Storm Warning for Bulgaria’s Commercial Real Estate Market

General Situation

Economic growth in Bulgaria since 2005 has been 6% annually. Its entry into the European Union on January 1, 2007 became an additional stimulus to business and led to an increase of investments into commercial real estate.

Another feature that makes investments in Bulgaria so attractive is the favorable taxation regime: from the beginning of 2007 the country can boast the lowest corporate tax rate in Europe, 10%, which, according to the experts, makes Bulgaria one of the most attractive European states for investors.

One cause for concern experts mention is growing inflation. According to the Bulgarian National Bank, in 2007 inflation had reached 8.4% (in 2005 – 5%, in 2006 – 7.3 %). Principal causes of inflation, according to CB Richard Ellis analysts, are the worldwide increases in prices for food products and oil.

Another risk that the economy of Bulgaria faces is its high dependence on foreign investments, which during a world financial crisis can have rather painful consequences.

Speaking about the crisis, it is necessary to note that Bulgaria is nevertheless considered one of the countries that are least vulnerable, which to a large degree is connected to the fact that this is a relatively new market for international investors. However in the last few months the real estate market of Bulgaria has been feeling the influence of the world economic recession. According to experts, the first decreases came in the resort real estate segment: according to some data, a considerable decrease in the quantity of transactions has occurred, and the quantity of residential and hotel properties being sold has increased. In particular, the Bulgarian Land Development Company put several of its projects up for sale; construction of both the Borovets ski resort and the Kavarna Black Sea resort has been put on hold. The Bulgarian Property Development Company has also stopped its work on the Bansko ski resort. Austrian Immoeast AG also announced that it was freezing construction of projects in Bulgaria to improve the company’s liquidity.

Nevertheless, Bulgaria still remains interesting to investors. According to research published recently by Jones Lang LaSalle devoted to transparency of European real estate markets (Real Estate Transparency Index), Bulgaria, which only this year was included in the rating, was placed in the “semi-transparent” markets level. The researchers noted that after its entry into the EU, the country has shown quite rapid progress in improving its regulatory and business climate. Now Bulgaria has even better transparency indicators than Romania.

Despite the visible impact of the financial crisis on the Bulgarian real estate market, the chairman of the Bulgarian national commonwealth on real estate, Luchazar Iskrov, at a recent press conference stated, “There are no bases for apocalyptic forecasts, and investing in the country’s real estate is a way to protect one’s investments during the crisis.” He also noted that he expects an increase in the share of Russian investments in Bulgarian real estate because of the profitability of the investments, the general culture, and the absence of a language barrier.

Office Real Estate

Traditionally, a country’s real estate market starts to develop in its capital city. The young Bulgarian market is no exception. According to experts from PricewaterhouseCoopers, Sofia’s office real estate market remains an attractive investment. Demand for quality office space is concentrated in the capital of Bulgaria, and seeing that there is deficiency of supply, construction of offices in Sofia is still justified even in the current crisis situation.

Offices in Sofia’s central business area are in great demand, yet today this demand remains unsatisfied. As PricewaterhouseCoopers noted, there is a considerable reserve of areas in old buildings in the city’s central part that offer good possibilities to investors.

Owing to the lack of sites for new construction in Sofia’s business center, there is an appreciable tendency for decentralization of office real estate. The positive factor for building outside of the city center is the ability to provide ample parking.

According to DTZ, the quantity of buildings meeting international requirements, the A-class business centers, is very small in Sofia. A considerable increase occurred in 2007 when about 80,000 sq m came onto the market. Some examples of A-class offices are the Sofia Tower and the second phase of the Expo 2000 project. In the B-Class category, many smaller projects have been completed such as Rainbow Plaza, Mandarin Center, and Hill Tower.

According to Colliers International, for the first half of 2008, the qualitative supply of offices in Sofia has grown by 143,000 sq m, having reached a total of 759,000 sq m (the current supply of A- and B-Class offices). A considerable share of the new supply is represented by projects that are very small in area. In addition, the company noted that more than a half of existing supply (388,000 sq m) is outside the central part of the city, including the suburbs.

According to CB Richard Ellis, by the end of the year commissioning of 250,000 sq m of office areas is expected. According to DTZ, between 2009–2011 about 400,000 to 500,000 sq m of qualitative areas are planned; however, it is unlikely that all of them will be completed. According to experts from Forton International in association with Cushman & Wakefield, the entry onto the market of all announced projects can lead to an overabundance of office areas.

According to Colliers International, the average leasing rates in the city vary in the range of 12–19 euros per sq m per month (144–228 euros per sq m per year). According to PricewaterhouseCoopers, the level of vacant areas in Sofia has decreased from 9.6% to 4.5%.

Though the demand, just like most business activity, is concentrated basically in Sofia, qualitative office projects are also starting to appear in other large cities. Some of Varna’s new office supply listed by the experts of DTZ are the first and second phases of the Varna Business Park office complex (the first phase is completely finished, the second is under construction), the under construction Varna Logistics Park multi-purpose project with office, trading, and warehouse components, and the recently completed Opera office center. According to Colliers International, at the end of the first half of 2008, the total area of projects in Varna, which can be ranked as A- and B-Class, stood at 106,000 sq m (class A – 47 %, class B – 53 %).

Retail Real Estate

An increase in disposable consumer income, characteristic for countries with a growing economy, leads to an increase in demand for quality shopping centers.

Among the leaders in the development of commercial real estate in Bulgaria, according to Forton International, are Aviv, Globe Trade Center (GTC), and Carrefour. According to the company’s experts, shopping center real estate in Bulgaria is the most actively developing sector in comparison with other segments of commercial real estate.

In the Bulgarian capital, the first modern shopping centers appeared in 2006: Sofia Mall, Sofia City Center, and the Sky City Centre. According to DTZ, in 2007–08 there was a decrease in rates of new project completion, but in the course of construction there are a number of large-scale projects including multi-purpose projects that will be in operation between 2009–2011. Several new retail-parks have been announced: this format promises to have a respectful place on the market in the next few years.

According to CB Richard Ellis, in the first half of 2008, the supply of the shopping center real estate in Sofia increased by only 26,000 sq m, the total amount of the retail shopping areas reached 650,000 sq m, and by the end of the year the company’s experts foresee the commissioning of another 210,000 sq m. Thus, by the end of the year the overall supply of the shopping center real estate in Sofia will reach 860,000 sq m.

Demand for retail shopping areas remains at a high level; however, opening of all announced projects promises to lower this deficiency of qualitative retail shopping areas. Today, according to Forton International, in the qualitative shopping centers the level of vacant spaces is almost nil. Among large retail operators are Billa, Metro, Technopolis, Technomarket, Kaufland, Praktiker, Mr. Bricolage and many others.

Because of deficiency of large retail shopping objects in the central area of Sofia, international retailers entering Bulgaria’s market must search for areas outside of the city center and in its suburbs. According to CB Richard Ellis, the retail operators are showing the highest interest in areas with high population densities located near large highways. Among such areas are Mladost, Lyulin, and Druzhba.

Other Bulgarian cities are also showing growth. According to Colliers International, in the first half of 2008 a large shopping center, the Varna Mall (shopping area 33,000 sq m) was opened in Varna. A considerable increase to the future supply occurred in the city of Rousse, where construction of four projects began at once, with a cumulative retail trade area of 123,000 sq m: Grand Plaza, Danube Mall, Rousse Mall, and Mega Mall. After their completion (years 2010–2011) the city promises to become the richest in retail trading areas in comparison with other cities of Bulgaria.

Today, the lack of qualitative supply of trading areas Bulgarian cities presents an obstacle for the entry onto the market by some international trading networks. Nevertheless, worthy projects are already appearing outside of the capital of Bulgaria, which promises to lead to an increase in the number of foreign retailers entering the market of Bulgaria.

Currently the greatest demand is for large shopping center projects with a well-thought-out concept, professional management, and sufficient parking.

According to Forton International, the average lease rate for non-anchor tenants in shopping centers stands at 35–40 euros per sq m per month (420–480 euros per sq m per year).

Warehousing Real Estate

In comparison with the office and commercial segments, the warehousing segment remained, until recently, the least popular for investors. These days, considering the quantity of office and commercial projects, investors started paying attention to warehousing real estate. However, considering the difficult situation in the world markets, the expected growth in newly announced projects has not occurred. Investors have adopted a wait-and see position, and announcements of new construction are rare. For now, investors are studying the warehousing market and waiting to see how events develop.

Today, old industrial buildings primarily represent the warehousing market in Bulgaria. New generation warehouse projects were built mostly for the needs of specific companies (built-to-order).

According to CB Richard Ellis, the most attractive area for building warehousing real estate is still the strategically important territory between Sofia and Plovdiv, along the Thracia Highway. But there has been an increase of interest in warehousing real estate outside of this territory as well; in particular, prospective areas for building warehouses are also in the cities of Russe, Stara Zagora, Pleven, and Plovdiv.

According to CB Richard Ellis, in Sofia in the first half of 2008, about 20,600 sq m of modern industrial areas came onto the market in Sofia, out which 6,300 sq m are in the manufacturing areas, and 14,500 sq m are warehouses. As a result, the total amount of modern warehouse areas in Sofia has reached 404,000 sq m. These areas are primarily concentrated in southeast (Iskar industrial zone and the village of Kazichene) and North-Western parts of the city. According to Colliers International, more than 40,000 sq m of industrial areas is under construction in Sofia.

The rental rates in Sofia, according to DTZ, for last two years stood at 4.5–5 euros per sq m per month (54–60 euros per sq m per year).

Plovdiv is another city in which warehousing real estate is developing, and according to Colliers International the total supply of industrial areas reached 760,000 sq .m, of which about one half are used for manufacturing needs. Still at the building stage are about 88,000 sq m, 66% of which are concentrated in the Rakovski industrial zone. At the end of 2007, the cumulative area of under-construction industrial objects here has increased more than ten-fold, which makes the Rakovski zone the fastest developing industrial zone in the country.

The demand for modern qualitative areas keeps growing, fueled by the development of the trading sector. Due to the deficiency of modern speculative warehouse and industrial objects, the level of vacant areas stands at around 3%.