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Looking to sell your Bulgarian Property to a Russian? Is the Russian demand real, what are they buying and how much longer will the wave last?

 

Everyone connected to or interested in the Bulgarian property market has heard of the elusive Russian buyers, who are said to be acquiring swathes of top end property. From comprehensive first-hand experience, this article allays the myths and offers the direct honest truths of the Russian demand; why it exists, what is keeping it going and how long it might last. If you own property or are considering selling, this article will help inform you of the current market conditions, movements, trends and catalysts behind this property bubble.

First and foremost, the wave of Russian interest in Bulgarian coastal properties is not marketing hype, it is absolutely real and currently the only positive movement propping up the Bulgarian holiday property market. Sadly it is not true for all areas, only the Black Sea region and some rural parts inland from the coast are in demand. Although many sales agencies will conveniently stretch this truth to also cover Sofia, the ski resorts and rural villages to encourage vendors to buy their advertising services, it is actually not the case as only 5-10% of Russian enquiries are for areas away from the coastline.

Quick overview of demand shift and price movements:

Bansko is an unfortunate example of what happens when steady demand suddenly leaves a property market and is not replaced, prices plummet and regardless of extremely low values it can be impossible to sell as there are simply no buyers. The coastal areas of Sunny Beach, Varna, Bourgas, Byala etc have all experienced the same sudden exodus of British and Irish interest. However, the Russian demand has replaced much of it and whilst prices are down they are not rock bottom as they are in the ski areas. The key fact to consider and accept is that whilst property losses feel bad for all of us, it is at least still possible to sell coastal property and collect a return. Ultimately, the situation would be calamitous if Russian demand hadn’t suddenly swept in and saved the day, at least in part anyway. This shouldn’t be taken for granted; if you are looking to sell anytime soon it is worth considering your losses now could be minor by comparison to the potentially greater losses in the near future if the Russian demand fades too.

For a fuller understanding, it is worth noting the critical differences between the bygone era of British and Irish demand by comparison to the new wave from Russia: 1) they are in significantly lower numbers, approximately a third at the very most 2) the demand is almost entirely for coastal finished properties, nothing off plan or semi complete 3) the market now hosts foreign private vendors (for the first time) in their thousands eagerly competing to sell at lower prices than ever before.

All of these factors have led to a typical ‘buyer’s market’ where prices are low and anyone with the money and intention will find themselves a choice of bargains. Furthermore, we have seen the rate of new properties coming to market at consistently lower values increase month on month from the start of 2011. The volume of private British and Irish vendors is so vast that it actually acts as a market catalyst; the constant flow of cheaper properties continuously replenishes the marketplace encouraging more Russian agents to sell less expensive properties, subsequently more is invested in advertising, more Russians become aware they too can afford a cheap sunshine property and hence the demand bubble expands.

Normally when demand increases there is a lag and prices soon follow, not in this case as the supply (property stock) is excessive and thus massively disproportionate to the demand. Furthermore, the bulk of foreign owners are predominantly driven to sell at any price due to financial constraints in their country of residence. This inescapable macro level motivation has impacted owners and their families on a nationwide scale, as such what started as a trickle of vendors has become a torrent. The end results is that the real transaction prices come down across the board (not just in one or two cases), as ‘distressed vendors’ come to the marketplace in bulk and take whatever they can get to offload their overseas asset and fulfil their financial priorities back home. The overall impact is increased market movement, an escalation in the volume of sales and thus an improved opportunity for vendors to sell, but no increase in actual values.

To put it in the favoured terms of British newspapers; only those distressed vendors willing to sell at ‘below market value’ will succeed in finding a buyer at this time, those holding out for ‘market value’ or for what they originally paid will still be holding out for possibly years to come. The simple reality is that in Bulgaria today the real market price is the ‘below market value’ and actually if you have a property in Sunny Beach you are not giving away a bargain at 500 Eur / sqm, you are selling at the highest achievable market value today. If this is no enough for you, keep it, rent it and forget selling for the time being.

Future for the Russian demand:

Whilst there is no exact science for predicting these market movements, any active agent, owner or vendor would be foolish to think that it will carry on indefinitely. Much of the industry believes that 2011 will see the peak of Russian demand (and thus the best opportunity for vendors), whereas very few believe 2012 will produce the same influx of buyers and thus a level of decline is expected.

Like any growth curve of any product; we first see the pioneers who trigger interests and start trends, then the masses follow in bulk creating a boom or bubble, which is typically followed by numbers falling away and plateauing to a sustainable constant level or dropping and ending the product life cycle. If anyone could accurately predict this with complete certainty we would all be millionaires, but by following some general models, lessons from experiences and carrying out analysis of current market data we can come to a general conclusion. NewEstate believes that this year is likely to be the best opportunity to sell as the demand for the coming 4-6 months is almost certainly the highest it has been since 2007, whereas anything heading into next year is uncertain and at best suspected to be less. In addition, for UK owners the currency rate will play an essential role in your financial return, see below.

Currency exchange and the impact of the Pound on your Euros property.

Accompanied by the uncertainty of future demand we must also consider the currency variation for owners who have bought in Euros and will sell back into Pounds. To take a classic example; in 2006 a 2 bedroom property in Sunny Beach was purchased for 75,000 Eur which was then £50,000 as the rate of exchange was 1.5 Euros to the Pound. Today the price of this same property is now 55,000 Eur following the drop in the market, however the exchange rate has dropped too. The rate is currently 1.1 Euros to the Pound, which means that if this apartment is sold for 55,000 Euros today then it would return £50,000 to the owner’s bank account, thus no actual value loss in encountered.

The above is true when the Pound is weak against the Euro, as it has been for the past six months or so. Whilst currency traders could speculate forever over ‘true value’ the general feeling is that the Pound is worth 1.2 – 1.25 to the Euro, let us assume this is true for the purpose of this example. If Bank of England increases interest rates before the end of 2011 (which speculators agree is likely) then the Pound will become a more attractive investment, its value will increase and it will again become stronger against the Euro. If we assume it reaches 1.25 to the Pound (as it was just 12 months ago) then this same apartment will still sell for 55,000 Euros (the market sets the price, not the chosen currency of the owner), which will only return £44,000. This is a 12% loss on the original investment and has nothing to do with the property market, this is exclusively down to currency rates and macro scale economies, yet the impact is absolutely on an individual scale and in this example shows that you could be 12% (£6,000) better off by selling this summer by comparison to next year when the Pound is reckoned to be stronger.

Conclusion:

In this buyer’s market the phrase ‘your property is only worth what someone else will pay for it’ couldn’t be more true. The Russians are prepared to pay the current market price, it is up to each owner to decide 1)if this is enough for them to part ways with their property 2) if they can afford not to resell and review in 4-5years from now 3) if they would like to gamble on the Russian interest lasting until next Summer or the Summer after etc  4) if they would prefer to wait for their property to be worth 10% more when the market does recover, but risk potentially getting 20% less than toady’s rates in Pounds.

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