Yana Bodourova
Kapital weekly newspaper
Issue 25, 2008

Until recently, Bulgaria's real estate market seemed a fairy tale told by a developer-type Hans Christian Andersen. High returns, quick profits, an omnivorous market gulping up projects from scratch. That magic world gave not only vendors, but also buyers a blissful life. They would obtain not only a home but also a rock-solid investment to safeguard them against inflation and jittery financial markets.

Mortgage monthly fees would be lower than the rent they would otherwise have paid for their apartments. At the same time, rising real estate costs generated good profits should the owner opt for sale. National Statistics Institute data shows that the value of homes more than tripled throughout the 2002-2007 period. The hike was most tangible in Sofia, and in individual neighbourhoods rates leapt by 50 per cent last year alone, whereas the average ask price for a sq m surpassed 1000 euro. Banks enriched the fairy tale scenario by helping many a Dancho (as the ad went on) say "yes, yes" to the mortgage contract.

But, just like all fairy tales this one has its end. And at the end how many of the characters will end up being happy…

The sleeping beauties
For the first time in a decade, homebuyers in Sofia signalled a further hike in prices would be untenable. Real estate agency Address has seen the contract value levels plateau since the turn of the year. A score of real estates and locations has witnessed discrepancies between sellers' ask price and the price buyers see as unacceptable. As a result, some real estate remains unsold for months, although that has not prompted vendors to adjust pricing. In isolated instances, depending on the time constraints of the sale, some owners are inclined to shave 10-15 per cent off the price, according to Address.

"In reality, demand has not suffered a decline but the number of deals has," chief executive of the realtor Address Katya Tsenova said. "In some Sofia neighbourhoods, price caps have emerged above which deals are very rarely struck." She argued that Bulgaria's real estate market has already been exiting the upward cycle and prices for some properties that are overvalued and fail to give value for money will decrease in the next two to three years.

Address has identified not only real estate demand segregation by neighbourhood, but also by price ceilings depending on size. In Sofia, the most obvious discrepancy between asking prices and contractual values has been with three-room apartments. Most often bid prices hover around 80 000 euro, while 56 per cent of asking prices exceed 100 000 euro. In other words, more than half the offers do not correspond to demand.

Cinderellas on the real estate market
Purchases of homes are most often made in Mladost, Lyulin, Ovcha Koupel, Nadezhda and Manastirski Livadi neighbourhoods. The reason is simple, buyers regard homes there the cheapest. However, as it often turns out, this is not reason enough, Address said.

Mladen Mitov, an analyst at Yavlena realtor, argues it is more correct to speak of the market sobering and real segmentation rather than of achieving ceiling prices. "Indeed, the market has been slowing and the reasons behind are many, starting from the fact that many of the transactions have already taken place. The global credit crunch made financial resources more expensive and this has affected mortgage interest rates. Supply is higher and is growing even higher with new construction and in the meantime demand has declined. This phenomenon is most tangible in the capital, but is no less valid for other cities," Mitov said.

Both agencies said that the number of speculative deals was on a sharp decline since the end of last year and that speculators were now eager to re-sell, which in turn has helped increase supply. Since the turn of the year, both agencies reported a decrease in the number of foreign buyers, the sharpest decline being with UK citizens, the hyperactive group until recently.

Adaptconsult agency said the number of flats, which have been put for sale because the owners cannot afford the mortgage payments, has been on a rapid increase. "The hike in mortgage loan interest rates alongside the marked price spike, which, however, was not accompanied by a similar income rise, made many think whether the time to buy a home was apt," said Blagovest Baldev of Adaptconsult. His observations are consonant with agency Arco's. Its brokers add as a factor banks' policy to renegotiate old loans, which, they believe, tames the price increase. Address also noted that, until recently, developers would sell newly-built homes on their own, now they sign contracts with almost all realtors. The agency ascribed this to the fact they found difficulties doing this job alone.

The good win
"Nothing apocalyptic is happening. Simply the market has matured and a 30 per cent price increase is not going to happen any time soon. To be precise, the month-on-month price increase, which was observed last year, was not normal. I expect home price increases to be on a par with inflation," Mitov said.

He argued that the market is now exiting the omnivorous stage and is entering one where the price of a real estate property would depend on the floor it occupies, which way does it face, quality of construction and available greenery around. A critical factor will also be whether the entrance is well kept. He predicts that price segmentation in individual neighbourhoods would become even more palpable. "Developers already feel the heat of competition and are ready to become more flexible, slash profits if they want to sell," Mitev said.

"The recession nowadays does not mean that there won't be expensive dwellings in the future. These, however, will be real estates that have, as added value, infrastructure parking lots, suitable location, and good management, among others. Simply, homes with a 10 sq m bedroom will no longer be in demand and there are many such instances now," said Katya Tsenova of Address.