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Property Market Update

The Knight Frank 2008 Global House Price Index reports that for the fourth consecutive quarter Bulgaria came top of the list with a growth rate of 32.2% for the year up to Q2 2008. Property prices have risen by an incredible 68% over the last 2 years. Residential property prices continue to rise and look set to experience 10% to 15% growth in 2008 with Sofia’s residential real estate market boasting one of the most dynamic markets in the country. According to a 2008 survey by the Association of International Property Professionals, Bulgaria was ranked as the 4th most popular destination for Britons purchasing overseas property. 75% of UK mortgage brokers expected to see an increase in the number of UK buyers looking to snap up property in Bulgaria over the next 3 years, according to a NatWest survey. The survey also revealed that Bulgaria is the number one destination of choice for Russian buyers, many of whom purchase resale property from British owners.

{adsense,pub-9449817363577881, 3370438888,336,280}Around 90% of housing development is accounted for by Bulgaria’s private sector, which also contribute heavily to infrastructure improvements. As the average Bulgarian income continues to grow, more credit facilities become available and more people move to urban locations, demand for high quality residential property will rise, particularly in the capital, Sofia. However, there are signs that the property market in some areas is approaching saturation point.

According to the Bulgarian National Bank, the property market contracted by 17% from January to June 2008. The problem is particularly acute in some Black Sea resorts where property analysts believe that over-supply means between 20% and 30% of new-build apartments may remain unsold over the next two years.

Bulgaria has recently been considered as one of the world’s top property hot spots. The growing economic stability and increasing credit opportunities are reinforcing the demand for high quality, residential properties with the emerging Bulgarian mid to high class market vying for properties within commuting distance of the city. With salaries on the increase – the monthly salary in Bulgaria has increased by 24.4% per month compared to the 1st trimester of 2007 - demand for property in Bulgaria is likely to continue to rise. However, a slowing in the property market compared to previous years has been noted. Despite this, 10% to 15% capital growth is still expected in the property sector for 2008. Sofia presents a highly strategic property investment location for investors, due to the massive commuter market. The rise in the number of domestic workers migrating to the capital to work for big multinationals, combined with the foreign workers arriving with the multinationals, is creating huge demand for both rental and sale property in and around Sofia. Letting to the local commuter provides an attractive option where gross rental returns are around 6%, although yields tend to be higher for smaller apartments of 60 to 90 square metres.

Property investment into emerging markets may carry some degree of risk. However, the degree that market risk in a particular country affects a property investment depends largely on thorough due diligence conducted prior and during the purchase process. Contrary to fears that Bulgaria’s economy may be at risk of over-heating, The Economist predicts that GDP growth will stabilise at just over 6% between 2008 and 2010, and that despite Bulgaria’s sharp increase in food prices, 2009 will see a reduction in the country’s inflation. Regarding the effects of the global recession, Moody’s Vice President, Kenneth Orchard, believes that Bulgaria’s banking system is strong enough to easily withstand financial difficulties. The recent intense construction in Bulgaria means that the current property market in some areas presents some risk of over-supply. However, property in many areas, such as Sofia, still represents excellent investment potential and according to Ernst & Young, investor confidence in Bulgaria is set to continue well into 2009.

Corruption has been a problem in Bulgaria, and the country is under huge pressure from the European
Union (EU) to undertake serious measures against crime and corruption. Whilst the EU recognises that genuine efforts have been made, particularly in the judicial system, more work and results are needed, until which time, the EU has frozen some of the country’s funding. Tackling this problem is one of the government’s top priorities and they are committed to more concrete results by the end of the year. With the EU keeping a watchful eye over Bulgaria’s progress, and the possibility of losing out on vital EU funds, improvements should be forthcoming in the near future.

Bulgaria has recently undergone huge transformation from communism to democracy. Hand-in-hand with this has been a booming property market, one with some of the highest returns in Europe. However, the intense construction in some parts of the country makes this still growing market one to approach cautiously. Until recently, investment in property in many parts of the country brought exceptional returns. However, although homes are still cheaper than in many European countries, investors now need to undertake more research and be more selective in their investment criteria. This ensures the right investment in the right place and avoids over-valued property. If the investor avoids areas currently suffering from over-supply, Bulgaria remains a good investment opportunity. Buying the right property in the right location still represents excellent potential. For example, high-end properties in and around the larger cities, especially Sofia, are highly desirable among foreign buyers, particularly new investors from Russia.

Extract from Obelisk’s Absolute Guide to Bulgaria available at www.obeliskinternational.com