Andrew MacDowall in Belgrade -

In the middle of the last decade, Bulgaria was regarded by some as one of Europe’s real estate hotspots. In 2007, one foreign developer whose billboards crowded Sofia’s boulevards told your correspondent that he always invested in property, as it would naturally appreciate unlike any other asset. His company’s launch in Sofia was reportedly a raucously boozy affair, and a priest was flown over from the other side of Europe to bless proceedings.

Then the global economic crisis ploughed into Bulgaria, bringing the party to an abrupt end: the economy shrank by 5% in 2009, and in the five years since has barely been able to build up steam, let alone return to the heady days of the mid-2000s. The property sector was particularly badly affected, and indeed the real estate crash contributed to the depth of Bulgaria’s recession and the slow pace of recovery.

Signs of the sector’s revival have been detected on a number of occasions, only for little to happen. Activity, and in many cases capital values and rents, remain below 2008 peaks. However, there is increasing confidence that this time the recovery is real. While still broadly tentative, in some sectors there is real potential, particularly where rising demand is coming up against supply that has been frozen for half a decade.

“The real estate sector has started to gradually recover over the past two years,” Iglika Yordanova, managing director of Colliers Bulgaria, tells bne IntelliNews. “The first positive sign typically was given by the office segment, which has seen recovery of demand and rental levels, especially in 2014. The office segment featured decreasing vacancy and scarcity of class A office space – only 6.5 % of all class A stock is available – and the highest levels of net absorption since 2007.”

There was “solid growth” in transactions and volumes last year, notes Yordanova. But the scale of the crash is clear from the fact that, while volumes are almost ten times higher than in 2009, they are still half of 2008 levels.

Nonetheless, net absorption now outstrips the annualized development pipeline, indicating that vacancies should drop further until new projects kick in, from an already fairly low average of 5% for premium space across the board. Most supply activity over the past five years has come from frozen developments being reactivated.

There has been a slight uptick in rental rates, to between €10-13 per square metre (sqm) for grade A space, depending on location, up from €9-12 in 2013 – but still down from €12-17 seen in 2009. Demand is being driven by sectors including ICT, which has remained remarkably successful in Bulgaria, with a range of local and international private equity funds realising excellent returns on start-ups before exiting through sales to major international companies. Office relocation is another trend to keep an eye on, says Yordan Petrov, an analyst at the Sofia-based First Financial Brokerage House. “We believe the office space market is currently undergoing a restructuring, with tenants seeking to move from premium locations, outside of the central business districts. Development of near-shoring centres outside of Sofia should drive new investments in towns like Plovdiv, Burgas and Varna.”

Home sweet home

In the bellwether residential sector, demand also outstripped supply for the second consecutive year in 2014. And again, there is a limited amount of high-quality property, the segment that investors are seeking. Well-designed, well-located properties outperform the market – something that may seem a statement of the obvious but escaped many developers in the boom years.

“Quality stock is now hard for buyers to find and we are seeing practical, liveable spaces selling within 24-48 hours at higher prices than in the past four years,” Christophe Gater, managing director of NewEstate, a Bulgaria-based estate agency, tells bne IntelliNews. “We expect price gains in the coming two to three years at 2-3% a year. New developments in commutable locations with functional compact design or strong rental returns can now and will continue to sell above the current average price of €749 per sq m. The rental market is buoyant, tenant demand has never been greater, good properties rent within hours. Off-the-shelf individual units from developers for under €50,000 with professional management can offer 7-8% return on investment.”

The market has been supported by very low interest rates, which has encouraged Bulgarians to invest in real estate instead: Colliers reports that 33% of its sales were to investors rather than owner-occupiers. Mortgage lending has also accelerated after a long period in which banks were reluctant to lend, with 33% of Colliers’ transactions bank-financed, up from just 8% in 2013. “Factors that support the growth trend are higher availability of debt at lower premiums, as well as discounts on existing debt on standing investments, which increases the general attractiveness of transactions,” says Yordanova.

Shop drop

The retail segment makes unhappier viewing. A glut of mall developments towards the end of the last decade looked like an oversupply disaster waiting to happen to many observers, given that this remains the EU’s poorest country. Nonetheless, there is some dynamism returning as the retail sector matures and consolidates.

“Retail space outside of the capital is the biggest loser since the crisis, with multiple shopping centres closing doors,” Petrov says. “The retail space market will be driven by M&A activity, including a number of big box retailers being acquired by locals, and one of the leading grocery retailers being acquired by Carrefour. The ownership changes and optimisations could open up locations for new tenants.”

While some provincial malls have shut, two new malls opened in Sofia in the second half of last year, with total retail space of 93,000 sqm, according to Colliers. Growing competition is expected to push mall owners to differentiate their offerings, targeting different demographic groups; in other emerging markets, this has seen long-in-the-tooth incumbents shift towards the mid-market, leaving high-end retail to flashy upstarts.

Even before the crisis, logistics real estate was widely seen as the most promising segment in the Bulgarian market, given the country’s position astride trade routes between Europe and Turkey and the Middle East. Motorway development has been one of the few success stories of Bulgaria’s turbulent past few years, strengthening its case as a transportation and logistics centre for the region. Petrov says that investors are now returning with interest, citing the example of Glorient Investment BG’s East Ring Logistics Park, the first phase of which has already been developed, and a number of announced project expansions around Sofia Airport.

Holiday hell

As for the coastal and ski-resort holiday property market that attracted a substantial chunk of foreign investment in the last decade, “the rule of thumb is still 50% reduction in values since the peak prices in 2008,” says Gater.

The pullout by British and Irish investors has led to 40,000 sales since the crash, mostly to citizens of former Soviet countries. This trend has been upended over the past year by the Ukraine crisis, with Russians now selling properties to realise ruble profits, even at a significant euro loss. NewEstate expects to sell 70% fewer properties to Russians in 2015, with this only somewhat offset by a “dramatic increase” in Ukrainian buyers looking to move their capital out of Ukraine.

The market is strongest at the lower end, with units worth €40,000 or more accounting for only a quarter of sales on the coast, says Gater. The average achievable price for a furnished unit in Sunny Beach, the biggest resort, is €425 per sqm, below build costs. Prices in major ski resorts remain stagnant, the construction boom that many saw as a blight on the mountains having led to oversupply.

“Prices will fall up to 20% along the Black Sea, and are only likely to recover to 2014 levels when Western sanctions end, Ukraine stabilises and Russia exits recession,” says Gater. “The ruble needs to be back to 50 to the euro for the Bulgarian market to appeal sufficiently to middle class Russian buyers.”

There may be some respite for owners in the rental market, however, particularly as the ruble’s fall leads Russians to take summer holidays in cheaper destinations like Bulgaria (600,000 Russians visited Bulgaria in 2014).

Bulgaria’s economic recovery is fragile at best – GDP is expected to grow by less than 1% this year. This is reflected in the real estate market, where revival is tentative. But segments are showing promise again, and on balance, the absence of the speculative over-confidence of the mid-2000s is a good sign.