Property Renting as an Alternative to Buying

2009-04-14

Provided that analysts define the sale-trade property market as being at a standstill the rental sector can be described as being in a period of confusion.

Where does this confusion come from? On the one hand, in the last few months there has been no significant change in house prices and if there is then it’s a falling trend. This is good for landlords because it is common knowledge that when sale prices fall rental prices go up. On the other hand, the crisis hit the market. Potential clients not only have smaller chances to buy property with a mortgage but a big part of them find it difficult to pay high monthly “installments” to landlords. The lessors saw this and many of them chose to lower the prices than see their properties stay empty and not bring them even a minimal income. Others when noticing the greater interest towards the quarter where they own a property were quick to raise the rental price. Thus the segmenting which we spoke about half a year ago is still valid today but the factors that define the rental price are different. Some time ago the leading factors were whether the property is in a busy place, the level of furnishing, the presence of facilities like a kindergarten, a school, supermarkets.

Today the key factor is the price. The question is not what extras the property has but “what part of my income will I have to spend on the rent”. “We often have clients who work in one end of the city but choose to work in the other end. We tell them that not only will they waste a lot of time commuting to work but that the money they will save from the lower rent they will give for transportation. Nevertheless, they stick to their decision”, brokers comment.

To buy or rent? Regretfully, the answer to this question depends not on the buyer, respectively the tenant but on the situation on the market. It changes so fast that there is no expert that could give the best advice or show you the winning move. A year ago buyers chose fast whether to invest in a home or rent one by just calculating how much they would pay to the bank every month and how much they would pay to a landlord. Today banks have tightened the lending conditions, the unemployment rate is rising as well as the uncertainty of keeping one’s job. These factors are sufficient to boost the rental market, at least in the capital Sofia. As far as the situation around the country goes the lower chances of finding a job in the bigger cities will make a great part of those wanting to migrate to the city change their minds. The result will be fewer clients, fewer deals and respectively a decrease in rental levels, especially for the bigger or more unattractive properties.

Still, those who want to buy a property will have to wait a few months. It is then according to experts that the market will start livening up. Until then the alternative for most candidate buyers will be to rent.

The Market Is Diverse

The sale-trade and rental market have always been interrelated. When the prices on one of them go up the prices on the other go down. However, the crisis changed the trends in this segment like it did in all the others. “In contrast to the sale-trade market’s slowing down there is a stable growth and increasing interest in the rental market which is best seen in the capital Sofia and Varna”, comments Polina Stoykova, Chief Operations Manager of real estate company Bulgarian Properties. The domination of the rental market is a result not only of the economic crunch. The waiting of the sellers for the prices to increase and of the buyers for the prices to decrease made them turn into landlords and tenants. The presumption is that if the property cannot be sold then at least the owner can make some profit from renting it out.

Sale prices of apartments fell by about 15%, experts estimate. Meanwhile, no upward trend can be outlined in rental prices. In all three most traded types of residential properties there is a decrease in rental prices which reaches up to 20 percent in some parts of the capital Sofia.

In other areas there is an increase of 15 percent compared to April 2008. The lack of a specific upward or downward price trend is due to the increased supply. Most rental offers led to a decrease in rental price in some areas. “Never before had we had prices of 250-300 EUR/month for a one-room apartment”, says Maya Ivanova, Rentals Manager at Yavlena agency.

In the capital Sofia and the other big cities the prices in the so called elite quarters and the more mass residential quarters are drawing closer, as the quality of the property and its location are leading when forming the price”, says Evgeni Dzhorgov, Manager of Arsenal agency.

“What I find interesting is that the southern part of Sofia’s reconstructed Ring Road is already turning into a big city boulevard. The results are that the new complexes and buildings around this road are becoming a better alternative for those wanting to rent”, he adds.

With the current uncertain economic situation the players on the market not only change the prices but also the conditions in the agreements.

“Lately there is a practice to sign an agreement for a period of one year,” Maya Ivanova points out. According to her the lessors are explicit and it is hard to rent an apartment for a period of less than one year.

Another problem is that the tenants do not agree to an indexation of the monthly rental installment. “The tenant has a budget and they have decided that they can pay a certain sum every month”, says Tatyana Vladikova, Executive Director of Century 21 Realty Center. If the agreement has a rent indexation clause then the actualization is calculated based on the data specified by the National Statistics Institute. Lately the European Inflation Index is also used.

The question whose answer is difficult and at a time of a financial crisis almost impossible is how the market will develop. “There won’t be a big increase in rental prices and there will be stable supply and demand levels in 2009 as well”, comments Polina Stoykova of Bulgarian Properties. According to her both landlords and tenants will be more careful and will count more and more on the help of professional real estate agencies so that both sides would get the best terms and conditions.

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