PHILIP BAY
Regional Director, Southeast Europe
EMEA Board Member
Colliers International
THE world’s oldest and most experienced central bank director, Allen Greenspan, once made a famous statement to the US congress during the Clinton administration just before the “dot-com” stock market crash of the late 1990s.
He said that investors were suffering from “irrational exuberance when it came to a belief that the stock exchange — with all its new sexy high tech companies brought into the market - would continue to rise.
Greenspan was right, and most of the players in the market did not listen. The rest of the story has become textbook history for most business schools.
But let’s get back to Bulgaria, anno 2004. Real estate investment in this country has become the panacea for EU and other international real estate investors who have been suffering from low returns in their mature markets, and drastically reduced returns in Rumsfeld’s “New Europe” (i.e. Poland, Czech and Hungary). In Bulgaria, the word on the street is: “now that we are a NATO member, investors will feel secure and real estate will go much higher.” The other favorite Irish-Pub-Statement is: “Soon Bulgaria is an EU member, and this means that since prices are so low (for apartments, homes, land, hotels, etc.) they must catch up with the rest of Europe.” Both of these statements can be correct as isolated indicators, but by no means are they market drivers.
Macro-economics, market liquidity, ROIs (Returns on Investment) and disposable incomes are the only market drivers that really count beyond the “infatuation” of the first encounter. Right now, many investors are infatuated with Bulgaria. Nonetheless the fundamentals of this relationship (initial investment) — beyond the current passionate courtship — remain to be tested for many first time investors.
Now let’s go back to the hype about investing on the Black Sea.
For the past two or three years, brokers and some bankers from here and abroad have been saying that a resort or second home investment on the Black Sea is the next best thing to getting a new 4x4 Porsche Cayenne with monthly leasing payments that are the same as a Toyota Yaris.
Everybody knows this is not possible, so why has the Bulgarian Black Sea become so popular all of a sudden? The answer is simple: everything is cheap when compared to other coastlines in southern Europe. This situation then begs the question: just because property is cheap, does that mean it is always a great investment?
If price is the sole driver, then just compare Bulgaria with Spain, Portugal, Greece, Serbia and Montenegro, Croatia, Malta and Cyprus. By far, Bulgaria is the cheapest (best?) real estate and travel deal when you look at price a square metre and days to be spent on the sand.
With that in mind, if real estate prices in Bulgaria are to increase and reach levels that equivalent apartments and homes sell for example in Spain, Portugal, Greece, Serbia and Montenegro, then the equivalent of the 700 euro a sq m bargain-basement Bulgarian coastal apartment must at least go up to the equivalent of Montenegro’s coastline which sells today for 1600 euro a sq m, if some form of competitive advantage in the market is to decrease. The question is: will Montenegro’s price go even higher? Or will prices decrease as Bulgaria’s price rise or exceed their levels? If the latter is true, then ask yourself why? NATO and EU?
If we leave that benchmark for a moment, let’s focus on charter costs to Bulgaria. If Bulgaria is such an inexpensive travel destination, then why should second homes, condominiums and resort facilities skyrocket in value to the extent that some say they will? Travelling income groups tend to follow each other, and as it stands today, Bulgaria’s competitors get over 90 per cent of the middle and higher income groups from the EU. Today’s Black Sea resorts (if we discount Russians and other neighbours) cater to working class EU families who cannot afford Greece, Spain or Portugal anymore.
How long will that last?
What is taking place today is that the market is being driven by a few players who are great at marketing sand to the Israelis and oil to the Arabs. Large scale projects that focus on foreign investors who do not know how short the warm season is on the Black Sea, and who do not know that Bulgaria has far less than 200 qualified golfers in the country, will end up as monumental large projects with poor returns for most, or worse as we have seen recently.
The Black Sea will be called the “Red Sea” for many investors, bankers and accountants in the next 36 months. Then after this cycle is over, real market forces will return and Allen Greenspan might even enjoy his one week stay in a beachfront condo that he bought - of course at realistic market rates and expectations.
Regional Director, Southeast Europe
EMEA Board Member
Colliers International
THE world’s oldest and most experienced central bank director, Allen Greenspan, once made a famous statement to the US congress during the Clinton administration just before the “dot-com” stock market crash of the late 1990s.
He said that investors were suffering from “irrational exuberance when it came to a belief that the stock exchange — with all its new sexy high tech companies brought into the market - would continue to rise.
Greenspan was right, and most of the players in the market did not listen. The rest of the story has become textbook history for most business schools.
But let’s get back to Bulgaria, anno 2004. Real estate investment in this country has become the panacea for EU and other international real estate investors who have been suffering from low returns in their mature markets, and drastically reduced returns in Rumsfeld’s “New Europe” (i.e. Poland, Czech and Hungary). In Bulgaria, the word on the street is: “now that we are a NATO member, investors will feel secure and real estate will go much higher.” The other favorite Irish-Pub-Statement is: “Soon Bulgaria is an EU member, and this means that since prices are so low (for apartments, homes, land, hotels, etc.) they must catch up with the rest of Europe.” Both of these statements can be correct as isolated indicators, but by no means are they market drivers.
Macro-economics, market liquidity, ROIs (Returns on Investment) and disposable incomes are the only market drivers that really count beyond the “infatuation” of the first encounter. Right now, many investors are infatuated with Bulgaria. Nonetheless the fundamentals of this relationship (initial investment) — beyond the current passionate courtship — remain to be tested for many first time investors.
Now let’s go back to the hype about investing on the Black Sea.
For the past two or three years, brokers and some bankers from here and abroad have been saying that a resort or second home investment on the Black Sea is the next best thing to getting a new 4x4 Porsche Cayenne with monthly leasing payments that are the same as a Toyota Yaris.
Everybody knows this is not possible, so why has the Bulgarian Black Sea become so popular all of a sudden? The answer is simple: everything is cheap when compared to other coastlines in southern Europe. This situation then begs the question: just because property is cheap, does that mean it is always a great investment?
If price is the sole driver, then just compare Bulgaria with Spain, Portugal, Greece, Serbia and Montenegro, Croatia, Malta and Cyprus. By far, Bulgaria is the cheapest (best?) real estate and travel deal when you look at price a square metre and days to be spent on the sand.
With that in mind, if real estate prices in Bulgaria are to increase and reach levels that equivalent apartments and homes sell for example in Spain, Portugal, Greece, Serbia and Montenegro, then the equivalent of the 700 euro a sq m bargain-basement Bulgarian coastal apartment must at least go up to the equivalent of Montenegro’s coastline which sells today for 1600 euro a sq m, if some form of competitive advantage in the market is to decrease. The question is: will Montenegro’s price go even higher? Or will prices decrease as Bulgaria’s price rise or exceed their levels? If the latter is true, then ask yourself why? NATO and EU?
If we leave that benchmark for a moment, let’s focus on charter costs to Bulgaria. If Bulgaria is such an inexpensive travel destination, then why should second homes, condominiums and resort facilities skyrocket in value to the extent that some say they will? Travelling income groups tend to follow each other, and as it stands today, Bulgaria’s competitors get over 90 per cent of the middle and higher income groups from the EU. Today’s Black Sea resorts (if we discount Russians and other neighbours) cater to working class EU families who cannot afford Greece, Spain or Portugal anymore.
How long will that last?
What is taking place today is that the market is being driven by a few players who are great at marketing sand to the Israelis and oil to the Arabs. Large scale projects that focus on foreign investors who do not know how short the warm season is on the Black Sea, and who do not know that Bulgaria has far less than 200 qualified golfers in the country, will end up as monumental large projects with poor returns for most, or worse as we have seen recently.
The Black Sea will be called the “Red Sea” for many investors, bankers and accountants in the next 36 months. Then after this cycle is over, real market forces will return and Allen Greenspan might even enjoy his one week stay in a beachfront condo that he bought - of course at realistic market rates and expectations.
