Bulgaria Construction/Real Estate Report

Executive Summary

Problems in the construction and real estate sector deepened seriously in the second and third quarter of the year. Not only was the enthusiasm in construction and real estate of the past two years replaced by diminishing demand, lack of financing, and strong price corrections in Q4 last year and Q1 this year. Indeed, the following two quarters were marked by a complete halt in investment activity in the sector, rising unemployment, and developer companies falling out of the market. According to estimates of the construction association works performed by branch companies will amount to only BGN 12.5bn this year, relative to BGN 16bn in the first half of last year. This will cause 35,000 workers in the industry to become unemployed, while a significant number of developers will drop out of the market. As a result of the challenges posed by the global financial crisis, international investors revised their investment plans and exposure which resulted in a 66% y/y drop in FDI in the real estate sector in H1. Real estate which used to be the driver of FDI growth, accounting for about 30% of total inflow in the past three year, now made up only 20% of the total in H1. In addition, its share to GDP declined to just 1% in H1, compared to some 6-8% in the previous three years. The decline in investments had a severe impact on construction output. The index measuring production in construction fell by 17% y/y in August, worsening from a drop of 14.4% y/y in July and 8.4% y/y in June. The decline in the number of construction permits was also considerable - 27.9% y/y in Q1 and 29.2% y/y in Q2. The number of permits for residential buildings exhibited the steepest decline of 33% y/y in Q2. Finally, the business sentiment indicator does not project an optimistic outlook for the following three months. Indeed prospects for a gradual recovery will be delayed to 2011. Uncertain economic prospects as well as the shortage of liquidity are cited as the largest impediments to recovery.