For sellers

Bulgarian Mortgages – The State of the Credit Market for Bulgarian Properties.

07 January 10

There is little doubt that 2009 has been a most turbulent year for the credit markets. Regardless of ones involvement in or understanding of the circuit of capital, it only takes minor research to discover that Bulgaria’s banks are as battered and bruised by the ‘credit crisis’ as any in western Europe. Statistical data on mortgage offers provides us with a key indicator for the general attitude of the lending institutions. Although far from the crux of Bulgarian economics these mortgages are fundamental to many small to medium private investments as well as numerous larger scale commercial Foreign Direct Investments, without which most property related transactions simply can’t conclude.

Mortgaging as a concept is still in its infancy in Bulgaria; products offered by even the largest players in the market have been relatively simple and largely undeveloped, not to mention uncompetitive and expensive. Nonetheless, it is a mistake for individuals to compare their experience of mortgaging and remortgaging properties within the borders of the financially advanced United Kingdom to those encountered as a foreigner buyer in Bulgaria (often for a property a tenth of the price). This is much the same as comparing our English beaches and Scottish ski resorts with the Black Sea coast and Bansko; it might be the same category but it simply isn’t the same product.

To understand the lack of capital currently available one has to first consider the position of the lenders. Several Bulgarian high street banks are owned by Greek, German or Hungarian parent companies, most of whom have drawn back the capital that they do have available from their outer reaching subsidiaries to minimise their exposure outside of their own borders, thus maximising cash availability within the ‘motherland’. In other cases, Bulgarian home grown banks who perhaps do not have the same risk and exposure to the foreign / international markets and haven’t traded Credit Default Swaps irresponsibly etc, are acting in much the same way. Why?

The suspicion is that it is better to follow the crowd into hiding rather than stand alone in a totally revised marketplace. It is actually a very expensive strategy for a bank not to lend as in doing so they rely solely upon their own trading capabilities, which in the case of local Bulgarian banks is not as advanced as many others. In reality, instead of competing for credit customers by offering preferential rates, conditions etc, they have competed by offering higher interest rates to savers and current account holders (up to 11% interest for the best part of 2009). Over the past year this has sucked up all the available cash in the public domain thus further hindering the recovery of the property market. In turbulent times a property market becomes dominated by cash buyers and these buyers typically become responsible for the majority of ‘below market value’ transactions taking place. However, in this particular turbulent time the cash buyers have opted for fixed high interest returns (8-11% RoI) with the immediate availability to withdraw their capital as offered by the bank’s deposit accounts, as opposed to buying a distressed property at huge discount to achieve rental income (typically 3-6% RoI) plus any potential future capital growth.

This has allowed cash owners to easily and comfortably ride out the storm, waiting for the ‘green shoots of recovery’ before making a bricks and mortar property investment. In essence, not only do we now have a market that is stagnating because of a lack of credit, but also because even the highly distressed properties have stayed unsold due to there being so few cash buyers willing to speculate beyond the comfort zone of the deposit accounts.

The good news is that the above situation is finite, simply put; high street banks cannot afford to pay out high interest rates without collecting higher interest rates from credit agreements of one type or another. Lending will have to restart, property’s role within capitalism is simply not possible without it.

So what credit is actually available right now?

It you have an investment within the Sofia district it is possible to achieve lending, although it is limited and dependent on the exactly location and quality of the build etc. Other urban residential areas (Varna, Plovdiv etc) are also feasible as long as the demand for the property is deemed as predominantly domestics. The banks will not lend more than:

· 50% of the value of the property (as determined by the evaluator, not the purchase contract)
· Not more than balance outstanding according to the contract for the purchase of the property
· Generally speaking not more than 500 Euros / sqm including common areas.

Most foreign buyers have sought property in the tourist markets of the ski resorts and the Black Sea coast where unfortunately there is currently no lending available. Likewise, there are no remortgaging products or equity release products at all. If you have already paid in full and have exchanged to receive your deeds, your best bet is to furnish and rent until the resale market comes back fully.

What is changing, when will mortgages come back?

At this moment in time progress is being made with a lender to reconsider their position on tourist property. This is a local Bulgarian bank who are keen to open up their recently launched product to encompass properties within ski resorts such as Bansko. However, with so many developments unfinished or finished without planned facilities etc, is it their strict policy to inspect and evaluate the property before considering the applicant at all. This naturally carries costs and with no certain product at the end, it is not a cost many honest mortgage brokers will be willing to suggest their clients pay upfront.

A potential solution, which is currently being work on, is to carry out bulk evaluations of properties with this bank, thus reduce the cost for the numerous individual applicants who have purchase contracts for the properties within the same handful of developments. This will tell us which developments qualify and which don’t without having to risk a client’s money to find out on a one on one basis. In an ideal world the banks would agree to this bulk strategy with the same level of vigor and zeal. Sadly this is not the case and whilst an agreement has been made, progress to get it actioned is painfully slow. It is most likely that individuals within the banking hierarchy are as keen as the brokers to get lending triggered again, yet despite this their superiors are probably focused on macro scale issues and won’t share the same enthusiasm, thus resulting in them being apathetic towards mortgage product progression.

All said and done, the mortgage market is not without advancements as this week we have witnessed the first Sofia mortgage offer be made to a client in the past five months. Whilst this only provides good news to a limited number of investors (those in the Sofia / urban / domestic demand districts), it is also a strong sign of positive change as a whole and should be taken as an encouraging indicator for the lending against tourist properties in 2010.

In conclusion, if you have purchased outside of Sofia and need a mortgage within the next 3-6 months, you should consider engaging a professional consultancy to renegotiate, revise and settle / extend the terms of your contractual agreement on your behalf. The alternative is to simply wait until mortgages are offered again, but this could be a long wait and one that is currently without known limits. Even if banks started lending tomorrow, applications will still take three months to process before funds are dispatched and deeds exchanged, as such if you are being pressured by the developer and repossession is a concern you need to empower negotiators to best represent your interests.

If you have any questions at all or are being affected by issues that this article covers and think we can help, please contact the author; Christophe Gater Tel: 0207 9934197. We are specialists in Bulgarian mortgages and renegotiations of distressed property purchases.