Bulgaria 2011 Real Estate Review

COLLIERS INTERNATIONAL2011 BULGARIA REAL ESTATE REVIEWAlbania Bulgaria Croatia Czech Republic Greece Hungary Poland Romania Russia Serbia Slovakia Ukraine

Accelerating success.

CollieRS inteRnAtionAl | P. 21

Bulgaria

Dear Friends and Partners,

Another year has passed, and we have a fresh, new year ahead of us – providing a much-needed cause for reflection.

Conventionally, a past year is always labelled significant because it has taught us something. i would dare to challenge this convention, by labelling the year of 2010 primarily as a stepping stone for — or a prelude to — 2011. to most markets, segments and businesses, 2010 was a bit of everything. it was definitely more profitable (and fun) than 2009, and certainly not as prosperous as we expect 2011 to become. So maybe the greatest thing about 2010 was what it promised for 2011 and beyond; the possibility of a fresh start.

We take great confidence in the future from the events and experiences of 2010. A new spirit of collaboration is emerging between different players in the market, aimed at making Bulgaria more competitive. Across sectors, enterprising business people are working together in a manner that hasn’t been seen before.

in the real estate sector, we have already seen new players entering the market, and i believe that this year we will see investors and developers that are coming to our market for the first time.

one thing doesn’t change though, Colliers is delighted to accelerate the success of our clients and partners.

Best regards, Atanas Garov

Atanas Garov managing director colliers international bulgaria

Address Business Park Sofia Building 7B, 2th floor 1766 Sofia, Bulgaria

Phone +359 2 976 9 976

Email [email protected]


P. 22 | CollieRS inteRnAtionAl

SUMMARY � Over the course of 2010, GDP growth

in Bulgaria was largely neutral but improving towards year-end. At the end of the first quarter of 2010 GDP posted negative growth of 4.0%, but grew by 0.5% and 0.7% respectively in Q2 and Q3, mostly driven by an increase in exports. Better news for the Bulgarian economy is the latest forecast showing that GDP is expected to increase to 2.8% in 2011.

� Foreign Direct Investments in Bulgaria for the first nine months of 2010 amounted to €1.427 Mln (4.0% of GDP), ca. 30% down on the €2.112 Mln (6.3% of GDP) invested over the same period in 2009. As with GDP growth, however, FDI into Bulgaria is expected to pick up moderately in 2011, reaching in excess of €2,000 Mln.

� In line with the overall neutral economic trends, unemployment increased marginally to 9.2% in December 2010 — a slight increase of 0.1% compared to the same period in 2009. Unemployment is forecasted to fall by 0.5% in 2011.

� A more worrying sign for the Bulgarian economyc was the sharp rise in inflation, which surged to 4.5% yoy, although this remains under the eastern European average inflation rate of 6.3%. Only a slight increase in inflation is expected in 2011, below the average for eastern Europe.

� On a more positive note, exports grew from January – September 2010 registering a 12.2% increase compared to the same period in 2009, but with differences in terms of the trading countries to which these exports were heading. The largest rise in exports were those aimed towards the European Union EU27, rising by 23.9%. The major markets for consumption of these goods were Germany, Italy, Romania and Greece, which absorb two-thirds of Bulgarian exports.

FORECAST � The economic outlook for Bulgaria is

generally positive, particularly for the second half of 2011. On the basis of increasing levels of business acivity, real estate demand is likely to grow.

� Importantly, bank financing and credit terms are expected to improve – at least in terms of retail finance – which will be of most benefit to boosting consumer spending and the retail sector as well as helping to drive residential demand through tha availability of affordable mortage finance.

� Although domestic consumption saw negative growth in 2009 and 2010 (falling 3.6% and 2.8% respectively), the forecast for 2011 is one of modest growth of 1.3% on average over the year. This is supported by growth of the consumer confidence indicator which has started to increase since Q1 2010 and thus retail sales are expected to be influenced positively.

� On a structural level, the use of EU funds for regional development will gradually improve the transport and communications infrastructure of Bulgaria, helping to create the fundamentals for a viable logistics market.

ECONOMIC OVERVIEW

KEY ECONOMIC FIGURES

Metric % ChangeGDP Growth 0.7%

Unemployment 0.1%

Inflation 4.5%

Source: National Statistics Institute, Bulgarian National Bank

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%

-6.00%

-8.00%

GDP & INFLATION

|Q1

2009

|Q3

2009

|Q1

2010

|Q3

2010

|Q2

2009

|Q4

2009

|Q2

2010

|Q4

2010

▬ GDP (real annual % change) ▬ Inflation

Source: Bulgarian National Bank

11%

10%

9%

8%

7%

6%

UNEMPLOYMENT

▬ Unemployment (%)

|

Q12009

|

Q22009

|

Q32009

|

Q42009

|

Q12010

|

Q22010

|

Q32010

|

Q42010

Source: Bulgarian National Bank

|

2006|

2007|

2009|

2008|

2010|

2012F|

2011F

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%

-15.0%

-20.0%

INDUSTRIAL PRODUCTION

Source: Focus Economics

▄ Industrial Production (annual variation, %)

2011 CoLLIeRs ReAL estAte RevIew » BULGARIA

Research: [email protected]

CollieRS inteRnAtionAl | P. 23Research: [email protected]


GENERAL OVERVIEW � The contemporary office inventory in

Sofia reached a new peak, with another 256,000 Sqm added to the stock during the year.

� The net absorption for the year was 111,200 Sqm.

� The overall vacancy on the Sofia office market reached 25.4% of the total existing stock, equivalent to 335,000 Sqm office area.

� Total office occupancy reached close to 1 Mln Sqm by the end of the year.

SUPPLY � On an annual base, the contemporary

office inventory increased by 256,000 Sqm. This means that a fifth of the total office stock is actually completed in 2010. This massive increase is driven by the completion of a few, large projects that were initiated mid-2007, in a more optimistic market.

� Among the new additions to the market in this period are European Trade Center, Mega Park, Sofia Airport Center, Doverie Business Center and Galaxy Business Center which all together added 135,000 Sqm to the Suburban stock. Serdika Offices (28,000 Sqm) and GRAWE Office Building on Blvd. Totleben (5,800 Sqm) were the major new additions to the Broad Centre submarket. Perform Business Centre on Pozitano Square, Crystal Business Center and the new head office of DSK Bank increased the stock in CBD (Central Business District) with more than 33,000 Sqm, equivalent to 30% of the entire inventory in CBD, which hasn’t seen new deliveries for a number of years.

� The total inventory of modern office space in Sofia reached 1,318,000 Sqm with almost even split between Class A and B. The pipeline continues to empty as few new major projects were initiated in 2010. Exceptions were Fort Nox (Suburban area) and TAO (Broad Center).

� The total active pipeline fell to the lowest level in years at just below 500,000 Sqm. The size of the latent pipeline (comprising office project under construction, but currently frozen) is app. 250,000 Sqm.

DEMAND � Net absorption in 2010 was 111,200

Sqm almost half of which were preleases in the office buildings that came to the market in the latter half of the year. The major transactions in the period included the expansion of Hewlett Packard in Kambanite Business Center; Cisco in Crystal Business Center; Call Point New Europe and Pfizer in European Trade Center.

� The majority of the demand was driven by relocation needs. Many occupiers took advantage of the attractive rental rate level for high quality office space in communicative locations.

� Incremental demand was driven primarily by the outsourcing sector and pharmaceutical companies which are already present on the market. Transactions were mainly closed for premises in the range 500 – 1500 Sqm. The preferred contract length was for 3 years or longer, but then with an option for renegotiation after a certain time. As in previous periods, genuine Class A premises attracted mostly large, international companies with more than 50 employees, while Class B offices are occupied by smaller, local companies.

OFFICE MARKET

KEY OFFICE FIGURES

Metric MeasureTotal Stock 1,318,000 Sqm

Take-Up 111,200 Sqm

Vacancy 25.4%

Prime Headline Rent €9.8/Sqm/month

Source: Colliers International

|

H12007

|

H22007

|

H12008

|

H22008

|

H12009

|

H22009

|

H12010

|

H22010

1,400

1,200

1,000

800

600

400

200

0

STOCK OFFICES CLASS A&B IN SOFIA (SQM,000)


INVENTORY STRUCTURE

20%Broad Center

8%CBD

72%Suburban

KEY OFFICE LEASE TRANSACTIONS

Tenant Size (Sqm) Project SubmarketHewlett Packard 3,500 Kambanite BC Suburban

Cisco 3,000 Crystal BC CBD

Call Point New Europe 2,500 European Trade

Center Suburban

Strabag 2,300 Megapark Suburban

Pfizer 1,800 European Trade Center Suburban


P. 24 | CollieRS inteRnAtionAl Research: [email protected]


OFFICE MARKET

� Over the past four years, there has been a distinct change in the concentration of business premises. In 2006, Suburban office space accounted for 43% of total occupancy on the market. Four years later, the number has reached 63% of overall occupancy which is Suburban.

VACANCY � Vacancy in Sofia grew by 145,000

Sqm in 2010 — significantly more than in any previous period. In percentage terms the vacancy rate at the end of the year amounted to 25.4%

� By sub-market, vacancy in the Broad Centre increased by 50,000 Sqm, reaching 66,000 Sqm. The Central Business District and Broad Center experienced negative absorption over 2010 as large-scale projects entered the market — these two factors significantly pushed up vacancy levels.

� In Suburban areas vacant space reached 242,000 Sqm. Although the Suburban part of the office market retained a high level of vacancy, almost half of the new supply in H2 was absorbed within the same 6-month period.

RENTS � In H2 2010 the average asking rents

continued to fall; Class A levels fell on average by €1/Sqm/month compared to the first half of the year, while Class B office space decreased more than €1.5/Sqm/month.

� On an annual base average asking Class A rents fell in the CBD by 15%, the Broad Centre by 23% and by 26% in the Suburban area.

� The reduction was most meek for Class A space in the CBD and most significant for Class B space in the Suburban area, where average asking rents fell below €7/Sqm/month.

FORECAST � The Inventory of stock is expected to

increase by ca. 150,000 Sqm in H1 2011.

� The general positive outlook for businesses in 2011, is likely to lead to expansions of office premises.

� As a significant number of lease contracts expire in 2011, we expect a large volume number of transactions over the year.

� Net absorption is expected to increase in 2011, as the economy starts recovering, but overall vacancy will continue to grow, pushing rental levels further down.

� Average rental rates in the CBD and Broad Center will have to adjust further to avoid a steep increase in vacancy levels.

140

120

100

80

60

40

20

0

30%

25%

20%

15%

10%

5%

0%

NET ABSORPTION / VACANCY

|H1

2007

|H1

2008

|H1

2009

|H1

2010

|H2

2007

|H2

2008

|H2

2009

|H2

2010▄ Net Absorption ▬ Vacancy


20.00

15.00

10.00

5.00

AVERAGE ASKING RENTS CLASS A (€/SQM/MONTH)

▬ CBD ▬ Broad Center ▬ Suburban

|

H12007

|

H22007

|

H12008

|

H22008

|

H12009

|

H22009

|

H12010

|

H22010


1,000900800700600500400300200100

0

PIPELINE SOFIA OFFICE MARKET

▬ Pipeline in ‘000 sqm

|

H12007

|

H22007

|

H12008

|

H22008

|

H12009

|

H22009

|

H12010

|

H22010

CollieRS inteRnAtionAl | P. 25Research: [email protected]


OVERVIEW � The total stock of contemporary,

speculative logistics and industrial space in Sofia grew by 29,300 Sqm on a year-on-year basis and now amounts to 441,200 Sqm.

� Net absorption increased slightly in 2010, but most transactions were driven by relocation and consolidation rather than expansion.

� Lidl opened its own distribution facility of 36,000 Sqm in Ravno Pole near Sofia, the major deal of the year.

SUPPLYCAPITAL

� The total inventory of speculative logistics and industrial space in the capital, Sofia was 441,200 Sqm by the end of 2010. Included in the figure are all speculative projects as well as premises offered for rent by third-party logistics providers (3PL).

� Though some owner-occupied spaces, became vacant due to decreased activity and were offered for rent, this doesn’t seriously impact the overall genuine market. These premises are often in a poor condition, and thus don’t constitute a real alternative or competition to established, contemporary logistics facilities.

� The pipeline of industrial stock remained stable over the year driven only by a few, new projects. Under construction at year-end were bERS (7,400 Sqm), Administrative Logistics Complex in Obelia (13,000 Sqm) and Univeg (8,000 Sqm).

� There are several key zones in Sofia comprising clusters of speculative and 3PL projects. Naturally, the key logistics and industrial areas in Sofia are situated close to major roads, highways and transport hubs. The largest is the Airport area which represents 17% of the total stock, followed by Gorublyane (14%), the area along Botevgradsko Shousse (12%) and Kazichene (7%).

OUTSIDE ThE CAPITAL � The supply of good-quality space

outside Sofia is limited. Plovdiv has numerous build-to-suit and owner-occupied projects, but despite the attractive, geographic position, developers are yet to endeavour with larger, speculative projects.

� The speculative market in Varna is the most developed after Sofia. There are a few projects with specifications of an international level such as Logitics Park Varna (9,600 Sqm) and Alpha Logistics (6,600 Sqm). The existingpipeline in Varna comprises building A06 of Logistics Park Varna which will add 10,000 Sqm of new stock to the market.

� Despite the strategic location on the Danube and close proximity to the Romanian capital, Bucharest, Rousse still hasn’t developed into a logistics hub. An area less than 1 km from the Danube Bridge, has, however, been designated as a modern industrial zone in Rousse. Logistics Park Rousse (13,850 Sqm) is planned within the zone, providing easy access and contemporary specifications.

FMCG DISTRIBUTION � Major players on the logistics market

for the second, consequtive year are the large, international food chains. FMCG retailers (Fast Moving Consumer Goods) increasingly prefer to build their own central distribution facilities rather than applying the model of decentralized distribution incorporating potential sales areas for storage. This model provides cost saving as goods are delivered directly to the central distribution facility and from here distributed to super/hypermarkets and retail stores.

INDUSTRIAL MARKET

KEY INDUSTRIAL FIGURES OF SOFIA

Metric MeasureTotal Stock 441,200 Sqm

Take-Up 19,000 Sqm

Vacancy 15%

Prime Headline Rent €4.5/Sqm/month




� The area around Elin Pelin is the preferred location for establishing central distribution facilities because of its proximity to the two highways in Bulgaria. In Elin Pelin, the central logistics facilities of Penny Market, Billa and Lidl (which opened in the second half of 2010) are now established.

� Only Kaufland preferred to build its central distribution facility in Plovdiv. The facility is 67,000 Sqm, the largest in the country. Alternatively, Carrefour has chosen to outsource distribution for their hypermarkets to a 3PL.

DEMAND � The outsourcing of logistics services

continues to define demand trends in the market as more and more companies are inclined to outsource part of their activities to be able to focus on their core business. As a result there has been a slight increase in 3PL activity. Companies, which choose to outsource activities, are often from the food, health & beauty, consumer electronics and automotive sector.

� Also active on the market are international companies from the beverage sector. The main reasons for their demand are contract expiration or consolidation of their office and warehouse space, cost optimization or renegotiation of the current contract conditions.

� The average size of a logistics inquiry in Sofia remains 1,000 Sqm for warehouse space, which is the typical size of a lease contract.

VACANCY � The upward trend in vacancy levels

continued in 2010. Relocations from older projects to contemporary ones explain why there is almost no change in terms of vacancy levels in existing stock, but new projects that have entered the stock in Sofia in 2010 are completely unoccupied with the exception of Bulding 15 of Trade Center Europa which is partly preleased. Usually it takes time for new projects to adapt to the market and adjust their offer accordingly, after that they start to be absorbed by the market.

� Net absorption on the logistics market for speculative space was 34,000 Sqm in 2010. The majority of this net take-up happened in ZMM, Universal, Transcapital BLCS, Sofia Airport Center and Trade Center Europa.

� Overall, this has put vacancy at ca. 15% by year-end.

RENTS � Overall, rental levels continued to

decrease slightly throughout 2010. The prime asking rents in Sofia decreased by a moderate 6% on an annual basis while logistics premises in Plovdiv saw an average reduction of 13% in asking rents.

� Varna kept prime rental levels steady, benefitting from a slightly undersupplied market.

FORECAST � Univeg will be completed in Q1 2011

adding 8,000 Sqm to the current stock.

� Logistics Park Varna building A06 and Logistics Park Rousse will open in Q1 2011.

� No major boost in demand activity on the logistics market is expected in the coming six months.

� Rental rates are expected to stabilize.

INDUSTRIAL MARKET

SELECTED INDUSTRIAL LEASE TRANSACTIONS

Tenant Size (Sqm) Project AreaStandart 17 3,000 BLCS Hadji Dimitar

National Distributors 2,500 Universal Gorublyne

TimeLine 2,500 Universal Gorublyane

Second hand 2,200 ZMM Ilianzi

Mercurius 2,000 Universal Gorublyane

Bullog 2,000 SAC Airport

Antalis Bulgaria 2,000 SAC Airport


|

H1 2008|

H2 2008|

H1 2009|

H2 2010|

H1 2010|

H2 2009

6.00

5.50

5.00

4.50

4.00

3.50

3.00

PRIME RENTS BY CITY (€/SQM)

▬ So�a ▬ Plovdiv ▬ Varna






GENERAL OVERVIEW � With the opening of nine shopping

malls in 2010, the total inventory of contemporary shopping mall space in Bulgaria increased to 560,000 Sqm equal to 74 Sqm/1,000 inhabitants.

� Demand for High Street space in the four largest cities remained stable.

� Rental levels in shopping malls and across the High Street continued to decrease slowly.

SUPPLY � 2010 marked the largest annual

increase in terms of shopping mall supply with a further 327,000 Sqm new stock completed and thus total stock reached 560,000 Sqm.

� There are two projects in the pipeline for 2011: Markovo Tepe (16,000 Sqm) in Plovdiv and Danube Mall (23,300 Sqm) in Ruse, which will add another 39,300 Sqm to the total inventory.

� Two very large shopping mall projects are in the pipeline for Sofia; Sofia Ring (70,000 Sqm) with the first IKEA in Bulgaria and Paradise Center (75,000 Sqm). With these two additional shopping malls, the Southern and Eastern parts of Sofia will be well serviced, while the Northern and Western areas of the Sofia will continue to be undersupplied.

DEMAND � Despite the economic slump, distinct

optimism amongst retailers is appearing. While 2009 and 2010 saw a negative development in consumption (3.6% and 2.8% falls respectively), the forecast for 2011 is for modest growth of 1.3%.

� Large international players kept to their expansion plans and continue to require space for opening of shops in 2011. The local and smaller operators however, are more cautious, focusing on optimizing costs.

� The market has proved ready to adopt new, innovative concepts developed by local retailers. In the future shoppers are likely to experience new, niche/hybrid concept stores (e.g. combining fashion & art, books & café or interior & fashion), many of which will include an entertainment component.

� Future demand is expected to come from three main segments; soft cash & carry, convenience stores and lower end fashion retailers. Particularly non-food hypermarkets are expected to expand in the years ahead.

VACANCY � Shopping malls in Sofia enjoy low

levels of vacancy, and aparently have absorbed the massive hike in stock in the spring 2010. As a result of intensive expansion and fall in consumer demand, some retailers are facing dwindling turnovers, and thus are pressed financially. With no new centers opening in 2011 in Sofia, existing malls have a chance to position themselves, and thus strengthen their competitive offer.

� The shopping malls that have opened in the second half of 2010 are characterized by significantly higher vacancy than most existing malls. A few projects in secondary cities are struggling to secure suitable tenants, and have opened with less than half of all retail units operating. This is particularly the case in cities that are already oversupplied with shopping mall space measured relative to the population.

RETAIL MARKET

KEY NATIONAL RETAIL FIGURES

Metric MeasurePrime High Street Rents €65/Sqm/month

Prime SC Rents €37/Sqm/month

SC Stock 560,000 Sqm

SC Vacancy 3%


600

500

400

300

200

100

0

SHOPPING SPACE/1,000 INHABITANTS (SQM)

| | | | | | | | |

So�a

Plovdiv

Varn

a

Stara Z

agora

Velik

o Tarn

ovo

Burga

s

Gabrov

oRus

e

Total

Bulg

aria

▄ 2010 ▄ 2011F

|

2006|

2007|

2008|

2011F|

2010|

2009

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

ANNUAL CHANGE IN PRIVATE CONSUMPTION

Source: Focus Economics



RETAIL MARKET

hIGh STREET � The High Street in Sofia is not

unaffected by the opening of two large shopping malls. In the first half of the year overall vacancy was pushed to 10% and remainedat this level in the second half of 2010.

� There were insignificant changes on the High Street in Plovdiv, Varna and Burgas, despite some movement among existing occupiers. As a whole, however, the level of vacancy and replacements remained the same as in previous periods.

BIG-BOXES / RETAIL WAREhOUSE � Discount retailers continued to be the

most active within the big-box format. The second half of 2010 was marked by the market entry of the hard discounter, Lidl, with a simultaneous opening of 14 stores. Their acquisition of the Plus chain from German retail giant Tengelmann concluded and the 24 Bulgarian Plus stores are waiting rebranding. Lidl is part of the Schwartz group, which also operates Kaufland.

� In the second half of 2010 the big box market saw the introduction of the soft cash & carry hypermarket format. Serbian Delta Holding, which acquired Piccadilly in 2008, opened their first ‘TEMPO’ store in Retail Park Sredetz in Sofia.

� The big boxes started to clearly define the retail market in Sofia. The area at the junction of Botevgradsko Shosse and the Ring Road has already started to shape up as the big box hub of the city. Jumbo opened their 2nd hypermarket in Sofia as part of Black Gold Park, next to which the G Park Sofia project is planning another 50,000 Sqm of retail park space.

� The graph shows the penetration of the various FMCG (Fast Moving Consumer Goods) formats in Bulgaria. The proliferation of the supermarket format in Bulgaria is primarily driven by local chains such as Piccadilly, Fantastico and 345, while the remaining formats are dominated by international chains.

RENTS � High Street space continues to be

more accessible with decreasing rents. The average annual decrease on asking High Street rents is 28% in Sofia and 30% in Plovdiv, 38% in Varna and 35% in Burgas. Rental levels are clearly affected by the increasing supply of shopping mall space.

� Due to soft demand, average rental rates in shopping malls across the submarkets have fallen with 13% in 2010.

FORECAST � Sofia Ring Mall (70,000 Sqm GLA) is

expected to start construction in the first half of 2011.

� Discounters will continue to be active.

� The convenience format of the Food and DIY (Do It Yourself) sector is likely to grow.

� Fashion retailers in the lower price segment will enter the market or expand.

� The High Street is expected to make a come-back in the coming period.

� New local retail concepts will be introduced.

SELECTED 2010 MARKET ENTRANTS

NameZara Humanic Marc O’Polo Next

Pull and Bear Peek & Clopenburg Koton Columbia

Stradivarius Gap Collin’s New Balance

Bershka Sephora Karen Miller Jennyfer

Massimo Dutti Mac LC Waikiki Frey Wille


|

Cash & Carry|

Hypermarkets|

Supermarkets|

Discount

70

60

50

40

30

20

10

0

FMCG SPACE BY FORMATS IN BULGARIA

▄ 2008 ▄ 2009 ▄ 2010

In Sqm/1,000 Inhabitants

|

So�a|

Plovdiv|

Varna|

Burgas

€70

€60

€50

€40

€30

€20

€10

€0

RENTAL RATES, SHOPING MALLS/HIGH STREET

▄ Shopping Malls ▄ High Street





GENERAL OVERVIEW � No new large-scale projects have

entered the mid-plus and high-end residential pipeline in 2010.

� The offered price range in the mid-plus and high-end segment of the market is quite wide, and is typically €1,000 – 1,600/Sqm (without VAT).

� There is a clear expectation that the residential market has reached the bottom in terms of sales prices.

SUPPLY � The amount of residential units in the

mid-plus and high-end of the market is estimated at 3,000 – 4,000 in the greater Sofia area. This includes projects with predominantly more than 50 units (apartments/row houses/houses) located in prime and emerging neighborhoods in Sofia — both finished and in final stages of construction.

� By Colliers definition, the mid-plus and high end market includes residential projects characterized by a clear concept at an attractive location, good quality of the construction, convenient access, green areas, effective layouts, ample parking, good surrounding infrastructure, property management services, and availability of amenities within the project or in close proximity.

� In terms of location, the majority of the mid-plus and high-end residential units (when referring to projects) are situated in the southern neighborhoods and in Iztok. The genuine new supply of mid-plus and high-end projects is small compared with the overall stock on the market, and must hence be considered a niche. Many of the projects are developed as so-called gated communities (compounds).

� No new large-scale projects have entered the mid-plus and high-end residential pipeline in 2010, and as the current stock is gradually absorbed, available supply is becoming scarcer. Having in mind that a medium-size residential project takes up to 3 years from initiation to completion, it is likely that this segment of the market becomes qualitatively undersupplied in the coming years. Thus, potential buyers might experience that the selection of appropriate properties gets smaller. There is little doubt also that developers will take advantage of the gap between supply and demand, and adjust prices to new market conditions.

� As most residential properties are bought for personal usage, only a few units are currently resold.

DEMAND � Demand for residential real estate is

growing in maturity with increasing segmentation of the market. Buyers of mid-plus and high-end properties have high expectations and requirements and prefer new projects offering an attractive standard of living.

� Research points to safety as the most important driver when selecting a home in a compound. Safety is followed by quality of the property and the maintenance of common areas as the demand factors. Large, green areas and the availability of parking solutions complete the list of priorities for buyers in this segment. This is hardly surprising as these elements are conspicuously missing in the vast majority of the Sofia residential inventory. Buyers are often attracted by neighbors with a similar lifestyle, and thus communities are being formed within these new developments.

RESIDENTIAL MARKET



RESIDENTIAL MARKET

� In the mid-plus and high-end segment most transacted units are 3 – 5 bedroom apartments as well as single family houses.

� The typical profile of a buyer in the mid-plus and high-end segment is a person in a key professional position, often self-employed. These buyers are less dependent on the availability of mortgages, since most purchases have a high degree of self financing. The buyer is often selecting a home for the family, and has quite specific (and high) expectations. The growing number of Bulgarian managers in both local and international companies further drives demand in this segment, as their remuneration enables purchase of properties in this segment.

� The institutional buyer has all but disappeared from the market, though sporadic bulk buying is observed. A substantial majority of buyers are Bulgarian nationals (in a few cases diaspora), reflecting the diminishing role of expatriate management across most businesses.

SALES PRICES � There is a clear expectation that the

residential market has reached the bottom in terms of sales prices. Some developers are even considering adjusting prices in 2011, reflecting the steady demand and what is seen as a potential lack of supply as the pipeline empties.

� The offered price range in the mid-plus and high-end segment of the market is quite wide, and is typically €1,000 – 1,600/Sqm (without VAT). Numerous factors influence the price including location, quality, scope of finishes, type of property etc. The upper end of the scale is typically reached for apartments with exceptional view/location as well as houses.

� Flexibility remains the key to closing a deal. Besides pure price discounts, developer’s concessions are made on finishing works, second parking space or notary/transfer fees.

� ‘Lease-to-buy’ remains a viable option in the market, but the success highly depends on the details of the various project schemes.

FORECAST � Demand of mid-plus and high-end

residential real estate will continue to grow as the Bulgarian economy gradually improves.

� Supply is dwindling and with increasing absorption, there is a genuine risk of the market becoming qualitatively undersupplied.

� Prices will stabilize or even increase slightly in 2011.





INVESTMENT MARKET

SUMMARY � Economic stability and positive GDP

growth as of year-end 2010 will exert a positive influence over investor confidence in Bulgaria which remained largely muted in 2010. This is not particularly suprising given the low volume of transactions which occurred outside of the core eastern European markets of Warsaw/Poland, Prague in the Czech Repuiblic and Moscow.

� There has been, however, increased activity in the market in terms of enquiry levels as of Q3 onwards, although mainly from investors that have been focusing on the country for the previous year.

� The result is that the conclusion of some deals which started negotiations during the end of 2010, have been pushed back to Q1 of 2011.

� In terms of product, as with more CEE markets, big-box retail and prime offices remain the focus of the majority of investors looking at the Bulgarian market. Interest in the office market of interest is confined to the capital city, Sofia, while the big-box segment has drawn attention to secondary locations across the country.

� In terms of pricing, ther were signs of yield compression over the year in the prime office and big-box retail sectors, moving from double to single-digit yield levels by year-end.

FORECAST � A minor continuation of yield

compression is likely throughout 2011 with prime office yields expected to approach 9%. Big-box and retail-park yields should remain at between 9.00% and 9.25% over the year.

� With stabilization and growth in the economy forecast in 2011, and with yields on prime product offered at fair, if not discounted, prices to neighbouring markets. We expect to see a return of institutional investors to the Bulgarian market in the second half of the year. Not least as a result of strong potential returns, relative to other markets.

� Banks, however, will remain conservative in their lending approach and are unlikely to exceed 60 – 65% loan-to-values for prime transactions, whilst loans on secondary product will become very difficult to come by.

� Whilst the pricing and retun opportunity exits, however, the lack of institutional-grade investment product will continue throughout 2011 and reduce any significant increase in transaction volumes.

KEY INVESTMENT FIGURES

Metric MeasurePrime Office Yield 9.00%

Prime Retail Yield 9.25%

Prime Industrial Yield 11.00%


600

500

400

300

200

100

0

OVERALL INVESTMENT VOLUMES (€ MLN)

|

2006|

2008|

2010|

2009|

2007


|

2006|

2007|

2008|

2009|

2010

300

250

200

150

100

50

0

INVESTMENT VOLUMES BY SEGMENTS (€ MLN)

▄ Retail ▄ Office ▄ Industrial

|

2005|

2006|

2007|

2008|

2009|

2010

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

PRIME YIELDS

▄ Retail ▄ Office ▄ Logistics



BULGARIA TAX SUMMARY

GENERAL � Several changes to the Bulgarian tax

legislation have come into effect from 1 January 2011. The most significant ones concern withholding tax (WHT) and local taxes and fees.

CIT AND CAPITAL GAINS � The Bulgarian Corporate Income Tax Act

(CITA) specifies that Bulgarian entities are subject to 10% corporate income tax (CIT) on their worldwide income. Foreign entities are subject to tax only on the profits derived from Bulgarian permanent establishments (incl. branches) and/or profits related to disposal of property of such a permanent establishment.

� The CIT is calculated on the basis of the annual financial result (as per the Income Statement of the entity) adjusted with certain permanent and temporary tax differences.

� The income from real estate derived by Bulgarian entities is included in their annual financial result. The annual accounting financial result is subject to further adjustments for tax purposes.

� The annual CIT liability is determined with the annual CIT return. Any outstanding liability (off-set with any advance installments made) should be remitted to the state budget within 31 March 2011. The same term applies for the submission of the annual CIT return.

� There is no tax grouping provisions in Bulgaria.

TAX DEPRECIATION � Bulgarian tax liable persons should

maintain Tax Depreciation Schedule (TDS) where they report all tax depreciable assets. The tax depreciation as per the TDS is to be reported as a downward adjustment to the financial result for tax purposes while the accounting depreciation expenses accrued during the year are disallowed for tax purposes and are reported as an upward adjustment to the financial result.

� The Bulgarian CITA provides for maximum tax depreciation rates depending on the type of the depreciable asset. The maximum tax depreciation rate for buildings including those held as investment properties is 4%. Land is not depreciated for tax purposes.

TAX LOSSES � A tax loss can be carried forward for five

years. It can be offset against a positive tax result for a subsequent tax year.

ThIN CAPITALIZATION � Thin capitalization rules apply in Bulgaria

if the company’s liabilities exceed three times the amount of its equity. Interest expenses are deductible up to an amount equal to the entity’s interest income plus 75% of the profits before interest and tax. Interest expenses on bank loans are not subject to thin capitalization, except in some specific cases.

TRANSFER PRICING � Transfer pricing rules allow the revenue

authorities to adjust tax bases where transactions are not carried out on an arm’s length basis.

� Under the transfer pricing provisions the tax base for CIT purposes may be adjusted as well as tax bases for calculating other taxes such as WHT.

WIThhOLDING TAX � Specific types of income with Bulgarian

source accrued by local tax resident entities in favor of non-resident taxpayers is subject to withholding tax (WHT) provided that the income is not derived through a permanent establishment of the non-resident entities in Bulgaria. Such income includes capital gains, rental payments, interests, dividends and liquidation quotas, royalties, technical services (including consultancy services), management fees, etc.

� The standard WHT rate is 10% WHT, with 5% WHT applied on dividends and liquidation quotas.

� Please note that dividends and liquidation quotas distributed by local tax residents to shareholders local entities, as well as foreign entities that are tax resident in an EU/EEA member state are exempt of WHT taxation.

� The WHT rates could be reduced under an effective Double Tax Treaty signed between Bulgaria and the country of residence of the foreign income recipient following a specific pre-approval procedure.

� The WHT is generally calculated on a gross basis. CITA includes provisions under which foreign recipients of income subject to WHT, tax residents of an EU/EEA member state, are entitled to annual recalculation of the WHT which has been levied and paid on a gross basis following a specific procedure. The recalculation is aimed at equaling the tax treatment between local entities and foreign entities, tax residents of an EU/EEA members states.

� As of 1 January 2011 the WHT due on income realized by foreign entities from rent/right of use of immovable properties, located in the country, should be deducted and paid by the local payer of the income, provided that the latter is a tax liable person under the CITA. So far the foreign income recipient had the obligation for deduction and remittance of the WHT.

INTEREST AND ROYALTY PAYMENTS � Under the EU Interest and Royalties

Directive, qualifying interest payments and royalty payments between associated enterprises, tax residents in EU member states may be exempt from any taxes imposed on those payments in that state, provided that the beneficial owner of the interest or royalties is a company of another EU member state or a permanent establishment of an EU member state situated in another EU member state.

Contact: [email protected]

CollieRS inteRnAtionAl | P. 33Contact: [email protected]


BULGARIA TAX SUMMARY

� However, a transitional period for the application of the Interest and Royalties Directive was agreed whereby Bulgaria has reserved its right to tax interest and royalty income arising in the country by applying the maximum withholding tax rates as follows: 10% for the period until 31 December 2010, and 5% for the period 1 January 2011 – 31 December 2014.

� As of 1 January 2011 the CITA is amended accordingly and the WHT rate on such type of income may be reduced from 10% to 5% provided that certain conditions specified in the law are simultaneously fulfilled.

LOCAL TAXES AND FEES � The main local taxes and fees in relation

to the ownership or acquisition of real estate in Bulgaria include real estate tax, garbage collection fee and transfer tax.

REAL ESTATE TAX � Owners of buildings and land plots

situated in Bulgaria as well as acquirers of limited ownership right over real estate property are subject to annual charges for real estate tax. The tax rate of real estate tax varies in the range of 0.01% – 0.45%. It is determined at a municipal level and may vary from year to year. As of 1 January 2011 the taxable base for real estate tax of non-residential property owned by companies is the higher amount of the tax valuation and the book value of the property. The taxable base for real estate tax of property owned by individuals or residential property owned by companies is the tax valuation of the property.

GARBAGE COLLECTION FEE � Generally, garbage collection fee is levied

on the book value/cost of the immovable property at a rate determined annually by the respective municipality where the property is located. The rates for the garbage fee may vary significantly between the municipalities.

TRANSFER TAX � Transfer tax is levied when transferring

real estate property or limited property right over real estate. The tax rate is in the range of 0.1% – 3% levied on the tax base of the property in cases of acquisition against consideration. When immovable property is gratuitously transferred the tax rate is in the range 3.3% – 6.6%. The applicable transfer tax rate is determined by the respective municipality.

� The tax base upon transfer of real estate property or limited property rights over it is the higher of the following values: (i) the purchase price/a price defined by state or municipal authorities and (ii) the tax valuation of the property.

� The transfer tax is generally paid by the transferee of the property, unless the parties have agreed differently. In case the transferee is not in the country, the tax is payable by the transferor.

VALUE ADDED TAX � The changes of the Bulgarian VAT Act as

of 1 January 2011 do not significantly affect the real estate.

� According to the provisions of the Bulgarian VAT Act the lease of buildings for residential purposes and the sale of unregulated land plots and old buildings (i.e. buildings for which more than 60 months from the issuance of the exploitation permit have expired) are considered a VAT exempt supply. However, the seller/lessor has the option to choose the sale of the land plot or the old building/the lease of building for residential purposes to be treated as a VAT taxable transaction and charge VAT at the rate of 20%.

� Sale of new buildings, plant, machinery, equipment and structures immovably fixed to the land is a VAT taxable supply, subject to 20% VAT.

� There is no VAT grouping in Bulgaria.

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Bulgaria 2011 Real Estate Review

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