Building on Demand

Economic News

22 Jul 2010
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With a major boost in the number of construction permits issued during the second quarter of this year, many are now wondering how real estate sector prices will adjust to this latest increase in the supply of new buildings. Some are worrying that the country's real estate market will become oversupplied, which could eventually trigger a price crash -- while others maintain what is happening is a normal development in a dynamic real estate market.



According to the latest figures from the National Statistical Institute, the number of construction licenses issued between April and June rose by 53.5% on the same period last year. A total of 1,491 housing construction permits were granted during this there month period, some 44% of the total number for the whole of last year. It is expected that 5,000 new apartments will be placed on the market as a result of these new construction projects, compared to 10,525 expected from permits granted in 2003. The total volume of dwelling stock increased by 27% in the first half of 2004, reaching a total of 2,597 units.



Yet analysts point out that previous expansions have failed to arrest price development, which has continued to soar, pushed up by limited supply and a huge foreign investment interest in the Bulgarian property market.



Veneta Krasteva, editor-in-chief of the weekly magazine Construction City told the OBG on September 3 that "The trends from the beginning of the year show continuous increase in investment activity. The market is dynamic, but there is no dramatic change."



The construction boom, which began last year, is focused on residential markets in
Sofia and the Black Sea.



Analysts say that the latest surge in construction is due to a combination of factors. First, there are smaller construction companies trying to enter the lucrative housing market to capitalize on high demand for 2-3 bedroom apartments. This has gone hand in hand with and a continuous rise in mortgage loans. News source Pari Daily reported on September 1 that high demand for 2-3 bedroom apartments meant some companies could secure as much as 40% of the total selling price in the initial deposit.



Meanwhile, an increasing number of consumers can afford expensive initial deposits due to improving lending terms from the banks. According to central bank statistics, mortgage credits to individuals in the first half of 2004 were 45% higher than in the same period last year. The total volume of mortgage loans reached Lv662m (332m euros) in July, which represents a significant boost for both the real estate and construction markets.



In addition, small construction companies can seek further financing from the banks secured against the building site. With construction costs at around 200-400 euros per sq metre (depending on the price of the land) and an average selling price of 400-1000 euros per sq metre, nearly all of the project financing can be secured externally with little need to rely on private capital.



Yet some analyst warn that the size of initial deposits will contract due to rising competition and some companies are in danger of overextending themselves, with the risk of failing to meet project deadlines and neglecting quality standards.



Meanwhile, demand for residential housing is not showing any signs of subsiding. In addition to mortgage lending, this demand continues to be fuelled by the traditional perception, especially among foreigners and Bulgarians living abroad, that real estate is the surest form of investment in the country, offering low risk and high returns. With real estate prices in Sofia still lower than in Belgrade and Skopje and expected EU accession in 2007, this argument has been very compelling so far.



Yet although National Statistical Institute average quarterly real estate price estimates show a 26.3% increase since last year, there has been a noticeable slow down in areas such as Sofia. Housing prices in the centre of the capital have risen by a mere 15.6%, year-on-year -- far behind regions like Burgas and Sliven, where property price increases were above 40%. As Krasteva told the OBG, "High price levels are asked, but there are few transactions that succeed."



Rosen Plevneliev, general manager of German construction company Lindner's Bulgarian subsidiary told the OBG recently that the expectation of high returns from real estate investments could result in disappointment.



According to Plevneliev, if the current levels of construction continue, there will be an oversupply of both residential and office space in two years time, which could trigger a price crash.



Yet most analysts predict that in the short term at least, the demand for new residences will remain high. It will continue to be driven by speculative interest from foreign investors, coupled with stronger demand from domestic consumers, who will benefit from increasing competition among mortgage lenders and access to cheaper housing finance.



Construction activity is thus set to continue throughout the autumn and even during the cold winter months, bringing high returns to both building companies and property investors. However, some analysts fear that with a large proportion of the Bulgarian population still unable to break into the inflated property market, a price correction is to be expected further down the line, as the stock of new dwellings increases.

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