Property demand pushing up Bulgarian residential construction

Written by Dragomir Belchev, EPI – EECFA Bulgaria

Construction activity

Since the start of the pandemic, the activity of construction companies in Bulgaria was hindered by economic uncertainty, the government’s anti-COVID measures and the lack of workforce due to quarantine or illness. Therefore, during the period of March 2020 – March 2021, NSI (National Statistical Institute) data shows that building construction decreased by 8.4%. However, the sector has signs of recovery as in March 2021 building construction production index increased by 8.0% for the first time compared to the same month a year earlier.

Short-term indicators also suggest the improved confidence of investors after the hesitant 2020. In the first quarter of 2021, permitted floor area was 11.0% more than in Q1 2020, and almost 4% more than Q1 2019. The same trend, but with stronger dynamics, is also observed regarding started floor area. During the first quarter, accumulated construction permits resulted in starting of more than 660 000 sqm., which is nearly 25% more than in the corresponding quarter of 2020, and by 5.5% more compared to 2019.

Sofia (Bulgaria) – Source: unsplash.com (photo taken by Georgi Kalaydzhiev)

Residential property market

Despite the experienced difficulties, residential construction is remaining in the center of investors’ attention due to the growing residential property market especially in the largest cities (Sofia, Plovdiv, Varna, Burgas, etc.). After the initial withdrawal of buyers in the middle of 2020, it became clear that there would be no evident shift on the residential property market.

Regarding the supply side of the market, 15 623 new dwellings were completed last year (Q2 2020 – Q1 2021), which is 17.4% higher than a year ago and is the highest figure in the last 10 years. Still, this cannot catch up with demand which pushed prices up at the end of 2020 and in early 2021. The number of transactions went up in the first quarter of 2021 by 17% compared to the same quarter of 2020, and it is actually the strongest first quarter in the last 5 years. The ongoing housing price increase intensified after 2015. Since then, the accumulated price growth has been over 41%.

There are several factors contributing to the ongoing process:

Low interest rates on housing loans: last year banks improved the conditions of granting loans. The average interest rate on housing loans in March 2021 is 2.75%, which is historic low. The increasing interest in buying a home resulted in a 6% growth of newly granted loans in the period of April 2020 – March 2021 compared to the same period a year earlier. In Q1 2021, 20% of all deals are financed with bank loans but there are significant differences between cities. In Sofia, where buying a property is the most expensive, nearly half of the deals are financed with the banks’ help. In Varna the share is 32%, while in Burgas and Plovdiv the respective deals are 30% and 25%.

Low deposit rates: interest rates on deposits are close to 0% as in the last months some banks started to refuse taking new term deposits, which shifted people’s savings into real estates as the most reliable option.

Speculative investment: investors’ invest in acquiring properties in early construction stages with intentions to re-sell after the completion, which generates additional demand, and increases prices. Additionally, the growing profitability of the real estate market attracts the savings of people working abroad who look for investment opportunities in their country of origin.

Residential construction forecast is available in the EECFA Construction Forecast Report Bulgaria that can be purchased on eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

Will COVID-19 shake Bulgarian housing?

How much the pandemic hit construction activity: short-term implications for the residential property market

Written by Dragomir Belchev, EPI – EECFA Bulgaria

Construction activity

Construction sector in Bulgaria, and building construction in particular, was not affected as hard as others by the COVID-19 crisis. Yet, limited economic activity during the 3-month long state of emergency (between March 13th and May 13th) resulted in a drop of the index of construction production during this period by 16.9% on average. In June building construction output was 4.3% lower as companies in the sector are returning to business as usual. But already started residential and non-residential projects are financially ensured and are expected to be completed on time. And the accumulated started projects during the last several years started to materialize and 3660 dwellings were completed in Q2 2020, which is 56% higher than in Q2 2019. On the other hand, the economic uncertainty temporarily cooled down investor thirst in residential projects. Permitted dwellings in Q2 2020 dropped by 29.9%, while in terms of started dwellings the decline was not so dramatic (-15.6%).

The full exposure of the Bulgarian residential construction to the COVID-19 crisis remains to be seen in the months to come. Unemployment rate reached 5.9% in Q2 2020, which is 1.8 p.p. more than at the end of 2019. In mid-term the loss of income will reflect in people’s intention for buying a home, which could have a cooling effect on investments in residential property.

Residential property market

During the state of emergency, activity on the residential property market was restricted due to hampered administrative services. Additionally, the uncertainty regarding the near future made buyers temporarily pull away from the market. As a result, the total number of home transactions in Bulgaria in Q2 2020 shrank by 27.8% over Q2 2019. In Sofia, which has the largest chunk of the market (around 15%), the decline was lower (-7.6%).

During this summer we saw buyers gradually returning to the market, but while they are expecting a more significant price reduction, sellers are still reluctant to make such sacrifice. The shortage of quality property in big cities still puts the market power in the hands of supply with price levels almost unchanged compared to the beginning of 2020. In short-term, demand for property is fostered by 3 main factors:

  • Despite increasing unemployment, there is no major loss of income of people willing to buy before the start of the COVID-19 crisis.
  • Interest rates on mortgages were stable in the last 5 months, and as of July 2020 the average interest rate reached 2.89%, nearing the historic low of 2.85%. During the state of emergency financial institutions started to be much stricter in requirements, taking into account the affected sectors of the economy. In general, banks have the needed liquidity to finance viable projects of both sides – construction entrepreneurs and families buying a home. According to the Bulgarian National Bank data, the total sum of granted loans remain stable except for a considerable negative change in May 2020 when new housing loans decreased by nearly 28% over May 2019.
  • Buying property as investment is popular among people with free money since deposit rates are close to zero. Such investments could record good profitability especially when made before the completion of the construction project.

One segment of residential property market is experiencing a noticeable upturn. Due to pandemic, people are seeking more freedom and fresh air, which is resulting in strong demand for family houses in the agglomeration of big cities or near to them (in radius of 30 km).

Construction forecast for Bulgaria, including residential forecast, is available in the latest EECFA Forecast Report Bulgaria that you may buy on eecfa.com

Sofia Office Construction: The Beat Goes On (For Now)

Written by Yasen Georgiev and Dragomir Belchev, EPI – EECFA Bulgaria

Bulgaria’s non-residential construction is set to grow in 2019 and 2020. The positive figures in the latest EECFA Bulgaria Construction Forecast Report are backed by, among others, the accelerated growth in office construction which is to witness the completion of many big projects in 2019-2021. The question is not on whether their delivery will impact the segment, but on how.

NV Tower, Balkan Business Center (left), Sky Fort (middle), Synergy Tower, Sofia Tech One,  Advance Business Center (right); Sources: www.markan.bg, www.advancecenter.bg, www.capital.bg, http://www.aaa.bg

As shown by the 2019 Summer EECFA Bulgaria Construction Forecast Report (which can be purchased here), non-residential construction in the country is to be on a growth path in 2019 and 2020, a major driver being office construction. After bouncing back in 2017, and keeping the momentum in 2018, it is relishing a real revival and is predicted to increase by over 10% on average in 2019-2021.

Office-related construction is mainly concentrated in Sofia where all major projects are located. The city is an attractive destination for companies that benefit from a favorable mix of skilled young population, competitive labor costs and rent levels to establish and expand in spheres linked to Information Technology, business process outsourcing and shared services. Companies in these sectors are active in relocations, often driven by their expansion plans and/or the rising preference of their employees for modern office premises.

Existing office space in Sofia totaled 2mln sqm at the end of 2018. In H1 2019 it witnessed the delivery of 100 000sqm and now looks forward to another 400 000sqm with an expected completion till 2021.

These dynamics are fueled by the peak in permitted office space registered in H2 2018 – an all-time high performance that by far exceeded the pre-crisis record of H1 2008 (265 065sqm).

In H1 2019 another 129 545sqm were permitted, which is still a rise of more than 90% y-o-y. It remains to be seen whether this data on permitted floor space will translate into the size of started office premises and, later on, in the number and volume of completed ones. H2 2015 recorded the peak in terms of started office floor space so far and if it is to be outperformed, H2 2019 and H1 2020 seem to be the perfect timing.

Against the backdrop of the latest development, the question is not on whether the delivery of all projects in the active pipeline will impact the segment, but on how. Demand is awaited to see logical limitations in the future because of skilled labor shortage being on the rise, the increased application of AI solutions and the changing behavior of office employees in favor of more flexible and remote work.

This altogether should keep the present rent levels in Sofia, or even put them under pressure. Rents did not considerably change over the last years and even now continue to be among the lowest in the CEE region. Thus, provided that all projects are delivered, office yields will be questioned. This scenario seems increasingly possible unless a new wave of major restructuring and cost-cutting takes place in countries with higher labor costs.