Bulgarian accession to the eu and the property market
This week we have a guest viewpoint from Chris Howard, the Managing Director of 4:Property. What will the effects be of Bulgarian accession to the EU and how might this affect the property investor?
It has been a long hard road for some of the new joiners to the EU, and Bulgaria’s has been as long and hard as any so far. Bulgaria established diplomatic relations with the EU in 1988, submitted its application for EU membership in December 1995, and in 1999, formal negotiations were opened. The Accession Treaty was signed in 1999 and, after several monitoring reports, the Commission is scheduled to review Bulgaria's accession status again in October 2006, and that may introduce a minor delay from the 1st January 2007 date that was hoped for. But what is a few months between friends?
So, 18 years after the first moves, success is definitely in sight.
What transforms these countries, their economies and their property markets is the European Union. Membership, even anticipated membership, brings in EU money, foreign investment, entrepreneurs and tourists. The EU alone expects to invest €6.6 billion during 2007-9 (that is 4% of total annual UK economy, invested in two years, into a country with 7m residents). Eastern European countries such as Poland and Hungary that joined the EU in 2004 have seen some startling changes. Bulgaria and Romania, hoping to join in 2007, have seen rapid investment and property price rises in anticipation of their membership.
The step Change in economic and tourism performance that this investment makes can accelerate a countries development out of all proportion to what could be achieved ‘organically’ without that injection of funds.
The economics can be summarised in a nutshell. The EU invests in the national infrastructure, private businesses invest to take advantage of the relatively low wages, and therefore increase their profits by achieving cheaper production than they could in the more expensive developed countries. The introduction of substantial new investment creates jobs and raises local incomes.
The EU invests in better roads and airports, energy supplies and the banking system, whatever will make the economy more efficient, and operate more effectively. Look at the recent Bulgarian motorway building into Greece, from Sofia to the ski areas and the Coast and along the Coast. It all brings new business.
This combination of improved operation and substantial investment kick-starts economic growth, increases wealth, gives the residents higher incomes and access to more credit, and so more ‘buying power’ which leads to property market activity and many newer cars (see Sofia any day of the week compared to 5 years ago, not many top car dealerships then). This raises prices as the long held aspirations for ‘modern’ housing can now be realised, and supply cannot respond quickly enough to the increased demand.
Add to this the attractiveness to foreign investors (UK, Irish, Hungarians, Austrian) to develop and invest in property and you have a recipe for good development profits until equilibrium is restored between the supply and the demand, which can take years, or decades. Of course, in a specific location there may be too much supply and prices may soon stabilise or fall, but that will be the rarity, and probably fairly short lived (eg Bansko, Sunny Beach?).
As we have seen in the UK, another social effect is the departure of many mobile workers to work elsewhere in the EU, where wages are already high, remitting funds back home initially; this was a quick way to increase incomes. The effect is that in the longer term these adventurers return with their new found ‘capitalist skills’ to stimulate the home economy themselves, with their wealth and their entrepreneurial ability.
We have heard all this before in theory, but it is good to see it so clearly in practice; the new joiners ‘cheaper labour’ is moving to the rich economies and the rich economies capital is flowing as investment into the new joiners’ economies. Experience of earlier joiners seems to show that this continues for at least 10 years after a ‘low wage’ economy joins the EU.
Broadly the increased wealth increases the property values of residential, commercial and retail properties. For you, the property investor the question is how can I share in those profits? That depends upon your wealth, the very well heeled can buy, or build, shopping malls or factories and then watch rents and therefore capital values to rise.
Individuals can buy residential properties, buy run down properties and renovate, or invest in development companies to let others do the work but the investor shares in developer’s profits of new build developments.
In short, good profits and capital gains, for some. Property investors looking to invest overseas are currently buying into Eastern Europe more than anywhere else. These former Communist countries, including Bulgaria, offer classic buy-low, sell-high property opportunities. Most of these countries share a background of state control, a poor economy and a low standard of living. Property can be bought at affordable levels, often starting from £10,000 for a house in a rural location, if that is what you want.
The very speculative early birds caught the worms 10 years ago, but there are now many reliable development opportunities, that it will take years to fulfil. These will give good development profits for a few development cycles, and the buyers will enjoy continuing high demand which will continue to push prices upwards.
As always in the property world, there is a lot of it about, the challenge is making the right choices, and preferably not putting all your eggs in one basket, either one country or one sort of investment. Risk and reward, but we’ve heard of those before too!
Chris Howard is the Managing Director of 4:Property offering investors the opportunity to share in developers profits through the 4:Property Projects operating in Bulgaria and Croatia as well as in the UK. For more information please call 01383 623322 or visit http://www.4you.uk.com