The market continues to show signs of improvement from the Covid-19 state, according to the Sofia City Report H1 2022, published by real estate consulting company JLL with the support of IPC Partners Bulgaria and Avalant Bulgaria, who provided relevant information about the evolution of the real estate market in Bulgaria.
The activity on the investment market for the first half of the year is promising. However, both investors and banks remain cautious and are closely monitoring the macroeconomic trends in Bulgaria and the region.
Prime yields for office and shopping centers remained the same as in H1 2021 at 7.50%. Retail sales have increased by 5.7% y-o-y in April 2022. Industrial production continued its surge, increasing to 17.3% y-o-y in April 2022. The price increase on the residential market is still not showing signs of cooling down.
“The Bulgarian real estate market shows clear signs of recovery following the COVID-19 pandemic on all market segments, but especially offices and investment. Even though the are many challenges ahead, demand is resilient and investors are interested in the market. However, a lack of new deliveries will limit short term growth”, says Alexandru David, Head of Research JLL Romania and Bulgaria.
The investment market gradually recovers from the effects of Covid-19
The investment volume in Bulgaria in H1 2022 reached €95.6mil, compared to only €26 mil. in H1 2021, which was one of the lowest figures in the last few years.
Prime yields for office and shopping centres remain the same as in H1 2021 at 7.50%. Prime yields for industrial also remain unchanged at 8.00%, although the market did not register any industrial transactions in H1 2022.
There were a few notable transactions during this period, most of which were registered in Sofia. The largest transaction was the sale-purchase of Rich Hill Office Centre to the gambling company EGT for approx. €36.5 mil.
The retail sector in Bulgaria has been relatively active with the acquisitions of Sofia Outlet Centre, Mr. Bricolage in Varna and 80% of Retail Park Yambol for a combined value of €26.8 mil.
We expect that the investment activity towards the end of 2022 will be dominated by local investors looking for value-added investments.
Demand is stabilizing on the Office market
Net take-up in Sofia for H1 2022 amounted to 79,300 m², which is a 21% increase compared to the same period in 2021. 2022 continues the trend of higher demand for top tier class A office properties. А large share of transactions (38%) are in newly developed office buildings, with companies betting on premium office space as an asset in their effort to bring employees back to the office.
The vacancy rate in Sofia has decreased to 20.1%, compared to 20.4% at the end of the previous year. Although a slight improvement, this is the first decrease in overall vacancy from the start of the pandemic, driven mainly by the recent increase innet absorption, as well as the drop in construction activity.
Prime rents are at €15/m², while class A rents range from €11.5 -15/m², depending on the submarket and building specifications.
Approx. 23,000 m² were delivered in Sofia in H1 2022, a notable decline compared to the volume delivered during H1 and H2 of 2021 (156,000 m²and 60,000 m², respectively).
The current modern office stock for rent in Sofia reached 2.08 million m² at the end of H1 2022, out of which 61% is considered A class. 72,600 m² are expected to be delivered by the end of the year, with the largest share expected in the submarket of Paradise Mall (Hladilnika). 26% of expected deliveries by the end of the year are already pre-leased and another 22% are owner occupied, leaving only 52% available on the market.
Retail market is shifting towards cost-efficiency
Currently only retail parks are being developed. As it is a very good time to build cost-efficient shopping areas, the tendency for the development of retails parks is in full compliance with the geopolitical situation, which pushed consumer attention towards affordable goods.
H1 2022 registered moderate activity in terms of new stores, with roughly 2,800 m² opening in existing shopping centres in Sofia. The perceived weaknesses of the high street model – the fragmented ownership, lack of centralized coordination and direct open-air accessibility, have recently turned into strengths due to the fact that the COVID 19 pandemic has revived a strong interest towards the shopping street experience.
The overall modern stock countrywide, including shopping centres, retail parks and outlet centres, currently stands at over 1.1 million m², out of which 542,800 m² operating in Sofia.
Continuing the same trend as in 2021, no new shopping centres are expected to be delivered in Sofia in 2022, and not even in 2023 and 2024. The largest retail park projects planned for Sofia total 57,200 m² GLA. Their delivery is expected for the end of 2023 and the beginning of 2024.
The vacancy rate in Sofia is also stable at 5.6% as of the first quarter of 2022.
Trend of moderate increase on the industrial and logistics real estate sector
The logistics property market in Sofia registered a relatively high leasing activity during the first quarter of 2022, with 34,200 m² net take-up.
The moderate volume of new completions, together with leasing activity resulted in sharp decrease of vacant space in Sofia. The average rate in the first quarter dropped to 2%, about 2 basis points down from the end of 2021.
At the beginning of the year, more than 420,000 m² were under construction. For the most part, these are represented by expansions of owner-occupied production and storage facilities.
The largest delivery during H1 2022 was the new DHL Logistics facility, with a size of approximately 5,100 m².
At the end of the first half of the year, projects under construction in Sofia total nearly 423,000 m² and the ratio between projects to lease and those for own use is almost evenly distributed.
Increasing operating costs and active demand resulted in slight rent increases during the first half of 2022. Thus, prime logistics rents in Sofia reached €4.4/m² for mid-size units.
Increase in the number of new deliveries on the residential market
During Q1 2022, a total of 147 homes were delivered in Sofia, which is 107% more than in Q1 2021. We see demand still very strong, as approximately 70% of buyers are opting for cash purchases. In the short and medium-term, we foresee that demand for new homes will be highly impacted by the continuous increase of the key interest rate, combined with high inflation rates.
7,268 homes were sold in total in Sofia during Q1 2022, according to the official registration agency. This is 9% more than Q1 2021.
Residential prices registered a 5.2% increase in Q1 2022 as compared to the previous quarter, levelling at an average of €1,200/m².
We expect the sale prices to continue their modest growth until the end of the year, reaching similar growth levels as in 2021.