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Bulgaria Hot Properties Market Turns Cold

3 April 2009

From The International Herald Tribune

By Matthew Brunwasser

After a decade of prodigious growth that seemed immune to global trends, the Bulgarian properties sector has fizzled out, mostly because foreigners have stopped buying and turned to selling.

Over all, the country’s residential market still looks a bit like a freak of economic nature, with the average sale price per square meter, about 10 square feet, rising 25 % in 2008.

But recent figures show that prices in the fourth quarter of 2008 declined 4 percent over the third quarter, to USD 697.14 per square meter from USD 727.30, or about USD 88.40 per square foot from USD 92.25. The downturn was the first since the country achieved macroeconomic stability following an economic meltdown about 10 years ago.
And the volume of residential sales went down by 40% last year, according to the Bulgarian Properties real estate agency in Sofia.

Just as Bulgaria was the last of the East European former Communist countries to reform its economy in the late 1990s, this small country of seven million also had been a laggard in real estate. Its market developed only in recent years and was among the last in Europe to decline.
"The global financial crisis came at an early stage of the bubble here," said Latchezar Bogdanov, of the business consultancy Industry Watch, based in Sofia. "It was a very short bubble with relatively small excesses."

According to Mr. Bogdanov, only a few segments in the Bulgarian properties market were overvalued – mainly holiday properties on the Black Sea coast and in ski resorts, which had attracted heavy interest from investors, many from Britain and Ireland.

But rents were not high enough to cover the prices paid in 2006 and 2007, Mr. Bogdanov said, adding, "There was very high optimism because they believed the prices would go up forever."

Brokers say the strong price growth that continued through much of last year was mainly the result of a low starting point and was helped by Bulgarians steadily increasing incomes.

And while corruption in the country, including claims of widespread fraud and organized crime in the real estate business, has drawn headlines in recent years, no one is saying that foreign sales or general pricing were affected.
In general, foreigners stopped buying last year, a change reflected in the 80 percent decline in sales volume, compared with 2007 levels, in the ski resorts of Bansko, Pamporovo and Borovets in southern Bulgaria.

The same study, by Bulgarian Properties, also found sales decreased by 30 percent during the same period along the Black Sea.

Just last year, the once-quaint ski resort of Bansko, crammed with new concrete hotels and vacation homes, had pubs filled with British property owners and tourists on package holidays. Construction was so intensive about 160 kilometers, or 100 miles, south of Sofia that locals joked there were two seasons: mud and dust.

"All the cranes are gone now because no one can rent them anymore," said James Hughes, who owns the Avalon Hotel in Bansko. "There are a lot of half-finished buildings."
Mr. Hughes says he knows Britons who are selling places for half of what they paid only two years ago, largely because the financial situation at home is driving them to take what they can get.

The situation is similar in Veliko Turnovo, a medieval town in north central Bulgaria popular with Britons.
"There was a buzz, a feeding frenzy," said Stephane Lambert, co-owner of Stara Planina Properties in Veliko Turnovo, who sold houses to many of the Britons who came to the area. "The demand was great, and the supply was restricted." Now he is selling many of the same houses to Bulgarian buyers; according to the National Statistical Institute, the city saw prices decline 12 percent in the fourth quarter of 2008, the worst downturn among the 27 cities surveyed.

Mr. Lambert said Britons used equity from their U.K. properties to buy in Bulgaria and, as a result of the real estate downturn at home, that equity no longer exists. But a British owner can sell a property valued in euros at a loss and still hope to come out ahead of the original price paid in pounds several years ago. (Most properties are valued in euros or in levs, the Bulgarian currency that has a fixed exchange rate with the euro , but some projects were sold to Britons in pounds.)

Over all, "the supply of properties for sale is increasing, while the demand is disappearing," said Georgi Ridjalski, a broker in Sofia with the international agency Re/Max. He said most of his buyers now were Bulgarian and that the only foreign ones were Russian.

"Now the market will become more realistic," he added.
Bulgarian buyers have been relatively isolated from the global credit crisis, Mr. Ridjalski said, as only about 40 percent of all residential purchases in the last three years were made with bank financing.

The conservativism of Bulgarian banks and the generally undeveloped state of the financial sector has actually helped the country’s financial stability, said Georgy Ganev, an economist at the Center for Liberal Strategies in Sofia. "The banks didn’t have a strong incentive to invest in global financial instruments because returns in Bulgaria were pretty competitive," he said, also noting that they did not engage in risky practices like subprime loans.

However, Bulgarian banks have reined in mortgage lending, worried about clients who may have been hurt by the global downturn, Mr. Ganev said. And while interest rates have not changed much, the banks loan approval procedures became much stricter last autumn, he added.


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