Will the real estate market repeat the stock exchange scenario or as alternative to the dropping indexes the real estate have not reached their price peaks yet?

What will be the effect from the global financial crisis?

The end of the short-term strategies – construction quality tops the agend

Around one third of the Foreign Direct Investments (FDI) to Bulgaria is utilized for purchases in the real estate sector. If to them we add the funds for repairs and finishing works, considerate turns out that in the real estate sector flow almost one half of all FDI. Real estate is a driving force also for lending, whereas over the last year alone banks have granted BGN 2.2 billions for housing loans. These data clearly show the importance of the sector – both for the thousands of participants on that market and for the economy as a whole.

The sustainable growth of the real estate market, however, may be only kept only through the creation of a good investment climate, the economists of UniCredit Group point out.In its latest report for 2008 the World Bank puts Bulgaria down the line at place 46 by investment attractiveness- 2 places ahead of Romania, which now is 48-th. The dynamic development of construction works so far has resulted in a tangible shortage of experienced labour.

Crucial reforms for improvement of the legal and administrative conditions are still forthcoming.

Despite these obstacles, the investment in real estate remains one of the most reliable and yield-generating areas of business. The expectations of UniCredit analysts are that this trend will be maintained although the profitability margin will gradually decrease. By this indicator Bulgaria already lags behind Romania and other new members- states to the European Union.

Chart 1: Yield from investments in real estate sector (in %)

Bulgaria Romania

Office buildings 7.5 6.5

Trade Centers 8.5 7.5

Logistic projects 9.0 8.0

Source: UniCredit New Europe Research Network, BA-CA Real Estate

When projecting the future yield from real estate one should not forget the comparatively higher risk in Bulgaria and Romania in comparison with the “more mature” economies of the other EU member-states. This issue becomes more and more important, since the crisis caused by the US sub prime mortgage market has dipped the risk appetite.

The expectations of UniCredit specialists are that the behavior of investors is likely to undergo gradual change – the short-term strategies, aiming at fast profit will become less popular, and the orientation will move towards long-term ones.

The topic for the quality of building construction will come to the fore.

So far, under the conditions of an outstripping demand for real estate in the large cities, the quality was not so crucial. The short-term strategies potential – however, the scenario of purchase and immediate sale is exhausted.

Construction of office buildings – profitable, but difficult

The next three years will see some new office space make its way onto the market. Presently, around 450 000 sq.m. office spaces are under construction, and the majority of them shall be completed between 2008 and 2011.

Most of the new office buildings are found along big boulevards. More and more attractive for that kind of building construction developments are becoming the areas, located around the airport.

The office spaces construction development in the central urban district, where rents are significantly higher is hampered by the difficult traffic conditions and the lack of suitable areas. The office spaces building development is also dynamic in the other large cities such as Plovdiv, Varna and Burgas, the observations of UniCredit specialists show.

However, rental prices there are by around 30 % less compared to these in Sofia.

The demand of office space is driven by the large international companies, who are already present on the market, but willing to expand or to reallocate their offices on most attractive locations. More and more active on the market are becoming the smaller Bulgarian companies, who still often use their converted apartments as their business offices and they are likely to move into more modern premises in the future.

But in its entirety, over the last years the profitability from office spaces construction decreases. Few years ago, the yield from investments in office buildings has been around 10%, while at the moment it is around 7%. According to UniCredit specialists, there is a potential for profitability drop, as meanwhile the significance of the quality of buildings will increase.

The chart in the presentation: Profitability of investments in office spaces

The chart in the presentation: Office spaces per capita of the population

Let’s go shopping – in Malls!

The growth of salaries and the optimistic income expectations have led to a robust development of trade centers and particularly of Malls.

The development of “Vitosha, Graf Ignatiev, ”Rakovski”, “Patriarch Evtimyi”, “Solunska”, “Alabin” Streets and their conversion into first class streets is hampered by the traffic conditions in the city center and the lack of suitable parking spaces. The advantage of Malls is also the fact, that they fully cover the international standard requirements, and collect under one roof the most popular brands, the analysts of UniCredit Group think.

Only in 2006, three Malls opened their doors– Mall of Sofia (35 000 sq.m), City Center Sofia (20 000 sq.m) and Sky City Center (15 000 sq.m).

Presently, some large-scale projects are on the planning table - Carrefour Mall (60 000 sq.m), Bulgaria Mall, which will be completed next year (50 000 sq.m), „Serdika Center” (85 000 sq.m), Olympian Mall, located in “Europa” Blv. (45 000 sq.m). Development of projects of larger scale is pending. If all of them are completed, the trade centers area will become four times greater.

According to UniCredit estimations, it will mean that, if at the moment the trade areas account for 0.07 sq.m. per capita of the population, after completion of the projects this index will reach 0.3 sq.m.

Growth of trade centers development is also evident in the other large cities as Varna and Plovdiv. Pleven, Stara Zagora, Haskovo, Dobrich, Sliven, Montana and many others have proved to be attractive locations and are included in the entrepreneur’s lists.

There are 5 large cities and 40 smaller size towns, which are interesting for investors for business area development.

 

The field of logistic projects also benefits from the scheduled infrastructural development

Five transport corridors crossing Bulgaria are forthcoming, supported by EU funds. It will also bring a benefit to most of the towns in the country.

A huge growth in transport and traffic volume, compared to the present levels, might be expected in Varna, Plovdiv, Pleven, Bourgas, Sofia and Vidin (in this order). Varna and Plovdiv are among the cities, which are also offering attractive areas for logistic projects development.

Bottleneck even for the more-dynamic infrastructural projects development in Bulgaria is still the insufficiently well developed legal and administrative conditions. They impede also the flow of FDI. The administrative dead-lock may lead to reduction of the expected EU funds, the specialists of UniCredit Group point out.

Main conclusions

• The opportunities provided by EU accession stimulate foreign direct investments (FDI). This is benefiting the real estates sector, which attracts half of it

• There is an income decrease from the real estates sector and there is still a potential for this process to continue. The crisis on the US sub prime mortgage market has led to a dip in risk appetite of players. In addition to market risk consideration, the quality of buildings is becoming a topic

• A great number of business centers is cropping up along the bigger boulevards. Further development of the central business district for the construction of office spaces is undermined by the lack of insufficient parking areas and the difficult traffic conditions

• The shopping centers and malls are experiencing a real boom. Except in the capital, this sector is prospering also in other large cities. Gradually, investors are training their sights on smaller size towns

• The field of logistics also benefiting from the opportunities, provided by the EU accession. Infrastructural projects development is the key driving force here