MIRROR, MIRROR ON THE SEA

by Stanislava Ciurinskiene

Can the history of the Spanish property market offer clues to Bulgaria

Wanna-be matadors take note: the Times has announced that Bulgaria and other poor EU countries will never become “the new Spain”. The reason? According to the British newspaper, “the club of the rich countries” is not ready to invest the same amount of money as it did in Spain. In the real estate sector, however, Bulgaria has already been emulating, if not replicating, the Spanish developmental pattern. Whether this is good or bad is a burning question for everyone who has invested in Bulgarian properties or intends to do so. Is Spain a crystal ball that can help predict Bulgaria's future?

Holiday home hopes and horrors

Are the Bulgarian and Spanish property markets really so similar? Yes - in many ways. Holiday homes put both countries on the real estate map, although not at the same time. Another parallel is that during the last decade prices for properties have reached record highs in relation to incomes. Bulgaria and Spain have counted primarily on holiday homes to attract foreign investment - and have subsequently neglected the development of other segments. The biggest mistake they have made, however, is building more hotels than their beaches could handle, raising the risk of ecological catastrophe. The outrageous lack of governmental control over building permits in both countries has irrevocably damaged their landscapes. After the second wave of the building boom from 1997 to 2004, the Spanish government attempted to enforce regulations against runaway construction - but failed due to the lack of municipal support. Sound familiar? The same thing happened in Bulgaria after 2006.

Most importantly, both countries are supposedly sitting atop property bubbles. Despite sensational headlines and ominous media predictions, nobody has seen any signs of bursting so far.

From isolation to sensation

The Spanish property boom took off in the 1960s, when the economy began flourishing and the country became a high-profile tourist destination. Spain had just been welcomed back into the international fold after almost 15 years of political and economic isolation. Western Europe was enjoying a buying power peak and Spain's golden beaches appeared to be the next good news in the rosy investment world. Holiday homes became the rage in the 1980s, especially after the country joined the EU in 1986. The Spanish property market has had its highs and lows over the past 30 years. Analysts have periodically warned of property bubbles, but so far the market has not fallen into a sudden siesta.

Bulgarian properties sent shockwaves through the western world at the beginning of the 21st Century. Prior to that, the country had spent 45 years behind the Iron Curtain, followed by a decade of painful economic recovery after the fall of Communism. Like Spain, at first Bulgaria attracted only tourists. Soon enough, however, far-sighted if aesthetically challenged investors discovered the country's potential and concrete took over the beaches along the Black Sea. Although Bulgaria's property market has developed much faster than Spain's, the obvious parallel has caused experts to warn of Bulgarian property bubbles. Similar to Spain, price growth in Bulgaria has slowed down in the last few years, yet the market is far from collapsing.

Skin deep differences?

Of course, the two countries are far from identical. Many experts claim that when it comes to holiday homes, Spain is a safer bet than Bulgaria. The usual argument is that Spain is a more popular tourist destination, hence the chances for good rental incomes are much better. It is true that 60 million tourists flock to Spanish beaches annually, while only six million visit Bulgaria. However, Spain's coastline is almost 10 times longer than Bulgaria's, giving it the capacity to host far more sun worshippers. In any case, rental income depends on occupancy and rental rates rather than body counts. Hotels in Spanish seaside resorts rarely remain vacant, but since 2006 prices for stays in comparable hotels have been pretty much the same for the two countries.

Others argue that Spain's natural environment is better preserved and more appealing to Scandinavian tourists than Bulgaria. Don't believe the spin - compared to Spain, Bulgaria's sea coast seems pristine and underdeveloped… for now. The Costa del Sol or the beaches near Valencia can give you a glimpse of what may happen to the Bulgarian Black Sea coast in 10 years' time if the government does not find a way to stop uncontrolled building.

Cost is another major difference. Asking prices for holiday property in Spain hover around 2,900 euros per sq m, while in Bulgaria they average around 1,200 euros. The last building wave in Spain, however, started almost 15 years ago, so don't be surprised if after 10 years prices in Bulgaria reach even higher levels.

Olé or ayde?

Spain does have its charms besides bullfighting and flamenco. For example, the tourist season in Spain extends from March to November, while in Bulgaria it lasts only from May to October. These three additional months guarantee at least 30 percent higher annual rental income.

Unlike their Spanish counterparts, Bulgarian estate agents have so far failed to provide year-round occupancy for holiday homes. Contrary to popular belief, the reason for this is not oversupply but the lack of adequate and experienced rental property management.

Before you say “olé!” however, you should be aware of one major downside - Spain has been promoting a restrictive policy on speculative property deals. For starters, there is a seven percent re-sale tax on every property. Patrimony, a capital gains tax paid by the seller, is three percent for residents and five percent for non-residents. Then add plusvalía, a tax set by local authorities based on the increase of land value from the date the owner acquired the property to the time of the sale. Local authorities determine the amount of plusvalía to be paid for every house purchase in Spain, depending on where the property is located. All these taxes take a sizeable chunk out of property profits, which may lead investors to say “ayde!” to a country with a less restrictive tax policy.

Spain is light-years ahead in the luxury holiday property sector, which is almost non-existent in Bulgaria. The latter's young and developing market, however, offers a wider range of investment sectors, including retail and office space, residential property, and logistical and industrial property.

A look into the magic mirror of Spanish property history shows that good markets have their highs and lows, but always manage to stay on the investment scene. If Bulgaria has been following the Spanish model, investors have no reason to worry - they look set to enjoy a bull market for years to come.

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