Small is beautiful but expensive

As more investors are discovering the potential of the Bulgarian market, land prices are scaling new heights. Given the scarce supply of sites for development,  ‘Eurobuild CEE’ wonders whether this is going to scare investors away

When it comes to developing an office building, the main question is, “Is it possible to find a plot in the Central Business District at all?” The answer is yes, but there are a few obstacles to over come. The first one is the limited supply of attractive sites in the downtown area of Sofia, which is why new record land prices are being reached. For those of you who have been to Sofia there is no need to explain why this is the case: the tiny streets in the downtown, the pre-war historical buildings,  the enormous problems with a lack of parking spaces and the general feeling of overcrowding,  all combine to produce limited opportunities for large-scale office developments. 

Welcome to Sofia

The few sites that are suitable for office building construction come with a special additional cost. Nikolay Neov, manager of office space at the real-estate consultancy company MBL, claims that: “The possibilities for development are limited as there are real problems with the ownership of the site. Usually the sites in the strict downtown area are small and acquiring the neighbouring sites is very difficult, if not impossible. Another problem is that according to the city regulations, the historic central area of Sofia should not have tall buildings, which makes the eventual project even more expensive.”  Real-estate analysts often describe the possibility of an attractive site within the city core as “a pure miracle”. Usually the most attractive sites belong to the municipality and as we were told, “the local authorities have their ways of deciding who gets the site”.

Following the accession of Bulgaria to the EU and the growing demand for modern office space, the prices of the available sites, not just in the CBD, have been steadily growing over the last 18 months. In May 2006, the prices per sqm were ranging from EUR 800 – 1,650, while at the beginning of 2008 a price record was set of EUR 3,850 per sqm. Moreover the areas characterized by easy access to the city center also experienced a rapid growth in price over this period - in February 2008 the highest asking price per sqm on the preferred Bulgaria Boulevard came to EUR 3,100, compared to EUR 1,650 in 2006. This also applies to the suburban areas, which are seeing the highest number of new office building developments. The highest price per sqm is to be found in Business Park Sofia in the Mladost district, which offers the highest concentration of office buildings, currently comes to EUR 1,810, while in 2006 the maximum asking price per sqm was as low as EUR 900. Furthermore the prices of the plots along the popular Tzarigradsko Chousse currently start at EUR 940, compared to EUR 700 in 2006.

CBD – access denied

The limited supply of available space is the main reason why recently in Sofia’s CBD, new record leasing prices per sqm were registered. The analysts argue however, that the EUR 30-35 being asked per sqm is a speculative price, and far from the average rent of EUR 17-18 per sqm in prominent locations. While most of the international companies are choosing suburban areas as a location for their headquarters, the ones which do need to stay in the city center, such as Deloitte, are paying more for smaller spaces. “The CBD is only for the very few companies that really need to be in the core centre, such as law and consultancy firms, and the big international companies have to stay outside in the downtown area,” explains Aleksander Tanev, head of business space at the commercial property consultancy, Forton International. “The companies who need 1-2,000 sqm of office space in the core zone simply have to look elsewhere, especially if they are in a hurry,” Tanev adds.

Given the high demand combined with the scarce supply, the latest figures from a Colliers International report on the office space market in Bulgaria, Romania and Serbia, are not surprising. According to the study, the vacancy rate in class ‘A’ office buildings in the central area of Sofia is as low as 3 pct.

The CBD will see the smallest number of new office developments in the future, but this is also likely to change as some streets in the CBD have already been excluded from the ban on the construction of tall buildings. Todor Aleksandrov Boulevard, a main street located in the vicinity of the TZUM department store, important government buildings and subway, is an example of an area where the city regulations are not applying. However the problem of high prices remain. Recently the Polish-based real-estate developer Echo Investment turned down an offer to purchase a site for an office building on Todor Aleksandrov Blvd, due to the high price. The developer was asked to pay EUR 3,500 per sqm for a 3,500 sqm site located approximately 2 km away from Sveta Nedelia Square, in the very heart of the city. “We were also trying to purchase another site on Todor Aleksandrov Boulevard, but our offer of EUR 2,500 per sqm was rejected,” says Echo Investment’s Business Development Director Adrian Karczewicz. However, as the real estate agency report states, the size of the plots offered in the central areas rarely exceed 2-3,000 sqm, which makes most of the plots chiefly suitable for residential developments.

Some figures

For investors staying in Sofia there are interesting opportunities outside the CBD in the suburban areas that have seen an incredible growth over the last few years. According to the Colliers’ International report on the office market in Sofia, the suburban areas was the main driving force of supply in the second half of 2007, accounting for 66 pct of the new office space in the capital (64,000 sqm). The suburban contribution now amounts to 332,000 sqm, out of the 704,600 sqm of total office space in Sofia. Therefore the suburban areas will naturally be the area that will see the most amount of new projects being developed in the near future. Locations such as: Tzarigradsko Chousse, Bulgaria Blvd, Nikolay Vaptsarov Blvd, the areas around the Business Park Sofia in Mladost 4 district and the capital’s ring road, will become more attractive to the investor due to the improving infrastructure, including the extension of the subway that is now in progress.

By the end of 2007 there was around 590,000 sqm of office space under construction with 70 pct being in suburban areas. Therefore the vacancy rates in the capital are not expected to grow significantly throughout the year. The market will feel a sharp rise in supply in 2009 when numerous large-scale projects such as Mega park (90,000 sqm), Serdika Business Center (24,000 sqm), Benchmark Center (33,000 sqm) and the first phase of Sofia Airport Center  will be completed (total of 100,000 sqm upon delivery). Therefore with this additional supply, this year will not bring a significant increases in rent levels (currently around  EUR 15 per sqm for Class ‘A’  properties and up to EUR 17 per sqm in the CBD) .

Leaving the capital

Is it possible for international companies, establishing subsidiaries in Bulgaria, to choose another city for their headquarters rather than the overcrowded capital? Despite the growing number of office buildings, which are currently under construction, it is unlikely that big cities such as Plovdiv (pop: 343,662), Bourgas (188,887) and especially Varna (350,661)  will be preferred to the capital.  However, these cities, which also offer an educated workforce, are often viewed as a good location for the IT and call centre industries. Aleksander Tanev argues that: “These are totally new markets for development, but most foreign companies are looking to be present only in Sofia.” MBL’s Neov adds: “Ultimately, some of the companies are renting small offices in Varna in order to underline their presence in the country, but it is not a major trend.” Despite the growing interest of investors over the last year and a half in prices of sites in secondary cities, they are still very careful when it comes to investing outside the capital. Currently the highest asking price for a sqm in the center of Varna amounts to EUR 2,290, while in May 2006 it was only EUR 1,350. In Plovdiv the prices start from EUR 1,000 for sqm (EUR 600 in 2006), while in the central area of Bourgas, the most expensive sites cost EUR  2,260 (EUR 1,300 in 2006).

Ultimately with all the major players and international investors staying in Sofia, the office market news from the Bulgarian capital will continue to be even more interesting. n

Mladen Petrov