Residential construction in Bulgaria – Growth goes on, challenges remain

Rises in employment and income in Bulgaria, combined with low interest rates both on deposits and housing loans, are pushing residential construction as well as the property market upwards. The rise in profit margin increasingly attracts investors in the sector. However, aging multi-family buildings and the growing number of uninhabited properties remain as major challenges ahead of the housing stock in the country.

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

Varna Wave ongoing residential project in Varna, Bulgaria – Source: varnawave.bg

Residential construction and the real estate market in Bulgaria continue to be in the focus of investors and developers. The turning point was in 2016 when the sector registered a growth of 31.1% and it is expected to increase in double-digit terms in the period up to 2019. These developments have a direct correlation with improved living conditions as in 2017 the Bulgarian GDP grew by 3.6%. According to European Commission forecasts, there are no signs for pessimism as they prognosticate a further growth of 3.8% in 2018 and 3.7% in 2019.

The economic development is accompanied by low rates of unemployment and an increased disposable income. Major cities in Bulgaria such as Sofia, Plovdiv, Varna and Burgas are getting more and more attractive, which leads to the concentration of the population and creates a strong demand in the residential sector. Consumer preferences are also changing in favour of quality properties (larger ones and with better location) that are lacking in the market. At the moment supply is still lagging behind, unable to catch up with demand. In H1 2018 completed newly-built residential buildings were 9.1% more than in the same period in 2017. In terms of dwellings, there is a drop of 10.3%, which is a proof of the completion of bigger-scale projects.

As a result, currently over 50% of the deals are made while dwellings are still under construction. Data on started residential properties shows that investors are trying to catch up. In the first two quarters of 2018, compared to the same period in 2017, the number of residential buildings was slightly less (-3.6%) while the number of dwellings grew by 46%. The same trend is observed in issued building permits as almost the same number of permitted buildings resulted in 33% more permitted dwellings.

The increased activity in the real estate market is boosted by low deposit interest rates and similarly low rates on mortgages, which by the end of June 2018 reached a historic low of 3.4%. It is hard to imagine a further drop since experts suggest that the European Central Bank is planning to increase its interest rates, which surely will lead to a slight rise. Since 2012 the volume of new housing loans almost tripled and only for a year (June 2017-June 2018) it has an upturn of 18%. Still, in a recent statement, the Bulgarian National Bank does not consider that there is risk for the financial system, although it urges banks to be more careful in the evaluation of real estate prices. According to the National Statistical Institute, strong demand pushed prices up by 8.7% in 2017 and another 7.1% in Q1 2018 compared to a year earlier. Interestingly, the growth is generated by the transaction of existing dwellings, which are more affordable in general.

However, the housing stock in Bulgaria is facing some big challenges in the upcoming years. In order to address them properly the Ministry of Regional Development and Public Works is currently developing a National Housing Strategy 2018-2030. One of the major problems is that over 75% of apartments in the country are located in more than 30 years old buildings. Additionally, a World Bank research shows that the number of uninhabited housing (30% even in the capital city of Sofia) is steadily increasing. The lack of maintenance leads to a rapid deterioration of their condition and moreover, unoccupied properties located in multi-family buildings hamper the implementation of governmental programs for energy efficiency and the renovation of the large number of buildings made of prefabricated concrete structures. Other goals of the strategy are to provide affordable housing, especially for vulnerable groups of the society, and to overcome the large deficit of social housing. However, it is yet to be seen what kind of measures will be implemented in order to achieve the strategy’s targets.

Detailed residential forecast for Bulgaria up to 2020 and forecast for the whole Bulgarian construction market are discussed in the EECFA Forecast Report Bulgaria released on 18 June 2018 together with the other 7 EECFA Forecast Reports. The summary of EECFA’s latest forecast can be read in this post. For sample report  please visit eecfa.com, for discount options and orders, please write to: eszter.falucskai@eecfa.com.

Sources:

http://www.nsi.bg/en/content/13329/hpi-national-level-2015-100

http://www.nsi.bg/en/content/4492/construction-new-buildings-started

http://www.nsi.bg/en/content/4495/building-permits-issued-construction-new-buildings

http://www.bnb.bg/Statistics/StMonetaryInterestRate/StInterestRate/StIRInterestRate/index.htm?toLang=_EN

http://www.strategy.bg/StrategicDocuments/View.aspx?lang=bg-BG&Id=431

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