The first months of 2006 brought forecasts that property prices in Bulgaria will still increase in 2006, but at a slower pace than the record jumps seen in 2003 to 2005.
This applies mostly to residential properties, which are expected to register a percentage increase lower than the 21.6 per cent in 2005 and much lower than the 47.6 per cent of 2004, according to a forecast by independent analytical company Industry Watch.
“After the price boom in the past couple of years, especially in 2004, prices of residential property will stabilise in large Bulgarian cities, due to steady demand and increased supply, while in some of the smaller cities they will continue to rise to catch up with those in larger cities,” said Lachezar Bogdanov, an analyst with Industry Watch.
In its annual report, Industry Watch considers five alternatives for investment in Bulgaria - copper, petrol, the 12 most liquid shares on the Bulgarian Stock Exchange - Sofia (BSE), residential property and US dollars.
While the price of Bulgarian stock, measured through the blue-chip index SOFIX, increased by 32 per cent in 2005, the average prices of housing properties in this country went up by only 21.6 per cent, Industry Watch said. This means that investment in shares of companies traded on the stock exchange had become more attractive to investors.
Return on investment in other sectors, like oil and metals, has also become higher at 60 per cent. Even the US dollar is more attractive as a form of investment because of the hiked interest rates by the US Federal Reserve, which are certain to continue their upward trend.
In 2005, the profitability of investment in copper was 66.3 per cent, and investment in petrol was 61.7 per cent. The profitability from buying dollars was 13 per cent in 2005.
Bogdanov expects that profitability from investments in copper and petrol will remain the highest of the five alternatives in 2006.
The growth in the supply of new residential properties remains upbeat. Two thirds of all construction permits in 2005 were issued in the country’s five largest cities, where developers can find better profit margins, said Industry Watch.
The Black Sea city of Bourgas leads the capital Sofia and Varna (also on the Black Sea) in terms of apartment building permits. The speculative demand driven by second-home buyers will ensure a sustainable level of construction activity in the region over the near-term, specialists say.
Growing supply will level off residential property prices in Sofia. The trend has already impacted several market segments in the capital, where prices for some types of properties declined in late 2005. Speculative buyers, both locally and non-locally financed, remain the most significant market factor, Industry Watch says.
Bourgas has the most overvalued real estate market, given that the price of services in the coastal city is significantly lower than those in Sofia, whereas the property prices lag behind the capital by only eight per cent. The property markets in Pleven, Plovdiv, Rousse and Shoumen are undervalued, says Industry Watch.
According to the analysts, mortgages will continue to be the most popular type of credit for financing investment in residential property in 2006 because of the lower interest rate.
However, the share of mortgage loans in the overall debt of households still remains low compared to the European Union member countries, where the average share is about 69 per cent.
In the eurozone, the growth in mortgage lending is also outperforming the overall growth in credits. It was 12.5 per cent in 2005.
The recent decisions by the US Federal Reserve and the European Central Bank to raise their basic interest rates has hiked the global price of capital. Nevertheless, the current situation on the mortgage markets shows that much more time will be needed for the interest-hike measures to influence these markets.
The competitive pressure forces creditors to maintain low interest-rate levels on mortgage loans, in spite of the two central banks’ steps. For instance, in the eurozone, the average interest rate on mortgage loans dropped from 4.4 per cent in end-2004 to 3.95 per cent in end-2005, while the basic interest rate moved up from two to 2.5 per cent.
Foreign investors can purchase property in Bulgaria directly or through a locally-registered company.
Only Bulgarian-resident individuals and entities can own land, while non-residents personally may acquire only buildings. Therefore if foreign citizens want to invest in property in Bulgaria, they must register a Bulgarian-based company.
As soon as the company is registered any property in Bulgaria, including land, may be purchased in the company’s name.
The most common type of organisation for foreign investors is a limited liability company (LLC or LTD), which in Bulgaria is called OOD (Druzhestvo s Ogranichena Otgovornost).
Other forms are companies limited by shares (joint stock companies), called AD (Aktsionerno Drouzhestvo), joint enterprises, business associations, general partnerships, limited partnerships, and sole proprietorships.
The law does not limit the extent or amount of foreign participation in companies. Foreign individuals and companies can open unlimited number of accounts in any Bulgarian banks, in any hard currency, including the local - the Bulgarian lev.
