Is it a financial crunch? Rather a refreshment

We still hope that the credit problems will have rather healthy than a destructive impact on the Bulgarian real estate market

The problems on the global financial markets, which started from unbridled lending in the US and some parts of Europe, have already changed the climate in the global economy. However, in a small part of it, Southeast Europe, the consequences have not yet been felt. This makes professionals believe that the real estate market on the Balkans will come out dry from the storm. Moreover, the crisis is said to gradually wash away non-professionals and speculations and to keep only bigger market players who would guarantee the projects’ quality and sustainability.
Generally, these presumptions dominated the Balkan Real Estate Conference - BalREc, held on April 15-16 in Sofia. The credit bubble, which burst in the US, blew away from their positions some of the most prominent financiers, led to a slump few European and American banks and cooled down residential markets on both sides of the Atlantic. Almost nine months later the central-European region is still perceived as a relatively safe island. At least this is how things are seen on a local level.
Meanwhile, real estate markets have their specific problems in some regions: planning disorders, infrastructural issues, high land prices, risks of creating price bubbles in certain segments and projects, issues on providing sustainable development in some rapidly expanding cities. Still, economic growth is pushing these markets forward.
"Obviously this is an area of growth", Jean-Pierre Vigroux, Senior Partner at PriceWaterhouseCoopers, said at the opening of the conference. "Economies are overheating a bit, but have not yet overheated", he added.
Vigroux said the Balkans have been moderately affected by the crunch but the countries still have to work hard to improve business conditions, for example in areas like bureaucracy, license regimes, and transport infrastructure.

Authorities
could do something more hinted David Sim, an urbanist, teaching architecture and Senior Consultant at the Danish Gehl Architects architecture bureau. He made an illustration with Barcelona and Malmo, cities, which decades ago had used to be perceived as industrial sites, while due to some changes of their zoning and infrastructure, they are now associated with tourist destinations.
Sofia has all the prospects of becoming one of the best European cities to live in, Chief Architect of Bulgaria’s capital Petar Dikov believes, but "cannot allocate public resources to handle all the problems, though", he added.
One of the ways to achieve this is by means of public-private partnerships, which combine private capital, know-how and public resources, providing benefits to both parties, John Infantino, CEO of American investment and development company Federal Development, noted.
Mr. Dikov also stated that in this sense the state and the legislator are indebted as there are no regulations in regard to public-private partnerships.
But the more important risk at the moment seems to be the economic one.
The credit crunch did not directly affect Bulgaria and the region but the global economy’s slow-down might not pass us by.
"We are entering second phase of the crisis, which will be more protracted. The driving force will be the slowdown of the US economy," said former Deputy Minister of Finance Krasimir Katev, who is now General Manager the investment advisory boutique Prime Capital Management. He believes that the impact of these processes will also be felt in Europe. Nevertheless, he is not entirely pessimistic about Bulgaria: "But globally and in the long-run, the situation is positive, although there is place for adjustment. It will be seen in a period of zero growth or small decline, which, combined with inflation, will lead the prices on a negative territory."
However, there are some signs of stagnation that are evident. "The first segment to experience bubble was the coastal and mountain holiday homes market," said Emanuil Santev, Head of the Real Estate Department of Hypo Alpe-Adria-Leasing, a leasing company. He forecasted that the next segment to be affected will be retail. "This is a serious bubble, which will blow up in 2009-2010".
As usual, extreme opinions are controversial. Martin Gikov, Head of Real Estate Finance at UniCredit Bulbank, said: "Even if there is real estate bubble somewhere it is not inflated enough to blow up." Although there are a number of shopping mall projects, Gikov hopes that not all of them will be finalized. Banks as well as investors will also be more cautious in financing them because of the deteriorated climate. "The effects of the credit crunch will be healthy in this regard," Mr. Gikov added.
"There is no danger of bubble in the retail sector", said Nicholas Spiro, Director at DTZ Central and Eastern European Investment Team. "There will be just several successful schemes of 15-16 as a whole", he said. "What the crunch does is to focus the attention on quality," Mr. Spiro commented.
Nevertheless, the financial market problems are not likely to end soon and they might take their toll on Southeast Europe. So far the eurozone has been resilient to the turbulence. "I am cautiously optimistic it will not grow to full-fledged recession," Spiro said. "I am more optimistic though on the CEE region", he added.
His optimism is well-grounded: high economic growth, low leverage levels (and in Bulgaria low level of external financing), stable market fundamentals and strong demand support it. If Mr. Spiro proves to be right, then developers and investors will simply have to pay more attention to the quality of certain projects and properties. Those who fail to do this will fall off the scene. If, however, Spiro is not right, then the market players will have to get ready for their first trickier period in the new history of Bulgaria.

BalREc started with a discussion on the problems of urban development, with the participation of (right to left) Arch. David Sim, Sofia’s Chief Architect Petar Dikov, the General Manager of Lindner Immobilien Management Rosen Plevneliev, John Infantino, CEO of investment and development company Federal Development, and Prof. Veselina Troeva from the University of Architecture, Civil Engineering and Geodesy

The credit crunch: the number of optimists is still higher than the number of pessimists. From right to left: former Deputy Minister of Finance Krasimir Katev, Nicholas Spiro, of DTZ real estate consultants, Ivo Prokopiev, co-owner of Alfa Finance Holding (also co-publisher of Capital, Dnevnik and Stroitelstvo Gradat newspapers and the Bulgarian Property Index Magazine), Martin Gikov , of UniCredit Bulbank, and Emanuil Santev, of Hypo Alpe-Adria-Leasing

The Western Balkans provide new opportunities in the region Some countries in the Western Balkans like Macedonia, Albania and Montenegro offer new opportunities to more go-ahead investors. The development of the tourism sector seems to be promising too, besides the growth in more traditional market segments. These countries really appeal to investors. For example TriGranit, the largest developer in Central Europe, has plans to develop a luxury resort in Montenegro, and attracted hotel operator Four Seasons to manage the site. "We believe that Montenegro can be a place, which, under certain circumstances, may rival even Monte Carlo and Dubai," George Bobvos, Regional Director of TriGranit commented (pictured on the right). Like Montenegro, Albania also boasts untouched coast line, which is maybe the last undeveloped area in the Mediterranean. "Resorts in Albania definitely have growth potential," Stela Dhami, General Manager of Colliers International in Albania, said. Although Macedonia is a land-locked country, it also has something to offer - the lake Ohrid for example and several winter resorts. "There are prospects for tourist developments close to the lake Ohrid", Borjian Borozanov, Project Manager of Macedonia’s government body for investment promotion, said. Borozanov, Dhami and Bobvos participated in a discussion on emerging real estate markets in Southeast Europe, part of the Balkan Real Estate Conference - BalREc.

Property management lags behind development
The property management and maintenance market is still at a very early stage of development but an increasing number of investors and landlords are realizing the need for these services. This was noted by the participants at the Balkan Real Estate Conference -BalREc. "Property management is still in very early phase," Nicholas Yovanidis, Director Property Management at Colliers International Southeast Europe, said (pictured on the left). "People still struggle to see what the benefits are", he added. The service kit that property management companies provide includes maintenance of buildings, facilities and installations, cleaning, current repairs, legal relations with tenants etc. "Supply of property management services lags behind real estate development," Tosho Kirov, CEO of Alfa Property Management, the property management business of Alfa Developments, also said.

Krasimir Katev, Prime Capital Management:
There are serious signs for crisis in the holiday homes segment. Yet, it is well differentiated market and sales are continuing. There are some pockets of bubbles in the residential market where investors - foreign and local - have bought speculatively. But globally and in the long-run, the situation is positive, although there is place for adjustment.

Emanuil Santev, Hypo-Alpe-Adria Leasing:
The crisis will be over by the forth quarter of the year. Interest rates will fall for a short period of time. But inflation is coming. The worst scenario will be avoided. The first segment, in which we saw a bubble, was the holiday homes market. It has been blown away and will stay like that for two or three years. But there will be crisis in the shopping mall market with 15 new projects in Sofia. This is a serious bubble, which will blow up in 2010.

Nicholas Spiro, DTZ:
With investors, a lot of attention was fixed on the yields, not on the fundamentals. What the crunch does is to focus attention on quality. Now we are returning back to the basics. Prime yields will remain fairly resilient with maybe 25 basis points move upwards. In less mature markets there is much more scope for repricing.

Prof. Veselina Troeva, University of Architecture, Civil Engineering and Geodesy:
On one hand, impetuous development creates a lot of work for professionals, which is good, but, on the other, leads to the development of buildings that are not adjusted to the market needs. Prospects for development should be searched for in the uniqueness of the country, in its nature, lifestyle and culture, as these are the things that would attract foreign investors.

Martin Gikov, Unicredit Bulbank:
Even is there is real estate bubble somewhere it is not inflated enough to blow up. There is a big pipeline in the retail sector. Hopefully, not all the projects will be realized. The effects of the credit crunch will be healthy in this regard. We do not worry about a bubble. We have to focus on quality.

Petar Dikov, Chief Architect of Sofia:
With the development of the underground and the underground car parks the center of Sofia will convert from chaotic parking lot into a territory for the people. We could hardly compete with the mall culture but it is extremely important to preserve Sofia as a city with human face. We have to pay attention to the economy so that to help it create high incomes for the people. There is no regulatory document for public-private partnerships. In this respect the state and the legislator have not done their duty.

David Sim, Gehl Architects:
Cities, which used to be industrial 20 or 30 years ago, have now converted to nice place to live because of multiple public spaces and investments in their development. This is something cities like Sofia and the other southeast-European capitals could do. Cities are inhabited by people so the starting point of architects should be people and their senses.

Jean-Pierre Vigroux, PriceWaterhouseCoopers:
Southeast Europe is obviously an area of growth. The economies are overheating a bit, but have not yet overheated. The average growth rate is 6 per cent, way above the European Union. The incomes and the purchasing power are rising as is the number of customers for all products. There are areas that need to be improved. Bureaucracy is one and license regimes, tax administration, the property registration, infrastructure are others.

Read more:
Industrial properties: High land prices are a real problem
Second wave of projects floods the shopping mall markets
Offices: Poorly developed projects will suffer
Developers stay optimistic