BMI View: The commercial real estate market has witnessed a slowdown in 2014 as a sluggish economy and escalating banking crisis has translated into falling confidence and weakening demand. The market's fundamentals remain relatively strong, however, which should see international investors start to return to the market as conditions improve.
Bulgaria's commercial real estate sector has come under increasing pressure during 2014 with an escalating banking crisis slowing the economy and restricting access to lending while also tarnishing the country's reputation among the international investment community. With the crisis lingering into the final weeks of the year, the impact on foreign direct investment (FDI) levels appears to have been significant with Figures from the Bulgarian National Bank (BNB) showing real estate FDI to have contracted by 30.1% during the nine months to September 2014.
A weakening in investment inflows reflects the wider stagnancy in the market as rental rates have largely plateaued across the commercial real estate landscape during the past few quarters of our review period. Uncertainty stemming from the banking crisis has combined with a wider slowdown in the Bulgarian economy over the year to dampen demand for commercial space. GDP is estimated to have expanded by a relatively moderate 1.2% in 2014, reflecting the country's exposure to a stuttering eurozone economy with its two largest export markets, Italy and Germany, both suffering a slowdown of their own in H214.
Slowing demand for commercial space has been mirrored by a lack of development activity across much of the market with a narrow pipeline helping to limit supply and help prevent any contraction in rental rates over the period. The exception within this scenario has been the retail segment which has witnessed significant expansion over the past few years. Organised retail is increasingly important in Bulgaria and as household incomes and spending rise, we see significant opportunities in this area. The capital, Sofia received three new shopping malls in 2014 to add to the 10 which came online over 2010-2013. Meanwhile, international retailers, including mass grocery retailers, are taking a growing interest in the market and should provide significant demand for high quality retail space.
Longer-term, we expect investment and growth in leasing activity returning to Bulgaria's commercial real estate sector as economic activity picks up and the country's financial sector stabilises. The low valuations of commercial property and growing demand for retail and logistics space in particular makes the country a viable alternative to more mature and saturated Central and Eastern European markets such as Poland and the Czech Republic. Foreign investment is likely to start to recover as confidence returns to the sector.
Recent And Current Developments
Sofia's Mega Mall opened in H214, one of three major new shopping centre developments to come online in the capital during the year.
The supermarket chains Carrefour and Piccadilly are expected to merge in Bulgaria. The Bulgarian operations of French chain Carrefour are owned by real estate company CMB Bulgaria.
The Infinity Tower, part of the Bulgaria Mall, opened in mid-2014. It has 21,000sq m of office space and according to the Salamanca Group, was already 80% let when it opened. A second tower is planned, with completion due in 2015.
Key BMI Forecasts
We forecast office rental rates and yields to remain stable in all three of the cities we monitor in 2015.
Rental rate growth will be limited to the office market in 2016, with Varna forecast to see a 5% increase in its average rental costs.
Retail rental rates will continue to outperform those of the remainder of the commercial real estate market over the next two years.