SPOTLIGHT ON SMALLER CITIES AND BUSINESS PROPERTIES IN 2008

“Will theBulgarian property bubble burst?" was the question of 2007. Experts had predicted a fall and investors were concerned. Other commentators argued that Bulgaria's entry into the EU would give a new push to property prices, although they would not rise as fast as during the last three years. The optimists were proved right and prices continued to rise by 30-35 percent in 2007. But the 2007 question still remains. What will happen to the bubble, and is there a bubble at all? In 2007, Eastern European real estate witnessed the unthinkable: prices for properties in Latvia and Estonia collapsed by 10-15 percent within just three months. That happened after prices in the Baltic States had increased by 300 percent over five years. As Latvian and Estonian economies were two of the strongest among the new EU member states, this collapse came as a shock. Analysts reported that Europe has already begun experiencing the impact of the credit crisis in the United States. What will happen to Bulgaria's property market in the year ahead, in the context of what looks like a global real estate crisis? We are going to experience deeper divisions in the market, and in most areas prices will continue to rise, while in others they will remain stable.

2007 brought new developments to the residential sector. Previously, attractive investment spots were Sofia, Varna, Burgas and Plovdiv. Investors are now turning their attention to underdeveloped areas of Blagoevgrad, Veliko Tarnovo and cities along the Danube, such as Ruse and Vidin. At the moment, prices in these towns range from 300 to 850 euros per square metre, with expectations that they will rise by 25-30 percent in 2008. Nevertheless, the main residential market remains in the capital. In Sofia and the larger towns, 2008 is going to be the year of so-called gated communities with their enhanced infrastructure and facilities such as a gym or tennis courts.

In 2007, prices in Sofia rose by 35 percent and costs varied from 850 to 2,500 euros per square metre. In the New Year, deeper segmentation will divide the capital's residential property market in half due to a shortage of high quality apartments in a good location. Gated communities will jump by at least 20-25 percent, whereas a lower quality apartment in a district without good transport links will increase by no more then 15-20 percent. The hottest investment spots will remain the districts of Lozenets, Buxton, Ivan Vazov, the Doctors' Garden and Iztok. A special case in 2008 is going to be the “city within the city” – Mladost I, II, III and IV. Although Mladost is not the most prestigious district, and apartments are generally of poorer quality, it is still anticipated that prices will go up by at least 25 percent due to the construction of a new underground line. Prices are currently about 1,000 euros per square metre.

Land

Bulgaria adopted Natura 2000, the EU network of protected wildlife sites in 2007. After a struggle between the government and ecological groups, 34 percent of land will be protected. This will lead to a price rise for land outside the protected areas. Until October 2007, it was estimated that in 2008 the number of deals involving agricultural land would reduce by 500 percent due to a planned tax rise for changing the purpose of the land. Investors usually buy agricultural land aiming to change its purpose and to do that they pay three euros per square metre. As taxes will now remain the same, agricultural land will be the hit of 2008, especially near the sea, rivers and in the mountains. Land near motorways, both operational and in the planning phase, as well as land in strategic locations (for example, near state borders), will be equally attractive.

Once again, land will be the most expensive in Sofia. Prices for land varied from 50 to 3,000 euros per square metre in 2007 depending on the purpose and the location. Surprisingly, in districts like Mladost and Darventiza – not among the most desirable areas – prices jumped by a remarkable 140 percent from March to November 2007 and this tendency will continue. This applies to all regions with a shortage of land for building purposes such as Buxton and Lozenets. There is a dramatic shortage of plots suitable for administrative, trade and retail development in larger cities. This is why prices in these segments may increase by even 50 percent over the next 12 months.

Holiday homes

Facing increasing competition from Croatia, Montenegro, Greece, Turkey and Cyprus, as well as the problem of over development in certain resorts, the price rises for holiday homes on the Black Sea coast may slow down slightly. Prices for high quality apartments and villas near the sea (known as first line and second line) are going to rise by no more then 20-25 percent. Prices for holiday homes of lower quality are going to slow down to 10-15 percent and some will even remain the same. This also applies to winter resorts. However, it depends how near the property is to a ski slope. For both winter and summer resorts, any price within 1,300-2,000 euros per square metre was considered reasonable in 2007.

Rural properties

The days when gullible foreigners bought houses “with a lot of potential” in small villages, without a clear vision of the purpose of their investment, are officially over. The only source of investment return from Bulgarian rural properties could be rural tourism. However, for a number of reasons, rural tourism is still not popular in Bulgaria, and nobody can tell for certain if it ever will be. During the last 15 years, many Bulgarians have been leaving their villages for the cities or even abroad.

Business properties

Class A offices are expected to be one of the most profitable investment sectors everywhere in the country, especially in Sofia and larger cities. In 2007, both local and Bulgaria-based companies finally left the small apartments some called “offices” and moved to large, luxurious and comfortable premises. That has led to a serious shortage of class A offices, despite the intensive development of administrative buildings and entire business parks. A new trend that will continue in 2008 is the relocation of business areas from the city centres to the outskirts of the larger cities and Sofia. In 2007, Sofia was ranked fourth in Europe for investment return from office buildings at 7.5 percent. For the first time in Bulgaria, last year's office prices reached higher levels than those for residential properties, and varied from 700-800 euros per square metre in smaller cities to 3,000 euros in Sofia.

Predictions are that a specific sub-segment of business properties, such as shopping malls, will be the investment return champion of 2008. It is almost impossible to rent space in a retail area for less then 25-30 euros per square metre and prices are expected to rise by up to 40 percent. Prices for retail premises are similar to those for offices and are to increase at the same pace.

The Bulgarian property market has begun its transition from a speculative investment haven to a profitable, but more conservative market. The real question over the next five years is not going to be where prices will rise fastest, but where the best potential is.

In 2008, the most promising sectors are residential and business properties.