ANALYSIS - Bulgaria's Construction Sector To Recover in 2011 Earliest

Until then the sector will continue to seek ways to adapt to decreased demand and tighter lending conditions and to find a new vision for its future development.

Representatives of the sector met central and local government officials on Thursday and Friday at the BalRec (www.balrec.eu) real estate market conference in Sofia to discuss what should be done to help the industry exit the recession healthier and achieve sustainable growth.

The Bulgarian real estate market thrived between 2003 ad 2007 with local and foreign investors drawn by expectations for high yields after the country's accession into the European Union in 2007. The global financial crisis, however, has cooled down the speculative mood in the market and has led to portfolio restructurings.

Everyone at the conference was very cautious when projecting whether the construction sector has hit the bottom and when it will start to recover but agreed that a new and clear vision is needed to steer the sector in post-crisis environment.

The Bulgarian construction sector was one of the main engines of the country's economic growth of some 6.0% in each of the past few years. Construction, together with the real estate and the financial services sectors, generated together around 55% of Bulgaria's gross domestic product in each of 2006 and 2007.

“The model was wrong […] It is not normal for the growth of the gross domestic product to be driven by the growth in the construction sector. The construction sector should be a function of economic growth," the managing director of real estate consultants Colliers International for Bulgaria, Atanas Garov, told the conference.

Friedrich Wachering, board member of Sparkassen Immobilien, the real estate division of Austria's Erste Bank, believes that the sector in Bulgaria will start to recover “definitively in 2011.”

The recovery will come after financial markets recover, Wachering told SeeNews on the sidelines of the conference.

“Finding bank funding for developers is very difficult right now due to the fact that the banking industry has not come back to the bottom and is still looking for their new long-term strategies and for their own financing,” Wachering said.

Banks then should decide what kind of strategies they will apply with regard to their non-performing loans, a process that will complete in the second half of 2010, Wachering said. By that time, the international capital market would have stabilised.

“Then we have the year 2011 when every industry, many companies will have rethought their strategies […] I guess our industry will be stable,” he said and added that financing will be available and new investment plans will be announced in 2011.

According to Kristofor Pavlov, chief economist and head of economic research in Sofia-based UniCredit Bulbank, the sector could see recovery after 2011 as household incomes have seriously shrunk and demand has dropped.

Housing prices will continue to fall in the next three quarters after which they will stablise, Pavlov told the conference. He added that Bulgaria's economy will exit the recession at the end of 2010 or in early 2011 as the industrial sector will be the first to post positive growth due to the already noticeable recovery in the country’s Western European trading partners.

“The year 2010 also will be a hard year. If we have to describe the sector right now it is like snowballs rolling down the hill and most of them swerving out of the road,” Plamen Andreev, managing partner of Bulgarian residential, retail, resort and industrial developer Planex Holding, said.

“The situation on the market is not rosy, it won’t be in the next two years.”

Industry officials believe that there is still demand on the market coming mostly from the middle class. The share of luxury flats in property sales will fall below 10%, officials estimated.

“It is the middle class that will sustain the market”, Maximilian Mendel, senior consultant with Warsaw-based real estate consultancy REAS, said.

“There is a mismatch, we have oversupply […] projects that are not matching real demand,” said Mendel.

Government and industry officials both highlighted the need for joint efforts aimed at reviving the property market in Bulgaria. They agreed that companies should focus on their core business and certain projects, and should avoid dispersing their business operations in many directions.

“Without the help of all the participants, the recovery will take longer. […] If the country wants to achieve the recovery in the short term, all the participants should push it, otherwise it will take longer,” said Shimon Ben Hamo, manager for Bulgaria of AFI Europe, part of Israeli conglomerate Africa Israel Investments.

The business urged the government to help it in the recovery through administrative and institutional reforms. Plamen Miryanov, chairman of Bulgarian real estate developer Arteks Engineering, asked for a centralised agency to serve as a one-stop shop for utility and communal services related to any construction project.

“It is up to us how to take advantage of the present situation – not how to exit it but how to take advantage of it,” Sofia’s chief architect Petar Dikov said. He urged construction companies to trim their margins to reasonable levels of around 10-15%. Margins were as high as 150% prior to the crisis and they have been cut to 80% since, Dikov said.

“If in February the prices were cut to normal levels, the sector would not suffered that much,” he added.