Offices: Poorly developed projects will suffer

The lack of quality space forced some foreign companies to delay their plans to enter the Bulgaria

Office market in Bulgaria is still far from being mature although the number of quality projects is growing.
Nevertheless, progress is evident. A couple of years ago there were no quality projects and even now some of them have simply vague resemblances to class A offices. Still, these are marketable as demand significantly exceeds supply.
Foreign companies have even postponed their plans to enter Bulgaria as they have actually had not found place to establish an office.
At first, Bulgarian developers just didn’t know exactly what investors wanted, Iliana Schmatelka, General Manager of Immorent Bulgaria, a leasing and real estate unit of Austrian Erste Bank, explained.
The term class A office is still pretty much unclear. However, almost every single offer on the market lacks certain features that would qualify it as class A - whether it comes to suspended ceilings, raised floors, lighted areas or a the needed car parking spaces.
"Although there is more to expect from Bulgarian developers, quality is improving", Elitsa Panayotova, CEO of Alfa Developments, a Bulgarian real estate development and investment company, said.
The first foreign investors to come to Bulgaria found there was actually nothing to invest in. They had to either start developing their own projects or to try to share the risks with Bulgarian development companies, the Executive Director of Forton International real estate consultants, Sergey Koynov, commented.
This scene has recently started to change. A booming economy has driven the absorption of 200,000 sq m of office space in 2007. The forecasts for 2008 are similar. As of the end of 2008 and the beginning of 2009, the first new projects are expected to be delivered and to change the ratio between demand and supply.
But investors will be much more cautious about when and what they are buying, as not all projects on the market will be absorbed. Thus, projects of poor quality will gradually start to drop out of the market, Elitsa Panayotova believes.
Financial concerns, prompted by the credit crunch, will also have an impact. More opportunistic and speculative players will gradually start to fall off the scene. A year ago most investors tended to be aggressive and use up to 75 per cent leverage ratios. But nowadays all of them seem to be more cautious. We are now witnessing a reverse effect with 80 per cent of investments coming from equity and just about 20 per cent from credits.
However, there are still problems remaining regarding the office market development in Sofia and solutions are unlikely to be found soon.
Problems with infrastructure equally apply to existing buildings and future projects. High prices of land, seen by all Bulgarian developers, are just another setback for the sector’s development. This, however, is expected to change once land owners’ unrealistic expectations are cooled down.

Iliana Schmatelka, General Manager of Immorent Bulgaria: Several years ago there were no quality projects in Bulgaria. Now, land prices in our country are extremely high without any economic explanation. But investors feel at ease when they think about the standardization of both legal and tax systems. Bulgaria’s EU accession has made them trust the market as they are already familiar with the conditions in countries like the Czech Republic or Poland.

Anton Slavtchev, Colliers International: A number of companies have come to the country as investors but started joint venture projects with developers due to the lack of investment grade product. The lack of quality space has lead to a slow-down. Some companies delay their plans for the market in Bulgaria and choose to wait until larger projects are developed. If a company has to be located in the city center, then it will pay whatever rent is required no matter the amount. We have to bear in mind that the market is rapidly progressing and a project which is now considered class A might turn into class B over a 10-year period.

Tanya Kosseva-Boshova, Executive Director of Landmark Property Bulgaria: It is very difficult to offer a project without knowing what investors have been looking for. Once Bulgarian developers get to know the market specifics, they will construct buildings of better quality. A good manager is essential for a building to become a proper investment product. The manager is a criterion of the projects.

Sergey Koynov, Executive Director of Forton International: If investors want to come to Bulgaria, they need to develop a project of their own or find a developer to share the risks with. The credit crunch has slightly increased the expenses of projects. Those who seek for fast profits will have to flee the market along with speculators. But investors with good projects and locations will remain on the market.

Elitsa Panayotova, CEO of Alfa Developments: There is still place for further improvements of class A offices in Bulgaria. The product is getting better but there are still many projects of poor quality due to companies’ lack of experience or search for fast profits. The highly insufficient supply is the reason why these projects still find their place on the market. New international companies have to be attracted because demand has been driven by expanding businesses that are already present on the market in Bulgaria. Most players follow the market trends. And at this stage, the real estate business has focused on the markets in the capital and Varna and, to a lesser extent, in Plovdiv.

Read more:
Is it a financial crunch? Rather a refreshment
Industrial properties: High land prices are a real problem
Second wave of projects floods the shopping mall markets
Developers stay optimistic