A ROOM WITHOUT A VIEW

The year 2008 taught the world a bitter lesson – in economy terms, we're all in the same boat. No country is safe from the effects of a global crisis. During 2008 most players on the Bulgarian property scene were still in denial about the pending meltdown, hoping they could somehow avoid it. Now that the crisis is offcially here, what's to be expected? The property market and its various sectors will continue to change dramatically as certain crisis-related phenomena appear that we all will have to deal with.

The mortgage mafia

The most frustrating face of the credit meltdown is the market of mortgaged properties. Last year it seemed that this newly emerging market could be the answer for defaulting borrowers and those seeking high-profit investments in a country that no longer offered astronomical returns on real estate deals. Until 2008 credit holders usually had no problems paying their monthly dues, and no more than 20 properties were auctioned off in a year, primarily in Sofia. However, following a series of interest rate hikes, now more than 30 properties are on the block every week in the capital alone, along with another 30 across the country. By the end of 2009 these numbers are expected to increase by some 500 percent.

The mortgage mafia, however, has warped this potentially profitable sector before it even had a chance to develop. Legally, if a credit holder defaults on two payments, the bank must auction off the property, opening the bidding at 50 percent of its market value. When demand for real estate was high, most owners who had trouble meeting their payments could sell their properties directly, avoiding defaults and auctions. Now it is not easy to jettison properties within a month or two, yet the law pressures both banks and owners to sell quickly. This is where the inventive mortgage mafia steps in. There are a few ways of fixing an auction, all of which involve fake bidders. Here is a classic example:

An apartment is put under the hammer for 50,000 euros. The person earmarked to win the auction offers 55,000 euros. Then a fake bidder immediately announces that he will fork over 100,000 euros, effectively shutting down the bidding. However, at the last minute, the "generous" bidder withdraws his offer and the apartment goes to the second-highest bid – 55 000 euros. Of course, the people at the auction house who are responsible for the set-up get a commission, too.

But what role will the mortgage mafia play to change the property market? It will make potential loan applicants stop borrowing. Earlier, most borrowers believed that if they were unable to repay a loan, at worst they would lose the property. Now, it is possible for the property to be auctioned off at half price – an amount that doesn't cover the initial loan. The owners stand to lose not only their own 10 to 30 percent down payment and the property, but may also end up owing the bank half of the mortgage. Of course, not all auctions are corrupt – you may get excellent properties at a bargain price. In any case, 2009 will clearly not be the year to apply for a mortgage.

The doomed sub-sector

"Attention, investors! XYZ Real Estate Brokers offer you investment projects for sale – holiday home complexes, residential and business buildings, gated communities, hotels – you name it! The packages include land, building permits and architectural plans. You can purchase a project of any kind, anywhere in Bulgaria." In plain words, such an ad would indicate that a large number of investors who have purchased land, put serious efforts into obtaining building permits and have paid architects for building design have abandoned a project and are desperately looking to recoup their costs. This market will hardly attract many buyers, although the prices for most projects are very reasonable and spare investors the headache of battling bureaucracy for building permits and dealing with other document-related nuisances. The problem is that in times when nobody dares or has the capacity to undertake new projects, such sales are doomed.

Off-plan is off the radar

Off-plan properties used to be a good way to buy property at a saving of up to 30 percent.

Residential and business property developers particularly relied on early sales, often long before the construction works even started, so that they could get cash to re-invest. Now the market got stuck, sales are scarce and developers may have trouble finding the financial resources to f9nalise their projects. Banks, in turn, make the situation worse – they will finance only 50 to 60 percent of off-plan properties. Before the crisis, credit institutions estimated the price of an off-plan property based on its expected value after it was completed. Now the price is calculated at the "Act 14 stage," that is, when the building has just a roof and walls. So the amount that a bank would be willing to lend is usually much smaller than the actual price of the finished property. All these factors have made Bulgarians very cautious about purchasing off-plan. Many of them still remember a similar situation from the mid-1990s: Buying apartments off-plan had just become popular when a major crisis struck. Many projects remained unfinished and thousands of people lost their savings. The year 2009 will not be the best year to buy off-plan, despite the fact that the prices of such properties have dropped substantially.

The green wave

Green building has come to Bulgaria, and this is probably the only positive trend 2009 will bring; in a cynical way, a new construction must be "green" for its value to increase. For those unfamiliar with environmental issues, a "green" building is one constructed with materials and technologies designed to reduce its impact on the environment and to preserve energy. Hopes are that in ten years 80 percent of new buildings will be the result of such technologies.

"Green" projects are not just trendy: they are the beginning of what looks likely to become a government policy enforced or inspired by the European Directives on Energy Effciency and Conservation. The recently updated Bulgarian Energy Effciency Act requires energy effciency evaluations for all buildings of 1,000 sq m or more, especially new construction and industrial facilities.

It is unclear how much an energy effciency certificate might cost – estimates range from 1 to 3 leva per sq m of the evaluated built-up area. The evaluation will recommend measures for increasing energy effciency. Owners who refuse to follow these recommendations can be fined up to 3,000 leva. Some see the energy effciency evaluations as a new form of government racket, since owners and developers will have to pay for them from their own pockets and will not be able to sell or rent uncertified properties.

Tax hikes in times of crisis?

As unusual as tax jumps during crises are, the Bulgarian Government has come up with an odd measure to encourage active investments. This year, property tax assessments will be by some 50 percent higher, and investors will not only have to pay higher annual taxes for owning a property, but this will also affect the initial purchase costs – the property tax of 2.5 to 4 percent of the purchase price, notary and registration taxes. For example, if the tax assessment of your apartment is 50,000 euros, in 2008 you had to pay about 1,500 euros in property taxes, while in 2009 you'll need to cough up 2,380 euros. In some regions you should expect property tax "adjustments" – read "hikes." A few hundred or thousand euros may not significantly deter investors from buying. However, this tax hike does call into question the government's willingness to create a good investment climate.

Holiday homes

Holiday homes are the sector that put Bulgaria on the property investment map in the first place, yet has suffered the most from the crisis. In 2008 sales dropped by 30 percent, according to offcial statistics. Off the record, every broker will tell you that foreigners are no longer buying holiday homes and that the offcial "decline in sales" rate is the understatement of the year. The desperate hope that Russians would remain active buyers in 2009 did not materialise, killed off by interest rate hikes and the economic downturn in Russia. The very few Russians still itching to invest have extremely high standards: they expect a sea view, excellent materials, ultra-modern design and reasonable prices. Such Class A properties in Bulgaria, however, still have ridiculously high price tags. At the end of 2008, certain luxury apartments in premium resorts were still on the market for 2,500 to 3,000 euros per sq m, and such prices will hardly tempt even the richest Russians.

Local experts have been trying to make the world believe no price drops are expected this year with the exception of very low-class properties. The truth is that in early 2009 holiday homes are by 25 percent cheaper than a year ago. Predictions are that prices will continue to plummet. By June and July they will most probably lose a further 25 percent of their value, as most developers will not be able to afford to wait for better times. Many of them need fast sales and fresh resources to cover the loans they had contracted to build. The intensive secondary market – mainly foreigners who are in a hurry to get rid of the properties they bought not so long ago – also feeds the oversupply. By the end of 2009, good holiday homes are expected to go for 500 euros per sq m or less.

The market has been witnessing a process that may seem strange but is, in fact, logical. While foreigners are trying to offload their holiday properties, for the first time in the history of the property boom Bulgarians are showing an interest in this sub-sector. Recently, a few major Bulgarian investors purchased at bargain prices buildings in Bansko, Byala and other winter and summer resorts. Most plan to use such investments as rehabilitation centres and retirement homes. The holiday home fairytale is far from over, however. Once the crisis subsides, this sub-sector will again gain in popularity and those who took advantage of the present price drop will enjoy hefty profits. If you can afford a long-term investment, the second half of 2009 is the time to buy holiday homes.

The basic sectors

In times of crisis, all predictions regarding the basic real estate segments – residential, industrial and logistical, offce and trade properties – are nothing short of speculation. However, it is safe to assume that 2009 holds no pleasant surprises for those who intend to or have already undertaken large projects. One positive aspect of the crisis is that it will end the danger of generating oversupply in the basic segments. Shockingly, the credit crunch hit even a segment that used to be considered crisis-proof – shops, malls and trade centres. The mass mall-ification of Bulgaria is now offcially over. In December 2008 three mall projects were put on hold in Sofia alone due to last-minute credit rejections. Experts predict that at least twenty more projects will be cancelled countrywide; however, asking prices and rental fees for existing trade properties are not expected to drop.

The vast number of new offce buildings set to hit the market this year will hardly result in oversupply. This segment will probably maintain the 2008 price levels due to the huge demand, especially in large cities. The residential sector, however, is certain to undergo price corrections, even in the major cities. By the end of the year, prices for low-budget properties will drop by about 20 percent. The only sector worth considering new projects in is that of logistics properties. Before 2009 such investments were not proἀtable because of the high prices of land and building costs, and the relatively low selling prices. Now, the extreme shortage of logistics space and the falling land prices make it a convenient moment to build logistical premises.

The year 2009 will be a critical period for the property market. The wisest thing to do is to buy properties if you need them or can afford them, and to take advantage of certain new phenomena. Starting new projects, however, is an unnecessary risk you'd be wise to put off.