According to the State Agency for Tourism (DAT), three-four hotels go bankrupt every week in Bulgaria. They are unable to re-pay their mortgages. Many hotels are put for sale but there are no buyers and banks repossess them but it remains unclear if the banks will be able to sell them.

It seems that Bulgaria follows the road of Spain where the state buys the bankrupted hotels and demolishes them, in order to create parks.

According to the statistics, in the first half of the last year, 820 new hotels have opened on the Black Sea coast. As result of the construction boom the number of hotels and holiday properties is much higher than the number of  the tourists.  Many hotels can not sell all their beds and their owners suffer losses. All this makes it impossible for the hoteliers to repay their mortgages and other credits and go bankrupt.

Jack Fagan, Irish Times

AROUND THIS time of year, the newspapers are generally packed with large ads for overseas real estate. That has been going on for over a decade but, in recent years, Bulgaria and other former Eastern Bloc countries have been particularly active in targeting Irish buyers who had a reputation for being big spenders during the Celtic Tiger years.

These overseas property ads are rarely, if ever, seen any more simply because Bulgaria’s real estate boom has turned to bust and Irish and UK buyers are fleeing due to rapidly falling values and the rising number of uncompleted developments.

Other former Eastern Bloc countries are suffering the same fate.

Bulgaria became a particular favourite for many Irish investors because holiday homes were frequently available at half, or even one-third, of the price of similar properties on the Costa del Sol. Attracted by unrealistic promises of exceptional returns, Irish investors had no hesitation in borrowing heavily to buy cheap buy-to-let homes.

Dublin mortgage agents say that, because of the refusal of Irish banks generally to fund property investments in Bulgaria, many purchasers released equity from their homes or Irish-based property investments. Others used hot money in the belief that the Revenue had enough on its plate in tracing second homes and investments in Spain, France, Portugal and other popular destinations without traipsing through the former Eastern Bloc.

“A great deal of the money invested in Bulgaria never appeared on the radar. It would be hard to trace,” says one of Dublin’s largest mortgage lenders.

Tom McGrath, a Dublin solicitor specialising in the overseas residential markets, says that a combination of naivety and greed led many Irish people to buy up to five properties in Bulgaria with the intention of “flipping” them on before they were completed to make a profit.

Any number of estate agents had recommended this as a fool-proof way of making money but the reality was different and they have been left “with properties that they do not want, cannot sell and cannot afford to complete on”.

The market in Bulgaria is over-supplied and pretty well on the floor. Real estate agencies say that at least one-third of the 2,200 foreign-owned holiday flats in Bansko – one of the country’s top ski towns – are on the block again, often at half price.

One media report has suggested that some Black Sea hotel owners have offered their debt-laden businesses for sale for €1 – grim news for tourism, Bulgaria’s top foreign investment sector.

The property market in Bulgaria, like Ireland, has had a hard landing. Construction firms have been laying off workers and, with bank borrowing getting more difficult, many developers are finding it increasingly hard to complete schemes.

McGrath says that promises of guaranteed rent from developers are often unfulfilled and these properties were overvalued in the first instance to take account of this arrangement.

Investment in the property sector, which accounted for 30 to 40 per cent of GNP in the past few years, brought an immediate profit, says local economist Tihomir Bezlov: “Real estate for Bulgaria was like oil and gold for other countries.”

The same could probably be said of Ireland but, unlike Bulgaria, there was never any suspicion here that the industry was being used to launder money from criminal proceeds.

Bulgaria’s authorities have admitted they cannot prove where the money that fed the boom came from. Could some of the proceeds of the Northern Bank robbery in Belfast in 2004 be in the Black Sea? There’s a thought.

The number of purchases of property in Bulgaria is expected to increase in the summer according to analysts. However, there will be no growth unlike the last two years due to the lack of fresh money and the stricter rules for lending of the Bulgarian banks. The prices of properties in Bulgaria are expected to decrease by further 15% by the end of the year.

The investment funds will be able to buy properties on territory of EU-member-states, according to the draft amendments of the law for the investment funds suggested by the Committee for Financial Supervision. Until now these funds could invest only in Bulgaria. The other significant amendment is that the minimal capital will increase from 600 000 levs to 1 million levs. The funds will be able to cooperate and work together on large property project which they would not be able to do on their own. The requirement that the depository bank which holds the money of the fund should give credits to them shall be removed. Other amendments include the possibility for investment in bonds and futures issued with the aim to finance major infrastructural projects. The requirement to obligatory increase the initial capital in order to get the right to operate as a fund will be also removed.

The rules for terminating the license of the company. The fund will be able to request it and in such case it will continue to operate as a normal company not as an investment fund.

The number of the personal and business bad debt has been steadily increasing for a second consecutive month according to the statistics of the Bulgarian National Bank. In the end of February 2009 the bad and restructured debt has reached 1.65 billion levs which is an increase of 314 million lev only in a month. This is 3,4% of all loans. In comparison last year this ratio was slightly above 2%. According to analysts this level is still not worrying as the overall condition of the Bulgarian bank system is rather stable. Companies which collect bad debt claim that their work has increased by 40% in the first two months of 2009. The level of the repayment of loans received by Bulgarian banks have decreased by 20%. The level of partial repayments has increased, while the level of total repayments have decreased. Job losses and the increase of the part-time employment are key factors for this.

In February 2009 the number of the delayed repayment has increased by 19% in comparison with January 2009 and for January 2009 the increase was 13% in comparison with December 2008.

Russians started buying apartments in Bulgaria in bulks of 300. They buy everything at prices ranging from 300 Euros to expensive attic apartments at 2000 Euros per sq m. The Russians are attracted by the drop of prices in Bulgaria which exceeds 20% in comparison with last year. “We buy properties in bulk!” is written on billboards on the streets in Sofia and in the Bulgarian Black Sea resorts. Many Russians have decided to invest heavily in property in Bulgaria in an attempt to protect their savings in the climate of uncertainty about the future of the major Russian banks. At the same time this is badly needed influx of fresh money on the Bulgarian property market.

Last year 60% of the mortgage applications in Bulgaria have been made for the purchase of a second home, according to Bulgarian bankers. Bulgarians used to buy properties for investment, expecting high returns and constantly increasing property prices.

This year the number of the mortgage applications have decreased ten times. According to bank managers this is due to the different expectations of sellers and buyers. The buyers expect prices to go further down and do not rush to buy, while sellers do not drop the prices of their properties and wait for the market situation to change back to the time of the property boom.

The banks lend much less money than before and cover a much smaller proportion of the price of the properties. At the same time prospective buyers are unwilling to take large mortgages and prefer smaller ones. Most of the buyers now have savings but they still need to borrow some money to buy a property.

Leading bankers think that the lending will not go back to the levels during the property boom of the last two years. They expect that at the end of the recession the ratio of the savings to the size of the mortgage will be 50:50 and in the following new boom it will go to 30:70.

The Bulgarian bank managers expect that in the next 6 months two new types of clients will enter the property market. The first type are people with good incomes and substantial savings. Currently, in Bulgarian banks there are 110 000 savings accounts with amounts exceeding 30 000 levs (15 000 Euros) with 76 000 levs (38 000 Euros) on average per account, according to the official statistic of the Bulgarian National Bank. Obviously, these people wait for the right moment to invest.

The second type are people who are not covered by the official statistics. They either keep their money at home or have incomes from the grey economy. Such kind of customers usually apply for mortgages that cover 20% to 30% of the price of the property.

At the moment the mortgage interests of Bulgarian banks are between 8% and 10%. Nobody expects any change until the end of the year, as bankers wait for the first encouraging signals from the U.S.A and Europe, in order to make a move.

Although banks’ interest rates of savings accounts are still high, in February those of one- and three-month deposits started decreasing. At the same time the interest rates for six- and twelve-month fix term saving deposits are still increasing.

UniCredit Bulbank did not continue with their promotions and decreased the interest rate of the fourth period of their Increasing Interest scheme from 12% to 9% for the deposits in levs and from 10% to 7% for the deposits in Euros. The interest for their one year fix term deposit has dropped from 8.80% to 4.85%.

First Investment Bank did not continue their promotion Golden Deposit. The bank has launched their product March Deposit, a three month fix term deposit with interest rate, both for deposits in Euros and in levs, of 8.75% instead of 9.75% like the previous promotion.

Most other banks still keep increasing the interests of savings accounts in order to attract fresh money. Among them are: PostBank, Raiffeisenbank, Eibank, Invest Bank and Alpha Bank.

Concerning customer loans, all banks have increased their interest rates by about 1% in February, apart from Alpha Bank who decreased it by 0.7%.

Most of the mortgage rates have not increased and in the rare cases of an increase, it does not exceed 1%.

Russians buy hotels on the Bulgarian Black Sea cost for peanuts. They hire estate agents to look for cheap property, mainly hotel owners who are on the verge of bankruptcy or developers who cannot complete their projects. They also buy already developed projects for holiday resorts which have been denied financing from banks. About ten very good purchases at attractive prices have been completed since the beginning of the year. Most of them are for about 500 Euros per sq m. The jewel in the crown is a four story hotel in Svety Vlas the area of which exceeded 1000 sq m. The hotel sold for 300 000 Euros. The Russians invest their money in Bulgaria in order to save them, as the trust in the Russian banks have sharply decreased over the last six months.

The rent of apartments in Bulgaria is expected to increase by 10% during 2009 because more and more people prefer to rent due to the stricter rules of banks for lending.

The most popular apartment for rent are located in the central parts of Sofia and the neighbouring areas like Reduta, Geo Milev, Pliska, Strelbishte and Ivan Vazov. Concerning the size of the rental apartments the studios and the one-bedroom apartments are mostly in demand.  Depending on the location and if the apartment is furnished, it can get a rent of 350 Euros per month. In the up-market Lozenets the rent of luxury apartments is 1000 Euros per month.

Apart from the central parts of the city, Mladost and Drujba in the outskirts are also very popular. Until now, studios and one-bedroom apartments were rented for 250-350 Euros per month but from the next month is expected that these rents will increase by 20 Euros per month. Most tenants try to secure a clause in their rental contracts that their rent will not increase in the next twelve months.

Representatives of the Bulgarian Chamber of Construction have had a fruitless meeting with managers from the leading Bulgarian banks. The developers have informed the bankers that construction projects exceeding 2 billion levs have been stopped. According to information of the chamber in 2008 the number of the new planning permissions have decreased by 20%.  The situation of the projects which have been already started but their developers do not have money to complete them is most alarming.  Although there are many shopping malls and business centres among the projects put on hold, there are also apartment buildings where most or all apartments have been sold off-plan to buyers who took mortgages. The owners of such kind of properties are in dire straights as they can not use them -  the buildings where the properties are situatied can not acquire permission to use (Protocol 16) in the foreseable future.  Deadlines have been missed.

The response of the bank managers was that now banks can only rely on the personal savings and on the budget and ignored warnings that they might also suffer from the recession and told the developers to manage on their own.

In the last years the bank credits have been the driving force of the Bulgarian economy. Now the credit flow has dried up, the money from the gray economy has become the majour factor.

Only credits to the amount of 33.6 million levs have been lent by the banks to Bulgarian businesses in December 2008. In comparison, the average amount of the business credits for 2008 is 626.9 million levs.

Many companies have been experiencing cash flow problems and they can not pay their expenses. The bad debt has increased and some analysts expect 30% of the companies in the country to go bankrupt. Others are more moderate in their expectations and do not expect a total collapse.

The construction industry is in a very bad state, despite the opinion of the analysts. The need for fresh cash is so serious that some of the companies have switched to barter deals. They offer their business partners apartments and office space instead of cash.  The problem of many developers is that they have started several projects at the same time and have relied on off-plan purchases. However, once the credit policy of the banks became more strict, the off-plan purchases have stopped.  As result, many investors had to freeze their projects, some of them stopped paying their subcontractors and suppliers. The banks have ignored the whole of the construction industry and now lend money only to companies who also work in another field of business, which can guarantee the repayment of the loans. There is still no official information about the level of debt in the construction industry but it is expected to be quite serious.

According to Bulgarian estate agents in the first half of the year it will be more sensible to rent rather than to buy. Although property prices have decreased in comparison to the last year, they are still high. At the same time, mortgages have become more expensive because of the high interest. As result, mortgage instalments are higher than monthly rents.

However, those who offer their property to tenants can not expect high profits. The number of prospective tenants is on the decrease because of the recession. High number of people from the country who had been looking for work in Sofia have gone back to their home towns and villages as there they can survive better during the recession due to the fact that living costs are cheaper.

On the other hand, those who have bought properties for investment can not sell at the moment and try to rent them. The supply of apartments for rent has increased while the demand has decreased and it is expected that this will lead to the drop of prices and of rents.

It is expected that in the second half of 2009 it will be profitable to buy property. Prices of properties are expected to drop further and by the end of the year it is expected that the mortgage interest will start decreasing, as of 1 January 2009 the Bulgarian National Bank has decreased the basic interest from 5.77 to 5.15, which is the first decrease since June 2005.

The Bulgarian banks have introduced tougher rules for lending money after two days of stopping crediting. Now they lend money only for the purchase of properties which can be easily sold if reposessed. Families with total income under 1500 levs per month can not take a mortgage to purchase an apartment in one of the larger cities. To such families the banks offer only small size credits with monthly instalments not exceeding 50 Euros. While in the past the banks were satisfied if the monthly repayment instalments were up to 50% of the total income of a family, now they restrict the instalments to not more than 39% of the monthly income. The average mortgage interest is 8.2% per annum and the average instalment is 360 Euros per month, which is an increas of 40 Euros for the last six moths.

The collapse of the banks in the West is a serious warning for the future of Bulgarian banks. In the last three-four years, the Bulgarian banks enjoyed enormous profit and record growth levels but the world financial crisis is going to put an end to this.

Almost all Bulgarian banks have started to change their development policy following September, 14.  Almost all plans for the opening of new branches have been frozen. The major problem in the banking sector is the lack of fresh money. The foreign financing has stopped and now all Bulgarian banks have focused on the domestic market to keep their growth. It is expected that a within a year a real war to attract deposits of new clients will unleash and the perks for the clients will include holidays abroad and golden watches.

However the biggest loser will be the business and the ordinary consumer. Many banks have changed their policy to attract new clients and now focus on keep the reliable clients with a good track record. It will be very difficult to get a credit if you are a new company. The price of this will be high for the Bulgarian economy – so far the banks have been the major force of the economic growth.

More than 97 Bulgarians have drawn loans exceeding 1 million Bulgarian levs, they owe 153.1 million levs to the banks, or in other terms, on average each one of them owes 1.56 million levs. Generally, the individual borrowing in the country has increased, according to the Bulgarian National Bank. The average personal loan is 5841.42 levs, which is an increase of 1139 levs in comparison to 2007. The size of the most of the personal loans does not exceed 10 000 levs. 2.46 million personal loans totaling 4.71 billion levs have been lent. Although these are as much as 88.4% of all loans, in terms of money, they are only 29% of the total amount of the loans measured in levs. The concentration of the credits is between 10 000 and 250 000 levs. In this price bracket the number of the loans is 320 000 but their volume in levs is 10.43 billion which is 64.1% of the total amount of all personal loans. The tendency shows that within a few years time the amount of the personal loans will exceed the company loans in Bulgarian.

The Bulgarian banks have lent a record number of loans to businesses from April to July. This level of lending, amounting of 3,2 billion levs, have surprised the experts as it takes place in the midst of a world economic recession. The greatest number of loans to the value of 975 million levs, have been given to traders, while at the same time, there is a decrease in the number of the loans for construction projects and for tourism. Even if the lending decreases in the remaining months of the year, still it will exceed last year’s levels, the experts say.

The Bulgarian banks have increased the mortgage interests in July by half percent. Some banks have increased their commissions. Out of 15 commercial banks, now not less than 9 banks have worse offers for their clients, an all time record. Among them are the largest commercial banks in the country – Raiffeisenbank, Postbank, DSK Bank and UniCredit Bulbank.

The State
Bulgaria can repay its foreign debt according to the Bulgarian National Bank. The Bulgarian government has to pay 2,69 billion Euros to its foreign creditors. At the same time the fiscal reserve is 3,73 billion Euros. The foreign debt has decreased from 3,02 billion Euros to 2,69 billion Euros in March this year. The government has to repay the Euro bonds emitted in 2002, which amount to 1,6 billion Euros. The other debts are: 760 million Euros to the World Bank, 330 million Euros to the European Investment Bank and 17 million Euros to the European Bank for Reconstruction and Development.

Private Companies
The situation with the foreign debt of the Bulgarian private companies is different. In the end of April 2008 the debt was totaling 28.03 billion Euros – similar in size to the Bulgarian GDP for 2007. In four months this debt has increased by 2.97 billion Euros and the annual increase was 9.59 billion Euros. 10.7 billion Euros of this debt have been in the form of loans which foreign owners gave to their Bulgarian companies. These loans have been granted for the purchase of equipment and technologies, and subsequently, the official statistic considers them foreign investments. Unlike direct investments, these loans have to be repaid. It is not clear if these in-company loans have led to the accumulation of profit, sufficient enough for their repayment or the companies just sell their production and services for levs on the domestic market and then buy Euros to repay the loans.

The Banks
According to the Bulgarian National Bank, the foreign financing received by the Bulgarian banks by April 2008 has increase by 740 million Euros and has reached 6.49 billion Euros in total. The increase is the result of short-term deposits of foreign financial institutions at Bulgarian banks, rather than long-term credit lines.

The question is how long the country will be able to withstand the speedy increase of the foreign debts and whether this will lead to shrinking of the currency reserve.