Bulgarian Residential Real Estate Market Overview /2023/

The real estate market in Bulgaria continues to be hot and rapidly changing it’s landscape. Considering the strong urbanization process in Bulgaria, this analysis will focus on the six largest cities in Bulgaria – Sofia, Plovdiv, Varna, Burgas, Ruse, and Stara Zagora. The aim is to identify the main trends, potential risks facing the market, as well as the investment opportunities it provides.

Market Structure

Economic growth, the prolonged period of record-low interest rates, and the development of cities logically led to this intensified construction activity. According to the National Statistical Institute (NSI) for the past year, in Sofia, the number of newly built residential units put into operation amounted to 5798, and the trend has been strongly rising since 2017.

After the beginning of 2020 with the onset of COVID-19, there has been an increase in the supply of threebedroom and multi-bedroom apartments in the capital. Correspondingly, there is a decline in the supply of one-bedroom and two-bedroom apartments. However, since 2018, the highest proportion of residential units put into operation has been accounted for by two-bedroom apartments.

Major tendencies and factors

In the current year, the real estate market can be characterized by the following main trends and factors:

  1. Decreasing short-term dynamics, but still relatively high over a 10-year period. In recent years, we have observed a high level of dynamism in the real estate market in the city of Sofia. However, according to the Registry Agency, while 40,906 real estate transactions were recorded in 2008, the past year saw a decrease to 34,101 transactions. During the first three quarters of 2023, a total of 21,997 property transactions were registered in Sofia, according to statistics from the Registry Agency. This represents a nearly 10% decrease compared to transactions for the same reporting period in the previous year. At the same time, it is the third strongest period (January-September) in terms of the number of transactions in the last 9 years.
  1. Expectations for an increase in mortgage interest rates. Currently, the average interest rate on mortgage loans remains stable at 2.8%. Even one bank stands out with a promotional interest rate of 2.18%, emphasizing the possibility of lower costs for housing financing. Mid-term forecasts from bankers indicate a potential upcoming increase in the average interest rate by 0.5%, as well as a stricter assessment of clients’ creditworthiness. It’s worth noting that according to theglobaleconomy, Bulgaria has the lowest mortgage interest rates among countries such as France, Germany, the United States, and the United Kingdom. At the same time, it is the only one among them that has not yet increased these rates.
  1. Continued increase in housing prices, but with weaker intensity. It is important to note that clients with high incomes continue to have an advantage in the approval of mortgage loans. There is a noticeable slowdown in the growth rate of housing prices, with no longer expecting double-digit rates.
  1. Inflation as a primary driving force. At the macroeconomic level, inflation significantly influences the real estate market, surpassing even the impact of interest rates. Developments in economic policies and strategies to control inflation have the potential to change the dynamics of the property market. In this context, the expectations for inflation in Bulgaria for the coming year are as follows: According to the European Commission (EC), inflation in Bulgaria is expected to slow down to 4.2% in 2024; The International Monetary Fund (IMF) anticipates average annual inflation in Bulgaria to be 3% in 2024.

  1. Affordability of residential properties relative to income. To determine the affordability of residential properties in Sofia, we will use the „Price-to-Income Ratio“ coefficient. It relates the average price of a 90 sq.m. apartment to the average annual household income, calculated as follows: the average net monthly salary for the city multiplied by 12 months and further multiplied by 1.5 (average number of members in a household on full-time employment). The lower this ratio, the more affordable the housing is in the respective city. For Sofia, as of the second quarter of 2023, the coefficient is: 11.8 for residential properties in the city center and 7.5 for residential properties outside the city center.
  1. Current Rental Yield. To determine the approximate net yield of a three-bedroom apartment when rented out, we take into account 10 gross rents (typically around 12 net rents after deducting expenses) and compare them to the average market price. Net yield is a measure of the return on investment for a rental property and is calculated by dividing the net rental income by the property’s market value.

Additional tendencies and factors

As complementary trends with the potential to become fundamental in the future, the
following can be highlighted:

  1. Environmental Trends. In the upcoming years, energy transformation in the construction sector is evolving from a mere modern trend to a mandatory aspect of the industry. By 2030, new buildings will be required to have zero carbon emissions. Simultaneously, certifying buildings as energy efficient becomes a crucial practice. In the future, this may even become a standard practice where the absence of an energy certificate could lead to credit refusal.
  1. Tax Changes. The methodology for tax assessment is expected to undergo significant changes. According to historical data, the last time this happened was in 2009. Altering the methodology every 15 years becomes a focal point, emphasizing the possibility of new tax assessments and, consequently, an increase in taxes and transfer fees. This aspect of the debate on tax changes offers a perspective on the evolution of tax policy and its impact on the real estate market.
  1. International Investments. Bulgaria continues to be perceived as a high-risk destination in the eyes of institutional investors. However, entering the Schengen Area and the Eurozone may change the dynamics and attract new players, especially in the real estate market with the goal of buy-to-rent entire buildings.

In conclusion

The future of the real estate market in Bulgaria is shaped by innovation, sustainability, and responsiveness to global trends. The sector continues to offer opportunities for diversity and growth, serving as one of the key pillars of the country’s economy.

*The data for calculating the „Price-to-Income“ ratio and determining the net rental yield are taken from www.numbeo.com.

*The data for the number of transactions and the number of mortgages do not apply only to residential properties.

*This information should not be considered as investment advice.

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