Calls for regulation and ethics to be injected into Bulgarian property market

The global financial crisis could actually be the saviour of the property market in Bulgaria which is struggling with falling prices and slow demand.The current real estate slowdown is an opportunity for the industry to take stock and a golden opportunity for regulation to be introduced, according to various property professionals.

Like many emerging property markets, Bulgaria saw a huge rise in real estate in the last five years. Entry to the European Union in January 2007 further boosted the property market. A large number of of-plan developments were built in the mountains creating a mini ski resort boom and along the Black Sea coast a similar boom took off as tourism became the fastest growing sector of the Bulgarian economy.

Indeed in first nine months of 2008 some €1.7 billion has been invested by foreign clients in Bulgaria's property market, according to research from Aston Lloyd.

But with the boom came stories of taxi drivers acting as estate agents, greedy developers, bad quality finishes on apartments and people boasting about becoming rich quick.

But the boom has now turned to bust. The property market is flat and many property investors are selling up at a loss. Although there are many investors who are sitting tight whose stories rarely make the headlines. Work on some developments has halted and others are struggling to complete.

'It was far too much easy money which kicked off the incredible property boom in Bulgaria and this money, as we are all too well aware, is no longer on tap,' explained Jain Goodall, director of Quest Bulgaria, an independent magazine for property investors in Bulgaria.

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The boom was like the first wave, she says. Properties were cheap. Property investors were split into two camps; there were those that wanted to buy a house and land and live the self sufficient life; and those who bought off plan in popular resorts in the mountains and along the coast to have a holiday home that they could rent out.

She believes that the property industry must now take a good look at itself and take the time to sort itself out. 'The slow down provides a moment to breathe, take stock and grab the opportunity to get it all back on track. Instead of sitting on their hands and saying it is all the fault of others, this is just the chance for the Bulgarian government, developers and agents alike to take a long hard look at the country's property market and make some decisions for a better, more solid long-term future,' she said.

'Bulgaria truly is one of the most beautiful countries in the world. It is not too difficult to imagine how the property market could be improved and just going back to the basics of what customers want will give straightforward answers with simple common sense,' she added.

One of the main areas that needs to be examined is regulation. Unlike mature markets like the UK, France and the US, anyone can set up as a real estate agent. In general the seller puts the price tag on their property. The valuation process goes something like this; Ivan across the road has advertised his property for sale at €45,000 so my house must be worth €50,000 as it is bigger.

There is also room for a more ethical approach by developers and agents. 'Buyers want them to stop being so greedy and will use those with a long term vision and top-notch customer service. Some agents, developers and vendors really need to develop a sense of reality. This may be forced on them as the flow of money had dwindled. Fortunately the slowdown is weeding out the rogues,' added Goodall.

Shtelyan Kalchev, the owner of RE/MAX Connection, agrees. 'The Bulgarian market real estate sector is in desperate need of regulation not only for brokerages but also for developers and builders. We need a legal ethical code regulated by and supported by the Bulgarian government,' he said.

'The European wide RICS (Royal Institute of Chartered Surveyors) regulations should be brought in as soon as possible here. We have waited long enough. These new regulations will clear out people who are here for fat profit, only hard working professionals will be left and the situation will definitely improve,' he added.

Typical of the kind of approach that needs to be stamped out is that experienced by British property investor Rachel Gawith. She agreed to buy a two bedroom apartment near the main gondola in Bansko. But when she visited the development for the first time she found that it was much further from the gondola than had been described in the original literature and the promised view of the town was actually the apartment block next door.

After lengthy legal proceedings she eventually sold the apartment but was not put off investing in property in Bulgaria and went on to buy a portfolio of 11 properties. 'I encountered many disreputable as well as reputable and helpful agents,' she told PropertyWire.

She ended up working for a Bulgarian property agency but eventually became disillusioned with them and set up her own property business. She encountered other investors who suffered problems. 'While Bulgaria is a lovely country in many ways and has much to offer, I do not know a single person that has moved here or bought here and not faced problems with agencies, builders and general difficulties of living in a different country and culture,' she added. She is now selling up and leaving.

The good news for the Bulgarian property market is that there are still buyers out there. According to Goodall property agents are reporting that luxury property, especially on the Black Sea coast is still selling. Russians, Germans and affluent Bulgarians are looking for high quality property. 'They don't ask what properties do you have, they ask to see the most expensive piece of real estate around, that's the difference,' explained Goodall.

But there also needs to be a plan to stimulate the economy. Financial analysts point out that even although the country's economy is expected to grow in 2009; it is still likely to be hit badly by the global economic crisis.

According to a report from Property Secrets published at the beginning of this year growth is expected to be much lower than in previous years. After recording GDP growth of 7% in the first half of 2008 and 5.6% in the third quarter, it is likely that the economy will slow down to a still respectable 4%.

The main issue that economists point to is that Bulgaria currently runs a large current account deficit, around 20% of GDP, which is expected to increase to 24 to 26% in 2009. The country's exports have weakened and are expected to weaken even more in 2009 due to lower demand from abroad.

The Property Secrets report point out that the Bulgarian government hasn't taken any real measures so far to fight the economic crisis, except for one meeting between government representatives and employer organisations and labour unions. Only suggestions for possible ways of dealing with the crisis were discussed.

'It looks likely that the government hopes that strong fiscal position of Bulgaria will act as a safety cushion for the economy. The country runs a budget surplus, which should allow increased public spending as the economy slows. But even this will probably not prevent the Bulgarian economy from a fairly bumpy landing,' it says.

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However liquidity is holding up. Mortgage lending has not tightened much. Banks still lend up to 80% LTV to local borrowers and up to 70 to 75% to non-residents. Interest rates vary from 8.5% to 11.5% for mortgages in euros.

Figures for property prices are difficult to obtain in Bulgaria and the official statistics are usually six months behind reality and are usually taken with a pinch of salt. Quest Bulgaria has been carrying out its own survey which has found that prices have fallen slightly but there has not been a massive crash. For example a three bedroom house on the coast that was selling for €140,000 in October last year is now valued at €135,000. In the cities prices have been holding.

According to research from Property Secrets among the main cities, Sofia looks fairly stable and they expect prices to see only a 5 to 10% drop for new builds in selected locations. 'The most vulnerable to price declines seems to be the Vitosha district as here most of the new builds are being built, which can lead to short-term oversupply, its report says.

Analysts expect prices to drop further, possibly up to 15%, in Varna as it is a popular tourist spot where prices have been to some extent inflated by foreigners. 'Additionally, the economic prospects for the city are worsening, because, as the main Bulgarian port, Varna could be hit hard by the slowing trade and transport sector,' it adds.

The situation looks very differently in the holiday resorts. Transactions in Bansko and other ski resorts are pretty much flat. Goodall has found that British property investors with second homes in beach resorts are selling because there financial circumstances have changed due to the credit crunch in the UK. They are perhaps facing higher mortgage costs, are worried about losing their job and the first thing to go is a holiday home.

Property Secrets reckons that prices have fallen by up to 30% in some resorts. The most distressed sellers in the most oversupplied resorts, like Bansko, for example, are reducing prices by as much as 40 to 50%.

'We can expect that 2009 will be difficult for property owners in the resorts. Those who want to sell have been finding that this is all but impossible and we don't see the situation changing. In addition to the price drops of 30% that has already happened we can expect further reductions of 20% on average. We do not see much prospect of a quick recovery from these devastating price falls. We expect the majority of the market to move into a state of torpor, while the relatively small volume of transactions declines further,' its report concludes.