Return of the property investors

Simon Feek, SR&L, September 2011

There has recently been much speculation about the financial crisis - which burst Bulgaria’s real estate bubble in early 2008 – is it going to ever end? What about the downgrading of super economies such as the United States; how is this going to affect real estate investment in Bulgaria? And what of the crisis in neighbouring Greece?

Surely, if the media and the other doom and gloom merchants are to be believed, shouldn’t we all start looking hard for places to stash our cash in fear of a “double dip” recession, change our Euros into Yuan (China’s currency) and baton down the hatches and wait for Economic World War 3 which will see the evaporation of the European Union?

And you must be crazy to even consider investing in anything as unstable as real estate after the past three years have seen literally billions of Euros wiped off property prices all over the world, not just here in Bulgaria.

Maybe… Maybe not!

Changes

Things have changed. Banks are lending far less to far fewer people. Property prices have dropped in many sectors in Bulgaria (mainly vacation homes) by up to 50% as a result of far less active buyers. And an oversupply of certain types of property (again, mainly vacation apartments) has meant that many owners cannot even cover their annual ownership costs of their “investments” in expected and much needed rental income.

But some things haven’t actually changed at all and some things, we suggest, have changed for the better. No one really knows what affect these dramatic financial incidents are going to have but we suggest it may not be as bad as everyone thinks.

Opinion shared too by Polina Stoykova from Bulgarian Properties, “The foreign investors are observing the market, waiting for better times, which I believe are already here”.

Having the cake and eating it

Thousands, upon thousands of would-be-property investors flocked to Bulgaria in search of “life style investments”. This meant that the majority of property bought for investment was done so in tourist areas such as Bulgaria’s ski resorts and Black Sea Coast. This seemed like a “sure thing” for the small time investors, often releasing equity from property in their home countries to purchase an apartment they could use for two or three weeks of the year whilst offering it for rent for the rest of the time. They would benefit from owning an asset that was bound to go up in value, make a residual income from rental revenue and at the same time have the use of their investment.

In reality, the vast majority of owners in resorts have been disappointed by poor management of their investments by local “professionals” which resulted in low occupancy, even in the peak periods. Aggressive tour operators saw a weakness and capitalised on the desperation of these buyers by offering contracts for their tour groups at such low prices levels which would have put anyone off buying for rental income if they could have predicted the future. And in most cases, if a tour operator does decide to offer a vacation development to its clients, it is normally on the caveat that the whole season will be block booked – depriving the owner of using the property at all.

In short, most buyers in the “good old days” thought they were going to have their cake and eat it, when in reality, they are now lucky if they are even allowed to lick the plate.

Tried and tested

But not all property investors have had the financial nightmares of investors in the tourist resorts. The majority of “professional investors” – including most institutional funds – made the decision to buy for purely financial benefit and the majority of these buyers took the decision to invest in the capital Sofia.

Capital cities rarely become unpopular – even Kabul and Baghdad are going through their own “booms” (excuse the pun) right now and Sofia is no different from London, Paris or Bonn in the respect that capitals always attract migrant workers (both domestic and international) and the attraction actually increases in times of economic hardship as jobs in the provinces often become harder to find.

Over Supply but Over Demand…

It’s true, the “boom years” saw virtually anyone with a piece of land in Sofia (and Bulgaria in general) bigger than a postage stamp become a property developer. It’s also true that there are many, many empty developments around Sofia. But why are rents still higher in Sofia than other parts of Bulgaria and from experience, why is it still fairly hard for most renters to find exactly what they are looking for?

The answer lies in the fact that when banks stop lending to developers to keep building, they also tend to refuse to lend to buyers to keep buying. Leaving renting as the only option.

Another aspect appears to lie in the fact that many of the empty developments you see around Sofia are actually not finished in terms of the paperwork. Many developers and their off-plan buyers simply don’t have the money to pay the Notary taxes to officially complete a property (and allow it to be officially inhabited) let alone pay for the fixtures and fittings (kitchens, bathrooms, etc.) required to attract tenants. And if you want a furnished property to rent at a low price… good luck!

No more over-stretch

As the banks have been over stretched with the credit they have issued to would-be-buyers and developers, they have tightened their belts, meaning many banks are forced to cancel their mortgage agreements and reposes whole developments and individual apartments from both groups who are both finding it hard to make ends meet. We have yet to meet any bank in Sofia that has the foresight to invest more money into its “distressed” stock to get the right paperwork (Act 16) to rent directly to tenants or even complete a development so it is considered “ready-to-rent”.

Most of these lenders are huge international institutions without the knowledge or even the desire to correct the balance of completed property that is suitable to rent which they have taken possession of, preferring instead, to wait for happier times and a resurgence in sales. To be fair, some banks are selling some properties at prices which can only be considered as “desperate”, but this presents a new opportunity to the savvy investor in itself.

Fire sales

Contrary to popular belief, banks are not “bomb proof” or made of money and the crash of several years ago demonstrated this beautifully. All over Europe, governments took responsibility to bail out lenders in trouble and although the Bulgarian government has yet to do this (if they ever would), the majority of banks in Bulgaria are owned overseas and feel the same stress as any financial institution in time of crisis. In short, they still need to make money.

The glut of re-possessed properties held by some banks has meant that many have had no choice but to sell developments and individual apartments at prices that are below what it actually cost to build them. Most international banks in Bulgaria have a property department and the hard-core investor would be wise to make contact with these institutions.

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