Petrov

An increasing number of investors is fighting for their slice of the cake on the attractive bulgarian  market.But For how long will Bulgaria be able to keep its ‘great investment opportunities’ label?

For many years, sunny Bulgaria was generally perceived as an attractive holiday destination for tourists on a budget. The turbulent political situation after the fall of the communist system and the wars in the former Yugoslavia slowed down the transition process. Bulgaria and Romania missed the first train to the EU in 2004, but the two neighbours finally joined the European family in 2007. Bulgaria’s entry into the EU was accompanied by an increasing interest from investors, who turned the country into
a investment hot-spot. A year and a half later, this fever still hasn’t dissipated, but for how long it is going to last?

Caution! Hot!

The Bulgarian real estate market has not yet been significantly affected by the financial crisis on the American market and the ensuing credit crunch, and 2007 was another year of enormous development activity. According to the ‘Sofia Property Market View – Year End 2007’ report by Elta Consult, the volume of investments in 2007 reached EUR 880 mln. Deyan Nikolov, senior market analyst at Elta Consult (CB Richard Ellis’ exclusive partner in Bulgaria), comments that: “Bulgaria can still be described as a hot destination for investors. Despite the tremendous interest, I believe there remains room for growth. Size-wise, Sofia can be compared to Prague, which has a population of
2 mln and where there is three times as much office space.”

Foreign investors welcomed

Foreign companies accounted for 94 pct of the total investment volume in 2007, compared to 89 pct of the total in 2006. Among the most active investors are companies based in Israel, the USA, the UK, Germany, Austria, Spain and Greece.
Bulgarian investors, however, are also waking up. Since the beginning of the year, local companies such as Marmeg, Sun City Invest, Rhythm 4 TB and Mall Gabrovo, have announced shopping centre and mixed-use projects in Stara Zagora, Ruse, Burgas and Gabrovo, with each project having an estimated investment cost of around EUR 20 mln.

Expanding in all directions

Naturally, Sofia is seeing the largest amount of investment, but the other major and even secondary cities are also starting to attract investors, as the capital’s market becomes more crowded. The retail sector is the one giving the investors the widest scope for opportunities to expand outside the capital. Sofia, however, remains in the lead in terms of investment volumes, with over EUR 358 mln invested in 2007; while Varna – the second largest city – attracted EUR 182 mln in investment. The third biggest city, Plovdiv, drew in EUR 147 mln of foreign capital in the same period.

 In 2006, around 82 pct of the new investment took place in Sofia, while in 2007 the percentage dropped to 41. Varna and Plovdiv were the two cities which benefited the most from this major shift. As Elta Consult’s Deyan Nikolov points out: “As the Bulgarian real estate market develops, we are going to see more investments outside the capital. In the long run, around 30-40 pct of the investments will be located in Sofia.”

The key to success

Retail and office projects account for the majority of the investment, with respectively a 36 and 44 pct share of the total investment volume each. In comparison, in 2006 the percentage for retail projects was 32 pct of the total, while office projects accounted for 25 pct of the total investment. At the same time, mixed-use projects decreased by 61 pct.  In terms of investment, office developments experienced the highest growth – an increase of 134 pct in comparison to the 2006 figures, while retail projects saw only a 49 pct growth in investment. 

  Concentrated in the capital, the Bulgarian office market is an area where high demand and a still unsatisfactory level of supply meet. According to
a recent report on Sofia’s office market by the MBL consultancy firm, in 2007 the inventory of class ‘A’ and ‘B’ offices grew to 784,000 sqm, with a record 166,500 sqm being delivered in the course of the year. By the end of 2007, around 580,000 sqm of class ‘A’ and ‘B’ office space was under construction in Sofia.

In 2007, among the newly delivered office buildings were Business Park Sofia Building 8 and 6 in Mladost district (27,420 sqm), Fair Play International Business Center (9,100 sqm) and Rainbow Center (7,200 sqm) in the broad centre. The biggest office lease transactions were registered in Business Park Sofia with HP leasing 5,700 sqm in the newly delivered building 8.

More space, lower yields

As new projects are entering the market the overall vacancy rate in Sofia is dropping. According to MBL by the end of 2007 the overall vacancy rate slipped to 4.9 pct from 5.1 pct three months earlier with rents remaining  stable. By the end of 2007, asking net rents for prime properties were ranging between EUR 14-20 per sqm, while the rents of class ‘B’ buildings varied between EUR 7.5-16, with 57 pct of the available class ‘B’ office space being offered for lease at EUR 10 per sqm or less. The list of office buildings with the highest rents includes Landmark Bulgaria Tower, Prestige Business Centre and  the TZUM department store building in the CBD. The current annual prime yield is around 7 pct for class ‘A’ office space in prime locations in the capital, while yield levels in non-central locations and office corridors vary between 7.5 pct and 8.5 pct. In the future, yields are set to undergo a further decrease.

High retail expectations

“The situation on the Bulgarian retail market looks like shopping mall mania. As the three shopping centres delivered in Sofia in 2006 are enjoying their success, many other projects are currently in the pipeline. The global credit crisis, combined with the competitiveness of current projects, will take its toll on the market, and most probably some of those projects might not be started at all,” believes Manol Goygadjiev, manager of retail space at MBL. “Some say that 13 shopping malls in Sofia is too much, but this statement can only be put to the test in 2010-2011, when the majority of these projects are scheduled for delivery. Those bringing high quality service and attractive tenants to the prime locations will be successful even if they start up their projects later. The big international developers, such as ECE, come to Bulgaria with their established set of international retailers. Therefore, it is easier for them to deliver a successful scheme,” Manol Goygadjiev adds.  

  Interestingly enough, due to the lack of plots, 
it is the southern part of Sofia, where a large number of exclusive neighbourhoods is located, that remains without any planned shopping centre developments. Other projects, such as the Carrefour mall on Tzarigradsko Shousse blvd, are expected to be highly successful upon delivery in 2009 with tenants such as Zara. Rents in the malls remain stable – in 2007 ranging between EUR 25 and EUR 60 per sqm
a month for smaller-sized shops (around 100 sqm) and EUR 12-20 for stores sized between 500 sqm and 2,000 sqm. The yield for prime new retail space is currently 7 pct in Sofia’s shopping centres.

Shopping around the country

In addition to Sofia, many retail projects have also been announced and launched in major cities such as Varna, Plovdiv, Bourgas (188,887), Ruse (157,526) and Stara Zagora (141,597).

Despite the activity from large developers, Bulgaria is still lagging behind the rest of the EU, with only 15 sqm of retail space per 1,000 people, compared to 170 sqm in the rest of Europe. 
As well as the major cities, investors are also looking to expand into secondary cities with populations below 100,000 people. The Israeli-based Plaza Centers chose Shumen (87,000) in the eastern part of Bulgaria for its first retail project in Bulgaria. In 2009, the company will deliver a shopping mall containing around 18,000 sqm of retail space. Ran Shtarkman, Plaza Centers’ CEO explains: “The city is developing rapidly and we have discovered it is lacking high quality retail space.” Is there any more room for these kinds of projects in cities such as Shumen? MBL’s Manol Goygadjiev believes that the secondary cities cannot accommodate more than one or two modern shopping centres. As he claims: “Investors are being more cautious. In the smaller towns, where the purchasing power is still low, the most reasonable project seems to be one with an area of around 15-20,000 sqm of GLA.”

The large number of retail projects in the pipeline, which if delivered will add around 2 mln sqm of retail space, is not necessarily connected with an increase in purchasing power. Despite the GDP growth (6.2 pct in 2007), average salaries in Bulgaria remain among the lowest in the EU.

Destination: higher prices

EU accession brought with it financial stabilization and the further development of the credit system, the residential market boomed in 2007, with the increase in prices reaching 47 pct over the year in Sofia. The capital was not the only city to see skyrocketing prices for residential properties. According to a study by the Address real estate agency, the average prices of new residential developments in Ruse, Bourgas and Varna went up by 30-50 pct.

Given the current situation on the global real estate market this year, growth is expected to slow down and analysts are forecasting a 10-15 pct increase in prices. The constantly growing capital city, where around 1.8-2 mln people currently live, remains undersupplied. Varna, where by 2009
1 mln sqm of living space is expected to have come on to the market, is also suffering from low supply. Due to this, as the report by Address points out, it was used flats that achieved the highest growth in prices: 45 pct in Ruse, 41 pct in Varna and 40 pct in Sofia.

Smaller cities, bigger profits

Investors are mainly interested in projects in the capital and the biggest cities, but there have also been the first signs of an awakening in smaller cities such as Shumen, Pleven (113,382) and Pernik (80,588). The same study by Industry Watch also showed that in these cities the prices of flats remain relatively low compared to the average salaries. While in Shumen and Pleven, where salaries are 20 pct lower than in Sofia, the average price per sqm is around half that of the capital city (app. EUR 1,100).

Trouble in paradise

As the situation on the residential market remains under control, 2007 brought signals about the worsening situation on the holiday homes market. According to Colliers International Bulgaria report the second half of 2007 saw a slowdown in the supply of holiday homes. The increase in supply was 17 pct in H2 2007, which however is to be seen in the context of an annual increase in supply (H2 2006 to H2 2007) of 170 pct in mountain resorts and 65 pct in coastal resorts respectively. The global credit crisis resulted in the withdrawal of a core target market for holiday homes – the British and the Irish. The range of sales prices narrowed in the second half of 2007, with asking sales prices on average between EUR 1,210 and EUR 1,420 per sqm in the mountain resorts and EUR 1,020-1,425 per sqm in the Black Sea resorts.

A bridge with sheds

The geographical location of Bulgaria is not only ideal for tourism and the country is now establishing itself as a popular destination for logistics companies. Given the poor condition of the existing industrial and logistics stock and the shortage of modern warehouse space it is easy to understand why this real estate sector is to enjoy further growth.

Currently, modern warehouse space stock in Bulgaria stands at 712,000 sqm (including only projects over 2,000 sqm and completed after 2000) with an estimated 414,000 sqm expected to come online by 2010. The area between Sofia and Plovdiv is the most sought after for industrial projects, with 385,000 sqm of warehouse space located in the greater Sofia area. As Elta Consult’s Deyan Nikolov remarks: ‘‘Cities located alongside or in close proximity to the five Pan-European Transport Corridors that cross Bulgaria such as Ruse (70 km from Bucharest). Vidin and Stara Zagora are also attracting developers’ attentions.”
A significant feature of the logistics market is that an increasing number of companies are preferring to build their own premises – it is estimated that over 70 pct of the industrial space delivered in 2007 is build-to-suit.

In 2007 rents remained stable at levels between EUR 3.5 to EUR 5.5 per sqm monthly, with
a vacancy rate of 8 pct. At the same time, yields continued to fall, and at the end of 2007 had reached 8 pct, whereas at the beginning of the same year had been at the 9 pct level.

Another report by Forton International, ‘Bulgarian Industry and Land Market – Q4 2007’, states that the land market underwent a healthy growth in 2007 with the prices in the capital’s suburbs coming to EUR 50-100 per sqm. Plots in the vicinity of the airport are now highly coveted, with investors paying as much as EUR 300 per sqm. Another attractive location is the ring road, where land costs EUR 100-200 per sqm.

Healthy growth

According to 2007 data from the National Statistical Institute, the amount of hotel facilities in Bulgaria doubled over the last two years to 3,300. The twofold rise, however, is not an indication of hotel bed capacity – over the same period it grew by 23.6 pct to 273,300.
  Returns on investment in first-class hotels in Sofia were around 8.5 pct at the end of 2007, thus outstripping the yields generated by office and retail developments, which ranged between 7.5 pct and 7.85 pct, a report by CB Richard Ellis reveals. In terms of yields, Sofia ranked second after Moscow with an average return on hotel investments of 9.25 pct. ν