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Our Winter Report is Late!

Hi everybody,

The report from our winter trip (January-February 2009) is late – how late? REALLY late. Sorry about that – no excuses.

What was the situation then with real estate in our main area of interest (Nessebar-Sveti Vlas-Sunny Beach)? Well, here comes the lowdown, but maybe a little background is in order.

The Sub-Prime Mortgage Market Meltdown

If you’re involved in real estate at all, even as an innocent bystander, you know that the international markets are really in the dumpster. This is the result of the sub-prime mortgage market meltdown in the USA last year. What is the “sub-prime mortgage market”? Without getting into lots of detail that none of us will understand, there is a market (or at least there was) where mortgages on private housing in the USA were sold by the company that originally made the mortgage (a bank or a savings and loan or maybe a large developer) to a second investor. The best of these mortgages – meaning the safest for the mortgage holder – make up what is loosely termed the “prime” mortgages, “prime” as in “first class”. The mortgages made with owners who did not fit the “prime” definition, became to be known as the “sub-prime” mortgages – those that were less desirable, but, because of that, were able to charge higher interest rates and consequently were more profitable, but less safe, to the mortgage holder.

Apparently there was an extraordinary amount of competition for the sub-prime mortgages, and many companies stocked up on them to increase their earnings, with little attention to the additional risk exposure they were exposed to in terms of the owner not being able to make the payments. This disregard to common sense made it easier for owners with not particularly secure finances to obtain (sub-prime) mortages, and the competition for these mortages by investors also made the interest rates less expensive for the owners. Apparently this functioned for a few years (!) until there was a hickup in the USA economy. This “hickup” caused an increase in owners who could not meet their payments, and eventually started the so-called “meltdown.” [Note: "Meltdown" is a term taken from nuclear reactors, as in a nuclear reactor accident when the uranium core overheats and melts, causing a serious accident, as well as (at least) the destruction of the reactor itself - e.g. Three Mile Island in the USA and Chernobyl in the Ukraine.] In this case, the “meltdown” extended to virtually all the USA financial community and many, many companies were destroyed financially. The effect continued like dominos into other countries and created the international financial crisis that we are still experiencing today.

The internal effect in Bulgaria was not a calamity, but placed on top of the overbuild in vacation housing – primarily of apartments on the Black Sea coast and in the ski regions – it turned into a minor disaster – compared to Spain, for example, relatively mild – but still, it has created major problems for the construction and real estate industries in Bulgaria. The one item that impacted the market more than any other probably was the virtual elimination of mortgage availability for residential construction. That turned off essentially all the speculative construction funds. It was topped off by the disappearance of foreign buyers who now had not only no investment funds, but in many cases – particularly in the UK – were starting to have problems with their own primary housing financing. Double jeapordy.

The two things that saved the Bulgarian market from a greater disaster are (1) the continued presence of Russian and Ukrainian buyers, who are looking for a “safe home” for their money in a much milder climate, and (2) the domestic housing market that runs for the most part on 100% own capital – i.e. it does not depend on mortgages for financing.

Apartment Unit Sales

What we discovered is that very, very few sales of vacation units are taking place. What happened is that the construction of new apartment units in the vacation areas has stopped. There was some construction work that progressed up to about the end on 2008, but that was done with capital already in hand, not with borrowed money. That leaves a large number of partially completed apartments that are augmenting the stock of finished but unsold apartments. Additional problems are being caused by the earlier investors who now want to sell their properties, either to turn their investment after three years or so, or to get out of a falling market, or to get away from their mortgage payments (which may have doubled with the increases in mortgage interest rates in Bulgaria), or all of these. The number of available apartment units probably has not increased since our estimate from last autumn, but it has not gotten any smaller, either.

The other complication in the equation is that the buyers who are still there, for the most part are not looking for a studio or one- or two-bedroom apartment in a large complex. They tend to be searching for villas with some land and privacy. In some cases, these are being provided by gated community plans – particularly in the greater Sofia area. But that’s not vacation territory. Domestic Bulgarian buyers are only buying if it is absolutely necessary – they see the prices moving downwards, and most are willing to wait to see how far down they go before they put their own capital into the new quarters.

There are a few buyers around who are looking for the super bargain – perhaps from a foreign investor who is in financial trouble and needs to sell at any price. My lawyer calls these buyers “vultures.” But these are usually individual sales as well, and do not set market prices.

The end result is that prices are very difficult to characterise. The consensus among the people we spoke to is that the market could be characterised as being about 15 to 20 percent off the highest prices from mid-2008. But it would be difficult to find someone who would say that definitively.

The Future?

The developments in the vacation property market in the next two to five years are very difficult to estimate, because they do not just depend on what is happening in Bulgaria. At the moment, it appears that things are deteriorating more drastically in Western Europe than was initially apparent. If this is true, and the situation continues to go downwards, it will certainly drag Bulgaria and the rest of Eastern Europe down with the West. On the other hand, if the various efforts of the individual national governments and the European Union are successful, recovery could come more quickly than anticipated. My guestimate – and this is about 99,9% guess – is that it will take more than five years before the construction industry in the Bulgarian vacation areas recovers. That does not mean that it will be dead before then, I expect there will be some work to complete units in progress and also to revamp existing used units to make them more desirable at a lower total cost starting possibly as early as next spring (spring 2010). I don’t expect anything significant before then.

We are interested in your opinion! If you would like to comment, please register and make your comments.

Ciao!

Elena and Craig

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This entry was posted on Monday, April 20th, 2009 at 23:08 and is filed under Special Reports. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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