Reselling Bulgarian Land? Land Market Report 2013

Land sales in Bulgaria are currently at their lowest since before the property boom started in 2003. Plots within the city limits or those arable continue to benefit from reasonable domestic and commercial demand, but for 99% of foreign land owners who purchased in rural, seaside, tourist or resort areas, the market is static with no signs of improvement on the horizon. This article considers the current reality for owners in those locations.

Oversupply from the courts:

Like any market, supply and demand have to meet in the middle somewhere for a transaction to happen. However, the supply of land is currently being fed unprecedented volumes by the legal system as developers and individuals continue to roll insolvent, liquidate and become bankrupt as years of legal cases resulting from the financial crisis now come to an end. To add some perspective, we have seen 15,000sqm plots of land in regulation with sea views, with permission and plans to build 200 apartments, once worth and selling for 800,000 Euros in 2007 as a concept with licenses and land, now liquidated and unable to sell for just 50,000 Euros. There are no bidders, no interested parties. There of literally thousands of such cases for plots and projects of every conceivable size and scale, all before we consider stock available from the regular private and commercial resale market. Courts and bailiffs have rightfully stripped non performing companies and individuals of their land assets, offered them for sale via public auction to return funds to creditors, but the market has not reacted and few parties at this time want to exchange cash for land ownership, as such the bulk of these offers simply stay available indefinitely.

Values not set by market forces:

Land prices are not currently determined by true market forces; normally any property is sold for as much as someone else will pay for it, but not so with land at the current time. Liquidated plots (the least expensive on the market) are simply being offered up at the amount owed to the liquidators, the courts, the tax man or the bank etc; the asking prices are set by the debt owed rather than development potential, by the vendor or by other regular market forces. Whilst this results in some available bargains, the real impact is the removal of true market conditions and along with it true market values, only when this oversupply ends will the market stop being flooded and the few active buyers absorbed. Until then private sellers have no chance to compete, hence their market being static, not very comforting given that typical private plots have been devalued by as much as 90% since 2007, but it will unfortunately remain the case for some time yet.

Many owners seek valuations for their plots, but as any professional in the property business will confirm values are best achieved by analysis of comaprables. However, without any local or recent sales to compare to, who can professionally say what a plot could be worth? Sadly, most plots are only advertised at the lowest figure the owner would accept, but even when advertised for that it will probably not achieve a sale at this time. It is like trying to sell your £10 for £1, yet the courts seem to have a nonstop £10 machine and do not mind offering each for just 10p, furthermore they also do not mind selling nothing at all; as a ‘vendor’ the court will never get desperate, never withdraw it from sale and never try to develop the plot or manoeuvre in some way progress its position and minimise loss.  The court’s role in the whole matter finishes when the legal case ends and the assets put on the market, sold or not the court’s priority is the legal aspect only, the actual sale and return of funds is never their concern. At least with private and commercial vendors the regular capitalist motives apply, game theory tells us that personal and strategic decisions will result in explicable trends, prices and trade outcomes eventually, but not so with the courts as they lack the motivation to decide when is best to sell and for the optimal amount, thus they present an effective black hole in the market.

Lack of liquidity and lending:

Unless land has been acquired or utilised for agricultural or arable purposes, the rule of thumb is that lending will always be necessary to produce and develop property structures onsite. Naturally, some buyers might well have sufficient cash reserves to fully self-fund projects, but to be realistic these investors are seldom active in the Bulgarian market because the returns are now either non-existent or insignificantly low and thus uncompetitive investments. Let’s face it, why would a cash investor consider a new build project in the Bulgarian property market when 20% annual return on investment can be found in Detroit, not to mention cash deposit savings accounts offered by Bulgarian banks where guaranteed 6% return is available, or to minimise risk and still be in the game for higher returns, gold and other precious metals continue to offer a safe haven? The harsh reality is that the answer explains why no one is buying land at this time, it simply doesn’t make a viable return and so is not worth the risk. Broadly speaking, average quality new build (build only costs) range from 450-550 Euros /sqm before land, VAT and other associated costs are considered, yet the average selling price in Sunny Beach is 400-450 Euros /sqm, in St Vlas it is 550-600 Euros /sqm, in Bansko is 300-325 Euros /sqm, in Sofia it is exactly 734 Euros /sqm and in Bulgaria as an average 448 Euros /sqm (National Institute of Statistics January 2013). Without needing anything more than simple arithmetic, anyone can quickly see the lack of available profit in new build projects at this time, which is why no banks are interested in lending to developers with such proposals.

Marketing and awareness vacuum:

As we have seen in other areas of the property market, when a product ceases to sell the companies involved in their promotion quickly loose out and fail to make sufficient returns, as such they halt their marketing and promotion indefinitely. When you consider the foreigner buyer land market and how large it once was in Bulgaria, it is actually hard to find any genuinely active agents spending their money to promote the availability of land offers today. Understandably, the odds are stacked against them selling successfully and so like any business they all find products that are more efficient to sell to existing demand, such as finished Sunny Beach apartments to Russians. Furthermore, land is a very expensive product to sell, the variants are endless and so the timescale needed to coerce any serious buyer is many times that of a comparatively standardised product such as an apartment, all for the same commission or less. All in all, it is currently too expensive to market land, too risky, with too few buyers and all for too little return. We can even go one stage further by considering that many speculative land owners who were braver and bolder than property buyers during the boom years have now been disillusioned with the state of affairs, with the market as a whole, with their investment, their liabilities and their losses, many are simply inactive and even if a willing buyer was camped on their plot, they wouldn’t have any means to know about it.

Options for Vendors:

Given the current state of the market there are few options for vendors, but you must be active or it is certain that nothing will progress . Critically, you should provide your agent with all the precise information they require without expecting them to visit the plot, to probe solicitors and neighbours for its confirmed location, or search through endless municipal schematics, these tasks simply won’t get done by them, you are the owner and you must do it. If you make it simple and costs effective for the agent to list and advertise your plot by providing sufficient information (photos, pinpointed map location etc) so that they can quickly and easily react to any enquiries, then you really stand a much improved chance. Many land owners lack details or are not exactly sure where on a map their plot is, sadly this is crucial and unless you can supply such information then it is highly unlikely that any agency will spend the necessary time to discover it for you.

Future Recovery for the Bulgarian Land Market:

Land markets will always be the last to recover from this recent financial crisis, but it is truly the only thing that is not made any more so with sufficient time the value will return, it is just impossible to know when. It is not exactly a case of chicken before the egg; first we must see the return of viable lending and liquidity to enable commerce and enterprise to reconsider the prospects that land offers. Our capitalist system and the circuit of capital itself depends on those willing and eligible to have access to borrowing, so that they can take a risk, build and potentially profit, without it we are all stuck in turmoil. Secondly, the volume of land stock being dumped and offloaded by the legal system must be dramatically reduced to form the minority of supply rather than majority, all of it needs to find new owners before any real prices can have a chance to establish. Finally, at the consumer end, property prices have to rise above build costs sufficiently to allow profit to become possible again from the creation of buildings and alike structures; without distance between production and sale costs there is simply no margin on land, thus there will be no real demand for it.

Resale values can only increase when the currently colossal number of distressed vendors of finished apartments reduces considerably. At this time the resale market is fed by vast volumes of vendors willingly selling at a loss and far below build costs, values have no chance to rise until these vendors all sell and reduce their collective impact of sheer oversupply. Without ‘cheap’ supply, the theory is that some of the demand can afford to buy at higher prices, at least in theory anyway. Of course, it is entirely possible that the courts stop feeding the land market and the desperate private vendors all sell, the only supply left comes from sources who are only prepared to sell for higher. In which case, we will either see a genuine rise in achievable property prices and everyone will benefit, or we will simply see transactions stagnate as these higher values fail to meet the requirements of the bulk of demand. This situation can be seen today in the Varna market; relatively high prices, very few vendors willing to drop to a level to meet demand, almost all private local owners are not pushed to sell (no mortgages and thus few financial pressures to sell, minimal career or lifestyle factors encouraging upward or sideways movement), there are no significant numbers of distressed foreigner owners in the market, as such there are simply almost no transactions and the market stays shrunk, dormant and with minimal sales at bygone values.