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What to Expect from the Real Estate Market of Bulgaria and Europe in 2018

building-construction-sofiaAccording to the Global Investment Atlas 2018 report published in mid-March, Bulgaria reports the highest annual growth of 153% in real estate investments among 60 countries in the world. The report was published by the international advisory company Cushman & Wakefield, which partners with Forton for Bulgaria. According to the report data, the value of the transactions reached EUR 856 million, ranking our country 32nd among the top 40 countries in terms of volume of new investments with cross-border capital. The good 2017 was primarily due to the large deals for commercial and business properties in Bulgaria from South African funds. Cushman & Wakefield’s experts believe that investment volumes will continue to go up in 2018, driven again mainly by the markets in Eastern Europe, which Bulgaria is also part of.  

 

Positive outlook for 2018 on the back of strong market in 2017

2017 has been very successful for Europe. This refers especially to the office space segment, which registered a record investment volume of EUR 253 billion. This was 43% of the total investment volume and was an increase of 10% compared to 2016, according to data from BNP Paribas Real Estate. The market showed an upward trend in most major cities in Germany, as well as in Paris, London, Dublin, Warsaw, Madrid, Milan, Amsterdam, etc., where the percentage of utilized office space recorded a historical growth and the decline in vacant office space raised prices.

The region of Central and Eastern Europe also showed stable growth. Europe reported an increase of 8.3% in investment volumes for the year, according to experts of Global Investment Atlas 2018. The growth was mainly due to the Central and Eastern European (CEE) countries, which experienced an increase of 19.2% in investment property deals in 2017.

According to a report by Colliers with a forecast for 2018, investment in commercial real estate in CEE reached a new record of EUR 13.1 billion in 2017, with Bulgaria being the most liquid market. Profit levels in the Bulgarian capital were the highest compared to other capitals in the region – 7.25% for retail space, 8.25% for offices and 10.0% for industrial properties. According to the company’s 2017 analysis, the volumes of local investors were highest in the Czech Republic (EUR 1.08 billion), Hungary (EUR 708 million) and Poland (EUR 421 million). Bulgaria ranked fourth with local level investments worth EUR 110 million in 2017. In our country, the investments of local companies form one sixth of the total market capitalization of the commercial real estate market in Sofia.

 

How the Real Estate Market in Bulgaria Ended up 2017

Bulgaria registered a record-high amount of investment deals which totaled EUR 957 million. 70% of the total volume was attributable to the sale of shopping centers. International buyers outpaced Bulgarian investors in terms of share of all deals, with South African investors having 71% of the total volume of deals. Second in volume came the office space deals – 17%, followed by building plots – 7%, hotels – 5% and industrial areas – 1%. Income-generating real estate deals were the most (83%), compared to those acquired for speculative purposes (12%) or purchased for own use (5%). Office spaces had the highest return – 8,25%, followed by commercial area – 7,25% and industrial areas – by 10%.

 

Sofia in 2017 by Key Segments

The market for class A, B and C office space in Sofia reached 2,000,000 sq. m., and the volume of deals concluded in 2017 is the highest since 2009 – just over 200,000 sq.m (55% growth on an annual basis). The 2016 trend of moving and merging teams of a company into one office building, mainly for companies within the outsourcing sector, continued in 2017 as well. The largest demand was in the information technology sector – 71%, followed by professional services – 15% and medicine and pharmacy – 10%. More information on the supply and demand of office space is published in the review of Colliers International | Bulgaria.

Space utilization of trade centers in Sofia increased by 17% on an annual basis. In the capital, the supply of modern retail space totaled 400,660 sq. m. in 2017. The average monthly rent was EUR 49 per sq. m. Most of the main shopping streets were occupied by fashion stores – 30%, followed by restaurants – 19% and services – 13%. The demand in trade centers was in four major categories – Supermarkets and Grocery (18%), Entertainment (15%), Fashion (13%) and Restaurants (12%).

Sofia’s modern industrial and logistics areas were mainly demanded by wholesalers and retailers (60%), business services (17%) and logistics operators (14%). Industrial areas supply rose by 5% on an annual basis to 883,600 sq. m., with retained rental rates of EUR 4.5 / sq. m. for class A and EUR 2.7/ sq. m. for class B monthly rent. The projects under construction totaled 177,600 sq.m.

By the end of 2017, supply in the middle and high class housing segment showed a 12% growth. The number of residential buildings in active construction continued to grow. A total of 58% of all deals comprised properties in a stage of construction. Demand was mainly focused on homes for private use, but the percentage of buyers aiming investment was also high (25%). The most dynamically developing areas are the area around Business Park Sofia, Krastova vada and Vitosha residential districts. Housing prices grew by 7% in 2017 and varied between EUR 1 000-1 600 per sq.m (including VAT).

 

Property Market Development Expectations in 2018

According to a report by the real estate company Savills, the positive expectations for the European economy as a whole will further trigger the positive trend in the real estate market. The demand for business properties will grow and exceed the supply, which will force the tenants to plan the needed space in advance and wait for their completion. According to Savills forecasts, the completed office buildings on the markets observed by the company will increase by 17% in 2018 and by 18% in 2019, with almost 40% of these areas already being rented.

Retailers will continue to search for the best shopping streets and shopping centers. Growing online trading will affect two segments. On the one hand, it is expected that more and more e-stores will open or expand their physical space, on the other – the demand for warehouse and logistics storage and logistics facilities will increase.

The importance of emerging sub-sectors such as co-working spaces, living and working complex spaces, and multifunctional spaces will also grow.

According to a forecast by Colliers International,  following the strong year of transactions with trade centers, a growing interest is also expected in other segments of the market in Sofia –

offices, industrial and logistics areas, and hotels. The volume of investment transactions is not expected to exceed that of 2017. State-owned industrial zones will become more attractive due to their strategic location, quick access to major arteries, and stable rental rates. In 2018, an additional 55,000 sq.m of logistics space is expected to enter the rental market. The Manufacturing sector (mainly automotive) is expected to record the highest demand.

The office space market will continue to grow with stable rental rates, where the interest will be mainly directed to Class B buildings due to the shortage in supply of finished Class A office space. In 2018, a total of 158,000 sq. m of office space is planned to become operational, with 50% of them already being occupied. The outsourcing sector will continue to determine the demand on the office market not only in the capital, but also in Plovdiv, Varna and Burgas.

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