With the lowest cost base in the EU and some of the highest yields in the region, Bulgaria is a relatively small country with big hype – and at times, unrealistic expectations – surrounding its property market. Some foreign buyers have been burned on speculative investments in residential properties, and scare stories abound about a lack of proper real estate regulation. But that has not stopped western European investors from snapping up buy-to-let properties and holiday homes in Bulgaria.

The country has overtaken Spain, Portugal, France and Greece in the foreign property investment market, according to West Properties International, an Irish company with residential projects under way in Sofia and on the Black Sea that serves mainly Irish and UK buyers. At present, there are 1399 residential projects under construction in Bulgaria and 423 at the planning stage, for a total floor space of 16 million square metres (m2).

More transparency

Tanya Kosseva, executive director of Landmark Property Bulgaria, says transparency is improving, there is more market information available and new industry publications are coming out. Helpfully, the land registry system has been improved, and real estate investment trust (REIT) legislation is now in place, with 36 licensed to date. Financing options are also opening up, with banks competing for the better projects. Bulgaria already boasts one of the highest home ownership rates in the world, and easier access to mortgage lending, better rates on mortgages and increasing purchasing power ensure that domestic demand will continue to underpin strong overall residential property demand, according to West Properties.

Office expansion

The office market is the most developed property segment and is also in an expansion stage. Office take-up has been spectacular in the past year or two, says Richard Macdonald, chairman of the management board of Landmark. Yields have compressed from 11% in 2005 to 7.5%-9% at the beginning of this year but demand for investment property is still outstripping supply. Rents are rising, but are still a bargain at €156-€240 a year.

Until recently, local companies were content using make-do residential properties as offices; now they are requiring proper corporate offices. Specifications are improving and tenants are becoming more knowledgeable. Projects are getting bigger and more ambitious. Business Park Sofia, the largest office development at 190,000m2, sold last autumn for €180m.

Centrally located office space is hard to come by in Sofia, however, pushing the larger domestic firms and international investors into the suburbs. Landmark Centre Sofia, offering 10,000m2 of class A office space in a prime central business district location, is all leased out to international tenants. Business Park Sofia and the prestigious Bulgaria Boulevard are absorbing much of the overflow from the central business district.

Large office buildings under construction, such as Sofia Tower and Hyundai Tower, and other projects in the pipeline, such the 240,000m2 European Trade Centre, will relieve some of the pressure on supply.

Out at the airport, which has recently opened a second terminal, Los Angeles-based developer Tishman is working on what is being billed as Bulgaria’s premier office park. The 165,000m2 Sofia Airport Centre will include office and logistics space, and a four-star, 12-storey hotel with conference facilities. Tishman expects the centre will employ 10,000 office and warehouse workers and create 3500 new jobs.

Retail fashion

Retail is the most fashionable property sector at the moment. Rising purchasing power, on the back of economic growth of well over 5%, has attracted foreign retailers such as Marks & Spencer, Carrefour and Zara, and big-box international names like Ikea, bauMa and Kaufland. Four shopping malls opened in 2006, three of which changed hands at yields of 7%-9%. There are 11 in the pipeline in Sofia, five in Varna and five in Plovdiv (although ‘shopping mall’ is sometimes a loose term in Bulgaria, not necessarily living up to western European and US ideas).

Success of these developments will depend on their quality of design, mix of tenants and attention to oft-overlooked details such as proper parking space, says Ms Kosseva. They will also test whether projected demand will live up to the hype. “People are shopping and going to the cinema. The question is what happens when all those in the pipeline are built?”