Mathew Youkee, Editorial manager for Bulgaria, Oxford Business Group

According to a report on the Bulgarian banking sector published by an international market research company on January 25, mortgages in Bulgaria are forecast to rise at a compound annual growth rate of 88 per cent between 2007 and 2010.

In 2007 Bulgarian residential property prices continued to rise, confirming the trend that began more than five years ago. This time however, the focus of this growth seemed to be shifting towards higher quality developments both in Bulgaria's major cities and in its tourist hotspots. Figures published by the National Statistics Institute showed that average annual market prices for residential property across the country saw a year-on-year increase of 28.9 per cent in 2007. Such robust growth was well above the average rate of 21 per cent seen over the past five years and the previous year's figure of 14.7 per cent, although it fell short of the rise seen in 2005, when recorded growth was 37 per cent.

While Sofia and Varna remained the two cities with the highest average property prices of $1370 a sq m and $1331 a sq m, respectively, the biggest increase was in the town of Rousse on the Danube where prices rose by 40.9 per cent to $953 a sq m.

Foreign interest in Bulgarian property remained strong in 2007 with real estate and tourism accounting for about 60 per cent of the country's record $7.8 billion foreign direct investment, according to the InvestBulgaria Agency. However, the demand for holiday properties was decreasing according to a report by investor.bg. The company said that in the mountain and Black Sea resort areas, an oversupply of properties had led to a drop in prices of between five and eight per cent.

Some analysts have said they anticipate a 70 per cent decline in property buying interest among British and Irish investors in particular. Falling house prices in the UK and concerns about over-construction in coastal and mountain resorts were seen as the key factors in this trend. A Place in the Sun, the UK's biggest selling property magazine, listed Bulgaria in eighth place in the world in terms of attractiveness for foreign investors, down from third in 2006. The leading countries in the survey were Spain, France and Turkey, with Bulgaria leading the way for Eastern Europe.

Meanwhile, there was a strong growth in demand from domestic buyers. Although the majority of Bulgarians own their own properties, there was a regular stream of people moving to Sofia from other parts of the country.

Kalin Hristov, advisor to the governor of the Bulgarian National Bank, told Oxford Business Group (OBG), "Every year between 50 000 and 100 000 Bulgarians migrate from the regions to Sofia and surveys showed that 60 per cent of them were willing to buy property. The idea of accumulating equity has taken root." At the same time, many affluent Sofia residents were looking to purchase property outside the city centre.

Despite the recent drop in interest, British and Irish investors were still the largest group of foreign property buyers in Bulgaria, making up 40 per cent of the market. This position may change next year as Russians currently account for 38 per cent of the market.

According to Silvia Gavazova, marketing manager of Sofia-based BelleVue Property Management, the growth in Russian buyers would offset the decrease in the number of other investors and could prove to be a more sustainable growth model for the holiday homes sector. She told OBG, "Research shows that the vast majority of Russian buyers in Bulgaria were looking for a long-term holiday home. Only 10 per cent of them were interested in exploiting their property for financial income, in contrast to British and Irish investors who often have unrealistic expectations of property value increases."

Gavazova said Russians were generally less price sensitive and placed a higher emphasis on quality developments. Many analysts have said they believed that high-quality tourist residential properties, such as BelleVue's Sozopolis, near the southern coastal town of Sozopol, would replace the glut of inexpensive hotel and apartment construction that had dominated the mountain and Black Sea coast in recent years.

 In recent years there had been a steady movement of business, prompted by the development of business parks, towards Sofia's ring road, which is still under construction. The development of gated residential communities in the suburbs is moving quickly forward.

Embassy Suites, BelleVue's gated community on the outskirts of the capital, features 80 apartments and underground parking. Nearby, Winslow Gardens, a 22 000 sq m gated community in the Manastirski Livadi residential quarter between Sofia and Vitosha Mountain being developed by Winslow Developments, is currently under construction.

Mike Wellings, a partner in Bulgaria-based Winslow, told OBG, "Rising incomes among Sofia's professional classes combined with the continued congestion of the city centre had led to a strong demand for gated communities. The municipality's urban plan and transport projects had also accelerated sub-urbanisation."

Elitsa Panayotova is CEO of Alfa Developments, which is currently constructing Panorama City a 176 000 sq m high-end residential development in Galata Varna. She told OBG, "In the past many high-quality residential projects failed because the communal areas were poorly maintained or the surrounding neighbourhood fell below standards. There was a strong demand now for quality construction with good management where people could live in proximity to like-minded residents."

Wellings said, "The most successful developments will be the larger ones that build their own infrastructure and combine green areas and facilities with quality apartments."

Local real estate agency Address Group recently predicted that property price growth would slow to around 10 to 15 per cent in 2008. The company's analysts said the high-end suburban property sector would be one of the real estate divisions to experience the strongest growth in prices this year.