Overview of investing in Bulgaria

Fast growing
Bulgaria, like its neighbour Romania, has become an economic success story over the last few years. While still relatively poor, it’s becoming more prosperous every year, with predicted GDP growth for 2006 at a healthy 4.2%. Bearing in mind that economic growth is a crucial factor behind the growth of real estate value, this can only be good news for you, the investor.

A key factor behind Bulgaria’s economic performance is its imminent entry to the EU. This is scheduled for 2007, perhaps as early as January. (There’s a mild risk of postponement to 2008, but in our view, the risk is slight – not least because the value of EU membership is one of the few things that Bulgaria’s politicians can agree on.) There’s no question that EU entry will lead to a substantial rise in property values, as investors grow in confidence, and bureaucratic barriers to foreign investment are steadily done away with.

Strong foreign interest
Even more than for other former communist states, the property market in Bulgaria has received a lot of publicity over the last two or three years . Foreign capital has been flowing in at a generous rate, with interest particularly focused on the country’s blossoming tourist industry. Is the optimism about Bulgaria justified? Yes, but in this country’s case, you need to pay special attention to the golden rule: location, location, location. And at the risk of stating the obvious, you also need to think about what kind of property you’re buying. Let me explain.

Recently, there’s been a flood of investment in off-plan developments on Bulgaria’s Black Sea coast. This coastline is undeniably beautiful, as the German tourist industry was quick to discover back in the 1990s. Indeed, tourists from all over western Europe are now sampling the delights of the country’s unspoilt beaches, with the number of British visitors (for example) increasing by about 15% per year. By the end of 2006, budget airlines will probably have established regular flights to the region, thus greatly increasing the supply of foreign visitors.

Pros and cons of the holiday market
Now comes the but. When investing in holiday property, you have to make sure that your yields will compensate for the off-season lull. In Bulgaria’s case, the coastal construction boom of the last few years means that competition in the rental market is now very tough. Plus, there are a vast number of cheap hotels which have been very successful at undercutting the self-catering market. (Why make your own bed and cook your own breakfast, when a hotel will do it for you, for less money.)

There is currently an over supply of holiday apartments, so if you’re not careful, you may find yourself the proud owner of a seaside flat that nobody wants to rent. This may change as the region becomes more popular with holidaymakers. However, because most investors currently prefer to buy off plan (i.e. brand new), this means it can be difficult to resell holiday apartments on the coast. This is crucial, as it can deny you what we in the trade call an ‘exit strategy’. You also need to bear in mind that the country’s cold, damp winters will not help you with that lucrative off-season, senior citizen market. (Unlike Spain, for example.)

What about ski reports?
Investment in the country’s ski resorts is a more interesting option, as these – like the Bulgarian coast – are becoming ever more attractive to foreign visitors. Of course, holiday accommodation on the Bulgarian pistes can be snapped up at a fraction of the cost of similar properties in France or Italy. And there’s no doubt that the demand for winter rentals is growing stronger. (For example, because many prime locations have already been taken, companies are now having to build further away from the slopes.) As for summer rentals of mountain property, the market for this is still unproven. However, don’t forget that a sizeable part of the ski holiday market is for short breaks and weekend getaways. Bulgaria is three hours flying time from, say, Heathrow, and the transfer time from airport to resort can be four hours. That’s a big slice out of a short break. Bulgaria’s ski resorts are cheaper for the tourist, certainly, but so far, they’re also less developed and well-equipped.

Capital is key
As with so many of the EU accession countries, most experts agree that your best investment targets may be found – surprise, surprise – in the capital, Sofia. Property here can be obtained more cheaply than in most other east European capitals. Dirt cheap, by British standards. Quality can vary dramatically, from the excellent to the downright poor. Local finance is rather difficult to obtain, as this is still a mortgage market in its infancy. The Loan to Value rate in Bulgaria is currently 70%, as against 90% in Poland, and often 100% in the Czech Republic, and interest rates in Bulgaria are running at a high 7%. However, the situation is improving, and will get better still after EU entry, as interest rates are forced more into line with the European norm.

Think local
The theme that runs through nearly all of our country profiles is the emergence of an newly-aspirant middle class: local citizens benefiting from economic growth, with money in their pockets for better houses and flats. These should be your prime target in Sofia, and in other major cities like Plovdiv. In direct contrast to holiday apartments, there is a serious under supply of quality rental accommodation for these ‘new Bulgarians’. So, if you get hold of a quality apartment in a decent area of Sofia, you should be in no danger of having it stand empty.

Good returns on offer
All economic analysts agree that living standards and wages in Bulgaria are set to rise strongly and consistently over the next few years. This will allow you to charge more and more profitable rents, and will also (when the time comes) make it much easier for you to dispose of a property at a healthy profit. Rental returns in one of the better districts of the capital, such as Vitosha or South Park, should run at about 12% per annum. You can pick up a very nice property here for about the price of a modest terraced flat in Leicester or Bradford. Your tenants would be prosperous locals, diplomats or one of the constantly-increasing number of resident foreign businessmen.

Sofia Bargains
Property in Sofia can still be obtained at bargain prices. (For example, a well-equipped two-bedroom apartment can usually be had for 40% less than the equivalent in Poland.) As of 2006, you can pick up property in the better residential districts for about 1700 euros per square metre, as opposed to around 2400 euros per square metre for similar property in Romania, and 11,000 euros per square metre in Athens. Nor is the buying process especially difficult. As in so many of the ex-communist states, you’ll need to set up a local Bulgarian company, but your estate agent can manage this for you, and the whole process – from viewing to exchange of title deeds – can theoretically be completed in as little as five weeks.

Positive but careful
So, to sum up this brief overview of Bulgaria, there are certainly good investment opportunities, but you must choose your property with care. Be wary of ski resorts; be very wary of coastal developments; but large cities, like Sofia, have very interesting potential, both for capital growth and healthy rental returns.