BG Property Market Update - December 2007

Don’t be taken in by all the Hype

I make no apologies for the length of this Update. The content is important and complex. If you are thinking of buying or selling Bulgarian property you should read it.

Following my last BG Property Market Update, I received some mail asking why it was that I being somewhat negative in my approach to Bulgaria especially when I am in the business of selling real estate there.

Don’t get me wrong, Bulgaria is a great place in which to invest for the mid to long term, take holidays and in which to live. For example, the:

• countryside is beautiful
• people are friendly
• cost of living is way below UK rip-off rates
• Bulgarians certainly look after their countryside and what they call their “Nature”
• property is relatively cheap

In the various things that I have written both on this site and its sister site http://www.sunseapropertiesbg.com, I done my best to tell my fellow countrymen and women about some of the difficulties into which it is very easy to get.

Go to any of the forums populated by those who have already bought in Bulgaria and you will find any number of “horror stories” telling how many, quite sensible, people have been taken in and ripped off by unscrupulous people and practices.

We know our own country very well. Most of us are aware of its laws and institutions. The main problem is that some people think that things are going to be the same in Bulgaria and/or check their brains into a left luggage office when they check in their baggage with the airline on departure!

In Bulgaria, “estate agents” are NOT estate agents as we know them. They are property brokers and there is a world of difference between the two. Our estate agents work on a purely commission basis. In Bulgaria the brokers find sellers and then agree with those sellers how much they want to get from a sale and then … they sell it for what they can get. Guess who pockets the difference!

This means that, when you buy through one of these organisations the buyer pays both the seller’s commission as well as the buyer’s commission via the inflated price!

They represent large scale developers as well as ordinary people. So how can you tell if you are paying the right price for the property? The answer is that, unless you speak Bulgarian or have a Bulgarian speaking friend along and talk to the seller, you won’t!

Some people have bought directly over the Internet without ever visiting Bulgaria and viewing the property. We know of cases where the land on which the house is built has not even been included in the sale.

Others have fallen into traps of their own making. For example, when buying a property in this country, you spend ages looking around at lots of properties with many different agencies, you choose your own solicitor or licensed conveyancer and only pay your money when your professional advisers tell you that the moment is right.

Why then do UK people dash over to Bulgaria for perhaps only 3 or 4 days, get completely “trapped” by some charming broker who stays with them morning, noon and night and does not allow them any room to breathe or look around elsewhere.

Then, having decided to buy from a very limited range of properties, allow themselves to be rushed into:

• giving the broker (who is only looking after No. 1) a power of attorney to represent them
• using tame lawyers who know that, if they refuse to advise clients not to buy properties which are not completely kosher, will get no further work
• paying their money to the brokers
• not bothering to get a structural survey done
• accept a false representation that any required work can be done cheaply and easily only to find out later that it is far more expensive and / or (after they have paid) that the work has been done badly … or not at all!

Worse than all of that, they do not bother to enquire about the rules governing Capital Gains Tax on any sale of the property - see the article at:

OK – enough! Let me now get on with the present update. Just to let you know what has triggered it, it was an article in Metro (30 November 2007) which mostly seemed to extol the virtues of Bulgarian Dreams [read Rachel Gawith’s comments on this company at http://www.thetravelbug.org (then click on “About Me”)] and one particular ski resort with implied promises of massive increases in value to come and a lot of other vague misinformation.

Yeah right! Sunny Beach, Bansko and now Pamporovo have been, or are being over developed, and at last Bulgarian developers are learning at first hand what has happened in the Spanish property market. Legislation has been passed to prevent this happening again.

“The Science Bit”

Don’t be blasé about this. If you are minded to invest internationally then you must THINK and be AWARE internationally. So, unless you are a “City Whiz Kid”, read on.

The international currency markets are in a state of flux. The main global currency has, until now, been the almighty US Dollar. So bad is the present situation, because the Dollar has fallen so much, that the OPEC Countries are now considering switching the price of oil from USD to Euros which is proving to be the strongest of the three major world currencies.

Over the course of the last few months the USD has fallen dramatically not only against Sterling but a whole basket of currencies. Because of other factors this may give rise to another global problem in 2008. America is the world’s largest single importer and, as its currency devalues, so imports become more and more expensive. Even before this, many Americans were in bad financial shape and this continues even after the Fed reduced its own prime interest rate.

The inability of the major industrialised countries to export to the US will result in recession. This is yet to come but will may well hit UK sometime in 2008. The price of our goods in the US has risen by about 20 percent over the past year. Our currency has weakened against the Euro so at least we can export there but, like America, our Euro imports will become more expensive.

Things have turned out to be a lot more complicated than I thought they would be back in June 2007 when I wrote my first Update. There have been some fairly dramatic changes. Just two months after I wrote it we became aware of the "Sub-prime Lending" problem in the USA and, not long after that the Northern Rock went into meltdown. Soon we learned that the two things were linked.

Much as bookmakers “lay off” bets with other bookmakers so banks lay off their lending with other banks. The “Debt Market” is very big and very international. Other banks in other countries buy other banks’ debts – particularly mortgages. Some of our banks did the same and thousands of pounds have been wiped off their share values because they bought US Sub-prime mortgage debts. Northern Rock was NOT the only one.

As result of Sub-prime borrowing and the subsequent inability of borrowers to repay, not only are financial institutions - not just in the UK but worldwide - in difficulties but the property market in the US is in grave difficulties and near to meltdown. If you can understand the concept, millions of pounds have basically ceased to exist. Banking institutions have had to wipe millions of pounds of assets because the debts they bought have become wholly or partly irrecoverable. This has led to an increase in the Interbank Rate which is the rate at which financial institutions lend money to each other.

It is the law of supply and demand. Financial institutions still want to borrow from each other but money is scarce - so the price goes up. This price is passed on to consumers - us.

Back in summer 2007, after five rises in Base Lending Rate, we were contemplating a sixth in September or October. This never happened partly because of the Credit Crunch. Suddenly, far from contemplating further rises in interest rates, the Bank of England came under increasing pressure to cut them and, on 6 December 2007 it cut Base Lending Rate by 0.25 percent. Basically it was damned if it did and damned if it didn't.

The role of the Bank of England, as we know, is to keep inflation down to within 2 per cent. It wasn't. It was 2.1 per cent. But, with a housing market meltdown becoming a very real and highly undesirable possibility as a result of the previous five increases something had to be done. Overall, UK house prices dropped by one per cent in November 2007 and this was the biggest single monthly drop for 12 years (source Daily Mail). The Sunday Express on 1 December 2007 told us in the front page headline that there were only “100 DAYS TO HALT HOUSING CRASH”.

Another factor in the decision to reduce the Base Lending Rate is the fear of the UK economy plunging into recession in 2008 as a result of trading difficulties and the problems in obtaining credit.

The Banks have already started demanding the return of unsecured borrowings, loans in default and “unauthorised” overdrafts etc. This could lead to a further increase in personal bankruptcies and IVAs.

You must not think that a reduction in Base Rate will automatically make life any easier. Only those with Base Rate Tracker mortgages will see the whole benefit. The Interbank Lending Rate is likely to remain high and this and will restrict the ability of your building society or bank to reduce their rates by very much. There are likely to be quite a lot more repossessions, bankruptcies, IVAs and even negative equity problems in 2008 despite the fall in Base Rate.

Now international currency operators could see that there was a strong possibility of cuts in the Base Lending Rate and, as a result, Sterling dropped against the Euro from 1.49 / 1.50 near the beginning of 2007, when successive interest rate rises were on the cards, and, following the cut in Base Rate, it is now currently down to an average of 1.38 / 1.39.

If you were buying property in Bulgaria at the beginning of the year when Sterling was relatively strong against the Euro a purchase of property at 50,000 Euros would have cost you about 33,444 GBP. At present rates of exchange the same deal would cost you around 36,100 GBP. This is a price hike of more than 2,656 GBP or around 9.2 per cent for absolutely nothing.

High interest rates on all borrowing in the UK and the increasing cost of food and oil will not only curtail spending at home but inhibit outward investment in foreign property markets including Bulgaria. Most people will just not have spare money to spend.

Individual personal debt in the UK is now a staggering average of 20,000 GBP for every man woman and child. Money is in short supply not only for domestic purposes but for any kind of investment – let alone buying property in Bulgaria.

The Buying Market

Although the Bulgarians have not quite adjusted to the idea, it is a Buyer’s Market right now. Brokers are still “talking up the market” even for places like Bansko and Sunny Beach which have been seriously over-developed and where there are a huge number of properties on the market both new and resale. The same will probably happen in Pamporovo.

Because of financial difficulties at home, many of those investors who borrowed money (we always advise against this unless it is only a short term “bridging” measure) are seeking to sell to repay borrowing that has become increasingly expensive. So, indeed, are some of those who bought “off-plan” 18 months to 2 years ago looking for a quick profit and to repatriate their money as quickly as possible.

There is a lot of property on the market in Bulgaria. Yes, there is profit to be made in Bulgaria in the medium to longer term and the good times will return eventually. At the moment, anyone who buys off-plan hoping to re-sell it at completion or to make a quick profit in some other way is, at the moment, a lunatic. Our advice is “don’t try it!”

A quick look around our European cousins shows that:

• the French, thanks to “Monsewer Sarkosi’s” battle with the Unions, there is, as I forecast in June, now a “winter of discontent” which should last well into 2008 and causing the French to tighten their belts

• the Germans are still subject to a domestic tax on any foreign property they own

• the Spanish Property market is still in a certain amount of chaos and the Government has now begun seeking out and demolishing people’s homes if there is the slightest evidence of failure to comply with planning regulations! This may solve some of the over-development but will frighten potential buyers considerably!

Effectively, only the Russians (and some other emerging eastern European citizens) are buying in Bulgaria in any numbers but they tend to do so in well-established Russian or other "ethnic enclaves" such as at Obzor for example.

There is a lot of property on the market chasing too few buyers – and too many rentals chasing too few renters. Sadly the Bulgarian people have only experienced an upward price curve and have not yet got used to the fact that what goes up must come down.

Your best bet is to find someone in the UK who is looking to sell property in Bulgaria. There are quite a lot of them, particularly those with apartments to sell in the Sunny Beach and Bansko areas many are completely furnished and ready to occupy.

You are advised NOT to buy from brokers or developers in these areas and certainly not to listen to any nonsense about "guaranteed rental income". This is a complete farce. You should buy ONLY if you want to use the apartment for your own use and maybe to rent it out VERY occasionally.

Make an offer to buy something and you will be welcomed with open arms. But do negotiate. Even if something seems cheap by UK standards, negotiate! If the seller does not want to, or cannot, play – walk away. Definitely walk away if some stupid Bulgarian seller thinks he can up the price just because you are from the UK! They will try this on - so teach them a lesson. With brokers, you can reckon that they will try to score anything from 10 to 30 percent of the ultimate selling price and it will be you that will be paying it.

In Bulgaria, Real Estate Agents are NOT Estate Agents as we know them in the UK. They are Property Brokers which is quite a different thing. First and foremost real estate agents in Bulgaria are not regulated by law in any way at all as are estate agents in the UK.

Secondly, they do not work on a “commission basis” as we know it. They find property available for sale, agree with the seller just how much he expects to receive from a sale and then market the property for whatever price they can get for it, pay the seller his share and keep the balance for themselves. This is what they call their “commission”. Once you take this principle on board, you will be better able negotiate. While they may say that the seller will not reduce his price, they are really protecting their "commission"!

The main thing is that it is very much in their interests to keep up an image of market buoyancy and continued growth. They do this by stressing that property prices are increasing by incredible percentages year on year and “guaranteeing rental incomes”.

‘Tis the season to be very careful! Certainly you should NOT be borrowing money to fund a purchase. Do it only with money that you actually have available for investment.

The Selling Market

I know that no-one wants to hear bad news and will seek comfort in “good news” wherever they can find it – even if it is false.

I am also sorry if you are one of those who is in the position of having to sell. None of this can be good news for you but, as international property investors, you must already know that investments go down as well as up. In common with many other agents we have had a really bad year for sales and it does not look like getting better any time soon.

If you already have a buyer near to or under contract then this is an excellent time to sell and convert your Euros into Sterling. Because the Pound is weak against the Euro (and you will be paid in Euros if the deal is completed in BG) your Euros will buy more Pounds than before. This means that, even if you sell at a price which looks like a loss on paper, you may just realise a profit on your investment because of the currency conversion.

Otherwise, if you do not have to sell right now – don’t. Hold on for 18 months to 2 years and see what happens. If you do have to sell, be flexible and prepared to cut your losses. Remember that, because of the “seller’s commission” trap, the price you paid for your property might well have been higher that the real market value. This means that, even if you had tried to resell your property immediately after you bought it, it would probably have been over-priced. Now, with a difficult market, you will have to factor this into your thinking.

Try to sell your property to a UK buyer with part of the purchase money paid in the UK. Read our "Bulgarian Tax Trap" article and you will see how this can work to your advantage. UK buyers will not have to lose money when converting Sterling into Euros and you can limit the amount of money shown as changing hands in Bulgaria for the Notary Act. This will limit your tax liability in Bulgaria - especially if you own other property and can restrict the sale price to 50,000 Leva (around 24,500 Euros) thus avoiding the need to register for VAT. The charges on bank transfers when repatriating the money will also be reduced.

If you are trying to sell your property then you must be aware of the state of the market and not expect to receive many offers at the moment and, for property in some locations, maybe none at all! If at all possible, try to hold onto your property until the market improves.

If this is not possible and you do need to sell, be prepared to be flexible. Remember that you have already had it drummed into you by many others in the past that investments can go down as well as up!

Our commission for selling is only 3 per cent. The other news is that we have just (December 2008) added a new feature to our Property Search engine. Buyers can now select the option to view only those properties which are being offered for sale by UK sellers. We have experience of dealing with Bulgarian property transfers between UK people and will help any of our clients as much as we can.

Another thing to consider, if you have a company and are disposing of your only property holding in Bulgaria, why not sell the Company?

Owners with Existing or Planned Building or Development Projects

Finally, here is a word for those of you who are contemplating – or actually about to embark on - building projects. The currency fluctuations, of course, will hit you as well.

The Lev is tied to the Euro at 1.96 BGN to 1 Euro. At the beginning of 2007, 1 GBP = 2.90 Leva (approx). The Pound is at the date of this article (6 December 2007) equal to about 2.71 Leva. This means that a project costing 10,000 Leva would have costed you around 3,450 GBP at the beginning of the year. The same value project today will cost you approximately 3,690 GBP - an increase of 240 GBP per 10,000 Leva of the contract price - because of the currency fluctuation. Be sure to factor this into your equations.

Unless you are planning to use the finished project for yourself or as your permanent residence, consider putting plans on ice for a while until it becomes more likely that the market is about to improve or the Pound strengthens against the dollar. Although the cost of the project may not change in Leva or Euros, it certainly will cost more in Sterling.

Nobody can have a real-life crystal ball but, if you are minded to invest your money on an international basis, it pays to be aware of everything going on in the World – especially the international money market.

Paul E. Moody ©
Owner and UK Manager
paul@sunseabulgaria.com