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B U L G A R I A N R E A L E S T A T E M A R K E T

Authors: Alexander Pazderski Dilyana BalevaThis publication is created by MM Consult Ltd. regardless of the companies and objectives discussed. The information contained in the document comes from sources available to the public as well as other sources and MM Consult Ltd. assumes no legal responsibility for the accuracy or completeness of the contents. We do not propose any solution concerning investment risks linked to any investment decisions. This document is not for resale. It may not be quoted or reproduced without the consent of MM Consult Ltd.

SUMMARYBulgarian property market is currently experiencing an unprecedented growth. The Bulgarian Real Estate Market Index (REMI) increased 23.8 points in February 2004 compared to September 2002. In year 2003, real estate prices average growth rate reached 12 percent.

We assume that this trend will gradually slow down, while a trend of moderate increase in real estate prices will be sustained until year 2007, the tentative year for Bulgaria’s accession to the European Union.

CURRENT MARKET SITUATIONLocal property market is currently experiencing an unprecedented growth. Prices have in-creased significantly during 2003 and Q1 2004, the following factors contributing to this phenomenon:

• Mortgage lending expansion – in 2003 competition among local commercial banks intensified, resulting in an expansion of retail banking, particularly in mortgage financing. Cur-rently, mortgage loans are 5 percent of the total credit supply within the local banking sector. In developed financial markets, this rate is typically in the range of 15 – 20 percent.

• Increased foreign investment in Bulgarian real estate determined by:

§ Sustained political and macroeconomic stability;

§ Bulgaria’s NATO membership as of April 2004 and expected EU accession in 2007;

§ Expanding tourist industry.

• Stable macroeconomic indicators:

§ GDP annual growth of 4.5 percent to 5 percent;

§ Decreasing unemployment rate.

• Attractive Return on Investment rates in the real estate sector – 15 to 18 percent on average (as per data released by the local realtor ADIS).

The pricing currency shift from USD to EUR in 2003 also contributed to the price increase. In H1 2003, due to the USD depreciation and the increased demand, sellers changed the currency of their offers from USD to EUR, thus inflating prices by at least 20 percent. For example, real estate that was offered for USD 300 per sq. m is now offered for EUR 300. As long the BGN is pegged to the EUR, and provided that Bulgaria is expected to join the EU in 2007, we do not expect a new shift in the pricing currency.

As of September 2002, the National Real Property Association of Bulgaria (NRPA) established the Bulgarian Real Estate Market Index (REMI), which increased 18 points in 2003 compared to September 2002, and additional 5 points in the beginning of 2004, reaching 123.80 as of February 2004.

RESIDENTIAL PROPERTY PRICESAccording to data released by the National Statistics Institute (NSI), 2003 price of residential property in Bulgaria increased 12.2 percent y-o-y. In 2003 Sofia was the city with the most expensive residential property, which was sold at an average price of BGN 810.5 (EUR 414) per sq.m – a 20.3 percent increase y-o-y, followed by Varna, where residential property was sold at an average price of BGN 580.5 (EUR 297) per sq.m compared to BGN 487.8 (EUR 249) in 2002. 2003 average price of residential property in Bourgas was BGN 442.9 (EUR 226) per sq.m – a 10.8 percent increase y-o-y, and average price of residential property in Plovdiv was BGN 377 (EUR 193) per sq.m – a 10.4 percent increase y-o-y. 2003 lowest average price of residential property was recorded in Silistra and Lovech – BGN 180 (EUR 92) and BGN 183.8 (EUR 94) per sq.m respectively. 2003 highest increase in average price of residential property was recorded in Targovishte – 22.6 percent y-o-y to BGN 251.1 (EUR 128) per sq.m.

Increase in demand on Sofia market of quality residential real estate still exceeds increase in supply. Residential properties supply is on the rise but still cannot meet the demand. During the last year, the demand for residential real estate, especially apartments in all Sofia regions, has

B U L G A R I A

THE ECONOMY

BRADY BONDS

*Prices at close as of April 02, 2004

EUROBONDS

Sovereign ratingsMoody’s Ba2Standard&Poor’s BB+Fitch IBCA BB+

Economic Indicators ‘03GDP, USD bln 19.86Population, mln 7.80Real GDP, YoY% 4.3Per capita GDP, USD 2538Cumulative inflation CPI, % 5.6Unemployment rate, % 13.52BGN/USD avg 1.73Source: the National Statistics Institute (NSI)

STOCK EXCHANGE*

*Index at close as of April 02, 2004

*Prices at close as of April 02, 2004

S E C T O R O V E R V I E WAPRIL 2004

Page 2

Bulgarian Real Estate Market, Sector overview APRIL 2004significantly risen due to improved and competitive mortgage lending by the banking sector - 80 percent annual increase as compared to 2002. In 2003 Sofia was characterized with dynamic local economic development, marked with almost 3.6 percent unemployment rate. There were more offers of high quality recent developments or renovated apartments providing contemporary design and excellent finishing works. The average sales price depending on location and type of construction was in the range between EUR 300/sq.m. and EUR 600/sq.m.

Rents for furnished apartments in downtown and Southeast region were between EUR 5/sq.m/month and up to EUR 10/sq.m/month for the most spacious and exclusively equipped. High quality individual houses for rent are located mainly in Sofia outskirts, beyond the ring road, at the foot of Vitosha Mountain. Foreign business community, diplomatic missions and expatriates were actively seeking in these areas for unfurnished or furnished houses with nice gardens and professional landscaping. Rental prices for such type of properties depending on location, size of property, quality of finishing works, type of furniture, were between EUR 1,500 and EUR 5,500 per month.

LUXURY REAL ESTATEDuring 2003 the market segment of luxury residential properties did not change significantly. Exclusive residential properties in Sofia were offered at an average price of EUR 650/sq.m. However, sales price of high quality apartments and townhouses in Sofia downtown and pres-tigious outskirts could go up to EUR 1000/sq.m. As of the beginning of 2004 sales price of luxury real estate in Varna outperformed the sales price in Sofia. Luxury real estate in Varna was traded at EUR 650-950 per sq.m. Prices of land along the Black Sea Coast and in Bansko mountain resort increased 30-100 percent in 2003 y-o-y. Compounds, which offer a higher level of security and various services, are also constructed in Bulgaria, mainly in Sofia.

Similar processes were observed also in other economic centers like Veliko Tarnovo, Rousse, Stara Zagora and Blagoevgrad. In 2003 there was an increase in the demand for real estate in the regions of Shoumen, Haskovo and Kardzhali by ethnic-Turk Bulgarian citizens who live permanently in Turkey.

OFFICE SPACEThe office space supply was higher in the last two years and demand for office space was relatively flat. As a result, vacancy rates in some office centers reached 25-30 percent. There was a secondary office space market generated by renovated apartments in condominiums with rents of EUR 3-6 per sq.m per month. In 2003 lease prices for office space in new busi-ness centers in Sofia were in the range of EUR 7-24 per sq.m per month. 2003 average sales price of offices was EUR 600-700 per sq.m, with prime “A” class office spaces reaching a price of EUR 1,500 per sq.m.

Experts observe that the appropriate terrains for the construction of business centers and residential property in downtown of big cities are almost exhausted. In Sofia, such terrains currently are not offered on the market, since their owners expect a significant price increase in the future.

MARKET DEVELOPMENT PROSPECTSIn year 2003, real estate prices average growth rate reached 12 percent for the entire real estate market in Bulgaria. We assume that this trend will slow down and a trend of moderate increase will be sustained until year 2007, the tentative year scheduled for Bulgaria to join the European Union. Market experts expect that in the near future real estate prices will continue to stabilize and entrepreneurs will continue offering new products on the market.

Branch experts forecast that real estate price increase in 2004 will be in the range of 5-10 percent because of lack of solvent demand. Due to 2003 intensified construction activity of entrepreneurs, supply of residential real estate is to sharply increase in 2004, which will balance price levels. Market of industrial buildings and agricultural property is to become more active in 2004. Economic centers like Sofia, Varna, Bourgas and Plovdiv as well as the Black Sea and mountainous resorts will remain preferred places for investments in real estate in 2004.

SOURCES1. Bulgaria Real Estate Market in 2003: A Snapshot by Deyan Kavrakov, ADIS Ltd.

2. Why have residential real estate prices increased? by Tanya Kosseva-Boshova, Colliers International

3. National Real Property Association of Bulgaria (NRPA) / International Real Estate Federation (FIABCI) - REMI index

4. MMC Research proprietary research & analyses

Source: National Real Property Association of Bulgaria (NRPA)

BULGARIAN REAL ESTATE MARKET INDEX

Source: FIABCI, ADIS Ltd.

AVERAGE RESIDENTIAL PROPERTY PRICES

MMC Research is a division of MM Consult Ltd.

Head of Research: Alexander PazderskiAnalyst: Dilyana Baleva

Contributors Policy analyst: Mira Badjeva

Capital markets analyst: Pavlina Koushalieva

Please, direct all your comments and suggestions to Alexander Pazderski at pazderski@mmconsult.biz, or phone/fax (+359 2) 953 3627