"My house is worth....... "

[Jain and Chris]

I thought I would share with you our lead story which appeared in the December edition.

“My house is worth…” - Putting a realistic view on re-sales

The media in both Bulgaria and the UK is still raving about the phenomenal investment potential of the Bulgarian property market. This hype has lead many people to invest in the market in the hope of making a fast return. Mass publicity about rising property prices lures many people to Bulgaria, but what is the reality of the situation?

Knight Frank, one of the UK’s most respected residential and commercial property consultancies, recently published a report stating that high increases in residential property prices placed Bulgaria in second place in a world table highlighting property price increases during the second quarter of 2007. The report stated prices increased by 27.1%, so does this mean my house is now worth around £44,000 more than it was when I put it on the market at the start of the year? Should I be increasing the price in line with market trends?

Yet another report by another reputable company, real estate consultants, Colliers, reported similar trends but focussed more on the fact that it was the number of buildings constructed. The mountain resorts showed 50% increases and the Black Sea coast 39%. How easy it is to read this statement in relation to prices increasing rather than that of the rate of build and to neglect the part of Colliers report, which states that overall sales prices have “remained unchanged for the past half year as supply continues to outpace demand.”

The reality of the situation is that most reports measure Bulgaria’s property market success in terms of price increases or build rates and neglect the fact that in Bulgaria, the real estate market is unregulated and the seller puts the price tag on their property. The valuation process goes something like this, “Ivan across the road has advertised his house for sale at 20,000 euro, so my house must be worth 30,000 euro because it is bigger.”

Another form of valuation has resulted from towns and in particular villages adopting unofficial rates. All it takes is a professional developer to move into the area and the price they charge for their properties, usually a cost per square metre, becomes the official standard.

The village of Rogachevo on the Northern Black Sea coast is a prime example. Bulgarian Land Development Plc, a newly incorporated company now listed on the AIM stock market, has started the construction of a six million euro apartment and villa complex just outside of the village. The price of the property in the development ranges from between 750 to 1,200 euro per sq.m. The conclusion amongst people wishing to resell properties in the village is, “my property is now worth at least 750 euros a square metre.” The fact that property up for resale may not have the same scenic outlook, modern facilities or luxurious design is irrelevant to the sellers. Bulgarian sellers have little experience of the property market because until a few years ago there was little demand. Consequently, they are unused to working to the laws of supply and demand. Many British sellers, who hail from a mature property market are lost without the skills of a valuer and stamp a price on their resale based on the following equation:

original cost + renovation costs + local market rates +desired profit =resale price

Yet, as everyone who emigrated here on the lure of cheap property and a fast buck now knows, the resale market is slow and underdeveloped. Apartment blocks are shooting up at a rapid pace giving new buyers lots of choice in both price and design. Renovated houses are two a penny and who wants to buy a renovated traditional build in the middle of nowhere, when they have so many well-designed new builds to choose? At the moment, it is safe to say, that in Bulgaria, supply far exceeds demand in terms of land and property.

The picture is not one of doom and gloom, but of caution rather than crash. The market is far from a crash, if it was, you would not see UK currency speculator Joe Lewis, investing 70 million pounds in the Bulgarian property market. And he is not alone, Israeli construction and investment company BSR Europe recently bought around 80,000 sq.m of land in Bulgaria for 37 million euro. Gardens Group is investing 400 million euro in a 600,000 sq.m development Lozen, a village close to Sofia.

A source from Raiffeisen real estates said that most sales over the last 2 years are from re-sale clients. Most of theses people bought land or property, sat on it for at least three years and are now re-selling for profits between 20 and 50%. This is easy to achieve when looking at properties at the low end of the market; recently Raiffeisen sold a property, which the client bought for 10,000 euro and sold for 15,000, but the demand for rural renovation projects has declined. Land re-sales are lucrative if the location is good. Apparently, there is good demand for regulated land, close to the coast. Again, patience is the key. Raiffeisen have dealt with re-sellers who bought land in 2004 at 10 euro per sq.m and sold it in October 2007 for 25 euro per sq.m.

British buyers have a “rising property” mentality. They expect property to increase dramatically in value as it has done over the last seven years in the UK. In this sense, they are not in tune with the rest of Europe; most of mainland Europe look at their
property as their home, whereas the British view their property as a way to make money. Their foray into the Bulgarian property market has left many disappointed, because lead on by media hype, they expected the market to earn them vast profits in a short space of time as had happened in the UK. The lack of regulation in the Bulgarian real estate market has meant that the seller is in charge of valuing their own property and often they choose an inflated sales figure rather than checking actual market rates for re-sales.

Property prices have increased in the last two years. Belinda Knowles (42), a trainee solicitor from Dulwich, bought her one-bedroom apartment in Golden Sands resort off-plan for 40,000 euro. It took two years to complete the project and she has just spent her first summer enjoying the fruits of her investment. A one bed roomed apartment in her block now costs 60,000 euro - a staggering growth of 50% - if she could sell her own. “I think the market is inflated by unscrupulous real estate agents. I’m certain that if I put my apartment up for sale at this price I would be left disappointed for two reasons. Why would someone buy my apartment when they can by a brand new one for the same price and if the demand is so great, why haven’t all of the apartments been sold?” Fortunately, Belinda bought her apartment as a long-term investment. “I have two teenage children and package holidays abroad were becoming ridiculously expensive. The children are also getting to the age where they would prefer to come on holiday with their friends rather than with me. I wanted to save money in the long-term by having a place abroad that the whole family could use via the low cost airline network and I wanted to be sure that it would be a safe place for my children to stay alone with their friends. Golden Sands is ideal. We get cheap flights with Wizz and British Airways from Gatwick which means we can come over more regularly and the nightclubs here are not filled with drug-taking louts, so I have no qualms about letting my kids go out.” She also knows that by the time they have out-grown Bulgaria, the apartment will yield a good return on her investment. “In ten years time, when my children have their own lives and means of support, they may not want to spend their leisure time here. I’m sure that with the rate of investment going into the country at the moment, my apartment will sell at a higher rate than I paid for it and I will have saved money in the long run by not having to fork out for package holiday fees.”

Jayne from Sofia purchased a run down country house this year for 20,000 euro. “I have been quoted a further 20,000 euro to do it up and have set aside a contingency budget of 20,000 euro. I expect to be able to sell the property within two years for 70,000 euro netting me a modest 10,000 euro profit. I think this is a reasonable gain.”

Assetz International Ltd, a reputable British investment company has warned its clients that growth rates of 20 -30 % in countries like Bulgaria would not continue and a cutback to a more steady and sustainable growth rate was necessary. They still labelled Bulgaria as the best place to invest in foreign property, but as early as 2005, Assetz advised caution, when investing in emerging markets like Bulgaria, “Low prices attract purchasers who are keen for a ‘quick fix’ solution to pension shortfalls, but as many agents will admit there is no guaranteed resale market in Bulgaria and little existing benchmark for measuring price increases.” Even as far back as 2005, they recommended that their clients view Bulgaria as a long-term investment rather than hoping for instant returns, sighting the fact that for a time supply would outstrip demand.

Economic indicators, as we pointed out in last months copy of Quest Bulgaria, look healthy for Bulgaria and will go a long way to increasing house prices in the market, but in the long-term. What we need right now is a realistic adjustment in market prices.

The key to investing in Bulgaria is; be reasonable, expect reasonable returns in the long term. Choose Bulgaria because it is a great place to be. It still offers reduced prices compared to the rest of Europe, which will provide you with inexpensive holidays or if you choose to move here, a low cost of living.


Tips and Hints

Supply currently outstrips demand in many areas giving buyers a great deal of choice and the potential for good prices.

Don't over-estimate the return. Expect to make modest gains in the medium to long term

Don’t take risks with a property portfolio if you need to make fast profits or need the money

Location and the type of property you buy will determine the size of your profits. So will future developments such as infrastructure, airports, cheap flights.... Research this.

Set reasonable prices on your resale, don’t pick numbers from thin air or copy what others are doing. Market the best features of your property, what makes it special.

Ask others how much they would expect to pay for your property

Sit back and enjoy your property for yourself or consider turning it into a business to take the pressure off the need to re-sell.

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All best wishes
Jain and Chris

[Damian George]

Hi Jain and Chris,

well done a interesting article and worth the 5 mins to read. i have dealt with a number of bulgarian property customers and i doubted their outlook as a 30% anywhere in under 12 months bar is high risk. but as you say 5% per year is reasonable outcome. (although i personally would look for 7/8%)

keep up the good work