Bulgarian Property Market
There are several factors that had come together to give an exceptional boost to the real estate market in Eastern Europe.The major factor that contributed to the boom was the abandoning of central planning, which was a system that was embraced by all communist countries before the fall of the Soviet Union.After that every Soviet block and East European countries had started introducing the market economy.
That automatically opened the door for property speculation and currently many investors are buying property in Eastern Europe with a mixed result.
Among the East European countries Bulgaria had finished ahead simply because it became among the hot tourist destinations in a few years time and it started to attract both investors and tourists in a big number. The outcome was mixed and there are some who say that Bulgaria’s property market is saturated whereas there are others who say it is still possible to make money by investing in Bulgaria’s real estate. It was in l996 that Bulgaria was able to topple the communist regime.
From then on, it had decided like many East European countries to introduce the market economy. While doing that, as European countries it was inevitable that they would join the EU. However, before doing that they had to go through a preparation phase that had a considerable amount of aid earmarked to it. Using whatever was getting into their system these countries were working to transform their economy that had been under a central planning for all those years and eventually they started showing some positive result. (Angelov, Ivan et al. 1992-2001)
Bulgaria was not different from similar Eastern European countries in such a way that there was a lot of activity in the capital Sophia where there was some kind of a construction boom simply because the workforce was able to make more money hence they were able to afford to pay for better accommodations. The commercial sector also saw some activity where offices and other commercial properties were in high demand. This started attracting investors since the country had opened its doors for outsiders as long as they met certain requirements.
What took place was a boom by any standard even if it was not different from what was happening in the other countries that were selling properties cheap simply because they were starting out from a system where property did not have any value since they were under communism. (Petrov, Georgi 1969) In all this Bulgaria got another advantage because of its tourist industry that became very popular to the point where it started to compete with other destination such as Spain, Greece and Portugal. One of the reasons for this was the low price that includes both cost of living and the price of buying property.
The second one was Bulgaria has a tourist sector that has a ski resort, a mountain hiking trails and summer vacation spots in the coastal regions of the Black Sea. None of the other countries had all three facilities in one location. In addition, there is a spa and mineral water that needed development. Once the location became popular, it started attracting tourists in big number. Some of them were only visitors attracted by the beauty of the surrounding area and the low price for the amenities.
Some also started buying property because other locations such as Spain were very crowded and the price of property was not as cheap as it was in Bulgaria. In addition, property development companies were also attracted and they had been building apartments, hotels and houses for a while now. However, after all the buying and investing that took place the demand for housing is not accommodated and there is some distance to go before that becomes a reality. The value of property is not where it was at the beginning yet, it is still cheap even if it had been steadily appreciating.
This means whether they are investors or people are buying homes for vacation or retirement it is still easy to get a good value for their money even if it is not going to be like those who invested earlier that had paid very cheap price for whatever they bought. Hence, since the demand for housing and other facilities that the tourist population needs is in short supply, especially companies and entrepreneurs who want to invest in the country will see a good return on their investment since the number of the tourist population is growing steadily.
There are various sectors to invest into. The office, commercial and industrial sectors go in parallel to the kind of economic growth the country attains, because currently the capital city seems to be saturated and the cheapest properties could be bought around there. However, the development is reaching the other major cities, which means it is still possible to make money by investing in the office, commercial and industrial sector since there is always economic activity. The tourist sector’s demand for various amenities is not met.
It means there is enough room for new entrants to make a hefty profit on their investment. What are hot now are apartment buildings, hotels, living accommodation around the spa and the spring water that are scattered around the country, luxury housing that is picking up, and golf courses are among the few areas that are requiring accommodation. Among the East European countries, Bulgaria has become one of the hot investment destinations. There are many reasons contributing for that and among them are its coastal, mountainous and recently its cities are attracting investors in a big number.
Although, at this particular juncture it is possible to say there is an on and off signal since some of the markets have started cooling down simply because of the close to 31% annual property value growth that was attained in the last three years alone.Yet there is still a huge price advantage when compared to any European country as well as there is a capital growth that is unmatched anywhere else. The other obvious attraction factors are the sun, sand, sea, skiing, spa and mineral water. It also has a stunning landscape with a moderate temperature that goes with it.
All this are coupled with a booming economy that started after the country abandoned its communist system and embraced a market economy. Bulgaria has similar size with Britain but its population is around 7. 45 million people. The country is located in the southern east of Europe and it borders Greece, Macedonian, Romania, Serbia, Montenegro and Turkey. Currently the investment business in properties has cooled off in Sofia the capital where the property price was the highest in the country and since the country had joined the EU the growth rate had accelerated requiring more housing and commercial properties.
At the same time because of its 354 km of Black Sea coast and its 37,500 hiking path, mountain trails, blended with its ancient history, it has become among the best tourist destinations in Europe. Many people are buying property at this location as a vacation home, or for future retirement or simply to speculate on the booming and overheated real estate market. The Property Market The property market in Bulgaria had focused on the capital city even if it was taking place across the country. It is possible to buy a decent cottage for ?
5000 whereas the average price could be between ? l0,000 and ? l80,000 yet ? 50,000 could also buy a well-maintained property in a good location. The nature of the property market focuses on various sectors. There is the tourist industry that needs accommodation that is not yet saturated, in fact, there are some areas that are not meeting the standard, yet they have become tourist attractions availing huge opportunities especially for property managing companies. The second area is for individual investors who want to buy a property whatever the reason behind it might be.
It is possible to use the property as a cottage and renting it out when it is not in use. It is also possible to plan for retirement or for speculation, because a property bought three years ago would have appreciated up to 30% in addition to the rental income it would generate. And it seems that the market is saturated with such a growth rate, but it is not, which means anyone who is buying property at this point in time certainly will see it appreciating in the coming years although there are a few caveats to look out for.
(Property Showrooms) However, the other sector that had become lucrative was the capital Sofia where the demand was high simply because of what was taking place in the capital. The city was attracting a huge amount of investment from outside by creating a prevalence of young and educated work force that needed modern accommodation and it had taken a lot of building to meet the demand creating a lot of opportunities for companies to head that way. (Baytchinska, Krassimira et al.
1998) It is not only that a huge amount of commercial development was required as the (Annual Reports 1991-2000) demand was growing at a fast pace, another opportunity that was attracting big developers. Another reason why bigger, experienced, and well funded companies had a good chance to be successful in that area is it is only such companies that will be in a position to obtain permission as they can meet the strict environmental standards that is being put in place.
As well, paying a particular attention to the natural beauty of the surrounding and the country parks is also important. What this meant was anyone that meets the requirements can go in there and buy built property and rent it out until the price appreciates and when it becomes profitable it is possible to put it on the market. While such opportunities are available even for individual investors, it is bigger developers that benefit more since they could be involved in a bigger scale development. (Due, J. M. and Schmidt, S. C. 1995) Tourism
The other driver is tourism that has created an unprecedented opportunity in the country by making it the newest attraction among the international tourist industry. Accordingly, the summer months see over 50% of the overall tourist population who are there to visit the coastal regions. The winter months come in second by attracting around l4% of the tourist population who are coming there to take advantage of the ski resorts. The forecast for 2010 estimates the number of tourists visiting the region would surpass 20 million making it among the emerging tourist attractions.
One of the reasons that is contributing to the success displayed in the capital city was its close proximity to one of the popular ski resorts at Vitosha where visitors are looking for high quality accommodation that is creating the dual market advantage fuelling the property investment. (Polycontact) LITERATURE REVIEW Real Estate Cycle Real Estate cycle had always been influenced by how the economy was performing. At the same time the population growth also has a direct effect on the demand of real estate since they will need more amenities.
It also requires accommodation, hence the amenities need to be at a given location to tend for all the needs. Because of that real estate is considered to be a cyclical industry that reflects what goes on in the economy. The first individual who discussed real estate cycle was Homer Hoyt in the year 1993 when he analysed the Chicago market scene. Prichett (1984) confirmed that there is a real estate cycle that always lag demand, but it was possible to determine the cycle when both demand and supply go the opposite direction.
Accordingly, he stated that the best time for investors to go in is when there is a decline in the market and when the market starts to pick up. Witten (1987) continued on the same idea by saying that every location has its own unique cycle that it introduces into the market and stated that supply is mostly determined by the availability of capital. That is proven to be true in Bulgaria where the demand is not met simply because the number of investors and developers is still very low even if the demand is already there and is growing.
Brown (1984) was not different from the others in that he stated that the main determining factor as far as cycles are concerned was what was happening in the economy. But he stressed on the length of the time such studies will be conducted since he believes that the longer the time is the finding will be better. According to him if the aim is to avail a reliable feasibility analysis, investment advice or credible market analysis, trends and seasonal components will have to be removed from the study that will be conducted.
Wheaton (1987) studied ten cities and determined markets for office space have 10 to 12 years time span and that had been demonstrated to be true in Bulgaria as it will be demonstrated later where the cycle is the outcome of how the economy performs and factors such as GDP, interest rate and employment growth have a direct effect on the cycle. Wheaton and Torto (1988) studied both rent and the available vacancy and found out that it is possible that there is a drop of 2% on a yearly basis for the glut that will be created in space for rent.
Phyrr, Born and Webb (1990) based their real estate analysis on a theoretical cycle model that focuses on demand, supply and the effect of inflation and arrived at a conclusion that the timing in acquiring and desposing off a property is crucial in realising profit for would be investors. Phyr, Born, Robinson and Lucas (1996) took their research further by comparing a traditional valuation model against what they called cyclical assumptions by taking into consideration demand, supply, absorption, occupancy rate and the rent difference between new and older units.
The conclusion they arrived at was cyclical assumptions could affect how properties are valued, but the better method was the cyclical model, which is a better indicator for a long term investment when compared to knowing the value of a property at one point in time. Mueller and Laposa (1994, 1995) took into consideration sub markets by stating, on the outset it seems that sub markets move differently, but in the long run they tend to fall back in place with the overall markets.
The case in Bulgaria had been different simply because of the number of drivers that can function independent of each other and have their own unique characteristics that are not influenced by the others, yet they can be labelled as sub markets. Muller (1995) came up with two cycle types, a physical cycle that looks at the demand, supply and occupancy rate and the second one that looks at the capital flow into real estate that will affect the property price. If there is excess capital finding its way into the market it will bring down the price of both rent and property value.
What is taking place in Bulgaria is the opposite simply because it is a new market and there is lack of capital coming into the country to satisfy the existing demand that is on the rise. It is also worth mentioning Grenadier (1995) who developed a theoretical option pricing model studying by how vacancy rate and rent are interacting. The finding was both follow the economic trend where when there are booms and growth rents will start to get higher as there is surging demand.
That is exactly taking place in Bulgaria now where owners or investors that buy property to rent will always see their rent income appreciating simply because the demand is rising consistently. The Price Factor When examining the factors that are influencing the property market in Bulgaria they are not different from what the academician above touched on. Because of that the FDW Model that came into existence when DiPasquale and Wheaton (1992) published a diagrammatic integrated property and asset market model on the website of Curtin Business School is used on this research.
The particular publication was followed by an article written by Fisher, DiPasquale and Wheaton that became FDW Model that focuses on a given real estate market, asset market variables and factors that contribute in establishing the equilibrium of demand and supply of a particular market. This particular model is applied here to examine the factors that are influencing the Bulgarian real estate market. One fact that ascertains a good future for the country is it has managed to keep property prices reasonably low when compared to other European countries that have joined the EU recently whose cost of living had risen considerably.
On top of that this particular country is managing to mix two sectors together in such a way that since what it avails for the tourist industry is vital there is a need for adequate and modern accommodation that is not met yet and that will be on the rise for as long as the number of tourists is on the rise. The other area is the country’s economy is also growing and it would create enough demand in the capital for now that will spread to the other regions over time. The demand in the capital is somewhat met and is saturated currently yet, as a growing economy there will continue to be a surge in demand as the economy grows.
Another area that is adding lustre to what is taking place is the new demand for secure and luxury development that is another challenge that has to be harnessed by companies that have specialisation in that area. (Eastern Europe Property) Hence, since it is possible to say the country is new in its endeavour it would mean that it still has more room and potential to grow its economy as well as raising the standard of living of its people that is not advanced yet, especially in the rural regions.
(Minassian, Garabed, Totev, Stoyan 1996) When that takes place over the years any company that has a good presence will be in a position to spot the opportunities and capitalise on them. Since the country is already a member of the EU that has a master plan for all its members to attain a certain amount of growth in a given period of time, it cannot become stagnant until it meets that requirement that will take years.
Moreover, as the living standard of the local people improves their demand for accommodation will be much higher than it is now creating a sustainable boom that is not easy to exhaust in the near future. In addition to that it is a tourist attraction that has seen an increase of 50% between the years 2000 and 2004 where 90% came from the EU countries. This means there will be a similar growth rate going forward into 2010 that is expected to reach 20 million and all that influx definitely requires accommodation that is going lacking now as there are busy destinations that are barely managing.
This means a huge opportunity mainly for developers that can build bigger housing complexes that are available for rent as well as for sale by the unit. Big hotels are needed badly and the amount the best hotels are charging now is very low compared to what is happening in the other part of the world, which means more opportunities for companies that want to open bigger hotels since there is an obvious shortage.