The crisis in 2009: A chance for a restart

The real estate industry has faced some serious troubles for the first time in years. But these might as well become opportunities for solving out problems and outlining policies to support the sector in the long term

When there’s a storm on the horizon, there’s nothing to stop it. Of course, you can sit and do nothing hoping that fate would be benevolent and would protect the roof above your head. But you can pull yourself together and not only limit the damages, but make sure that the roof of your house resists some future storms.  
Facing the worst weather forecast in 10 years, the real estate industry in Bulgaria will have to make a similar choice. The clouds above our heads started in the second half of 2007 and didn’t clear away. On the contrary, they thickened at the end of 2008.
The budget forecast for the economic growth - 4.7% - seems far less attainable. The national bank has prepared both a major scenario, which says the economy will grow slightly slower and a pessimistic prognosis, according to which growth can collapse to 1.2%. Some foreign observers foresee even a recession in Bulgaria. After the 6.2% growth in 2007 and the 7% in the nine months of 2008, the economic development will now look like an automobile traveling on Tsarigradsko Shose Blvd. down to Orlov Most – slowing down from 80 km per hour to 20 km/h and it will even stop if the light isn’t green. 
How further can the real estate sector slow down after the unrelenting growth in the last two years supported by the financial expansion? The regions where the major resorts are concentrated used to stand for more than half of residential built-up areas during the property boom. The prospects that volumes will soon recover are minimal considering the lack of buyers.
The development of primary homes is highly likely to diminish after it has been propped by the affordable and cheap credit in the last couple of years. A number of shopping center projects are endangered of being suspended or frozen. The failures of two transactions in the end of 2008 showed that the investment market is quite near the freezing point, if not already at it. We can undoubtedly say the same about the land market.
Well, construction is not likely to stop all at once or completely and the country still needs contemporary real estate. Neither low-quality of residential stock, nor the small volumes of commercial property, which meet the companies’ contemporary standards have changed a lot. The majority of people still live in panel prefabricated blocks whose exploitation dates are expiring. And Bulgaria still ranks at the bottom of the European chart for retail space per capita - less than a tenth of the average 200 sq m per 1,000 inhabitants for Europe.
But what has really changed is the flow of money producing high returns. And money is the fuel of the real estate industry.
It may prefer to wait and see what happens, but it may also choose a moment to bring the major issues that have waited for years to be solved to the agenda. Key figures in the real estate sector in Bulgaria, summoned by the organizers of the real estate conference BalREc and real estate exhibition BalPEx in the end of 2008 have outlined the most important impediments that the crisis has made ever more obvious. In this issue of the Property Index Magazine a stress is put on the main messages that market participants send plus the opinions of economists and representatives of local authorities. The most important statement is that the industry does not need help, but is willing to receive support for the implementation of reforms, which would improve the business environment, create new investment opportunities and facilitate the affordability of quality real estate. These reforms consist of four main steps: elimination of unnecessary administrative setbacks that impede the investment processes, adoption of a residential policy by the state and local authorities, facilitation of the work with local administration and adoption of rules regarding public-private partnerships, endorsing real estate quality standards and services. The common opinion is that the use of such measures will not save the real estate sector from the crisis, but will definitely help it go through it and thanks to its importance will help the whole economy as well. If we get the perfect scenario, the crisis may even provide the industry with the perspective for accelerated development once the
turmoil is over.

What real estate leaders suggest
•          The introduction of controlling mechanism to monitor and stimulate mortgage lending, taking into account its life-saving importance for the real estate industry. It could be part of the functions of an ad hoc group, proposed by the Confederation of Employers and Industrialists in Bulgaria, with business representatives, the Ministry of Finance of Bulgaria and the Bulgarian National Bank. The idea is that this group would scrutinize mortgage loans under certain parameters and will sound the alarm should they reach critical level and a need arises for new measures.
•          The introduction of measures to support purchases of primary homes, for instance the widespread system for residential savings in Europe or a model for financing the middle class under special conditions, including with state investments realized through the Bulgarian Development Bank.
•          Amendments in the public-private-partnership legislation to encourage infrastructure development through a mechanism for the construction of public and state infrastructure by private companies under clear rules for the reimbursements of their investments.
•          Improvement of administrative services through the introduction of express and ordinary services with differentiated taxes where that is possible.
•          The creation of a program for the stimulation of low-energy and passive (energy-neutral) development. In Austria, 25% of new construction permits are for passive houses. This has saved the country billion-euros worth of investments in new power plants and has created employment in the construction industry.
•          Mechanism for control of monopolists, which offer public services like water supply, sewerage and energy distribution. This step aims to give developers quick joining to the networks and quality services.
•          Legal change to diminish the opportunities for objection and freezing the development of municipal infrastructure, like it is for projects of national importance.
•          Introduction of standards for property sales and new-builds to protect consumers.
•          Strict control on the regulations stipulated in the Spatial Planning Act concerning unregulated use of homes for offices in multi-family buildings. 
•          Improving the work of local authorities in several aspects:
Public-private partnerships
Redirecting funds for municipalities and introducing mechanisms for their spending (i.e. infrastructure)
•          Improvement of administrative services to stimulate the attraction of new investors. Other measures for attracting foreign direct investments.
•          Regulation of the activities of real estate agents. 

Read more:
Way to quality
Municipal woes
Home for everyone
Arch. Georgi Nikolov: Investments to be made in accordance with the property quality
Valeri Atanassov, executive director of Soravia Bulgaria: We are positive that new industrial and office projects will be needed
Tsonko Tsonev, Mayor of Kavarna: Better synchronization between municipalities and the state is needed
Evgeni Vasilev, general manager, Arco Real: Faster administrative services even at higher cost
Mihail Chobanov, general manager, Bulgarian Properties: Residential policies should stimulate young people and keep them in Bulgaria
Tsvetelina Taseva, executive director, Address Real Estate: State interventions should be precise to the maximum level
Toni Tonchev, general manager of development company Torin: Let’s take advantage of the crisis and put the branch in order
Mauricio Mesa Gomez, regional director, Bulgaria and Romania, Hercesa Internacional: VAT on property in Bulgaria is too high
Stefan Sharlopov, owner of Sharlopov Hotels: We have to be creative in the time of crisis
Bogomil Manchev, executive director of Risk Engineering: Completing large-scale infrastructure projects will bring good results.
Kalin Peshov, executive director of Glavbolgarstroy: In one-year time the market will stabilize
Lachezar Bogdanov, economic analyst, Industry Watch: Reforms to facilitate investment have to continue
Georgi Angelov, senior economist at Open Society Institute:Reasonable macro policy is what prevents economies from serious crises
Rosen Plevneliev, general manager of Lindner Immobilien Management:Factories have to come to the front.