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Houses built on sand

Created:
12 March 2008
Written by:
Claer Barrett

Initially, property investors marvelled at Bulgaria's tourist credentials. Today, it's a different story, with the Black Sea coastline blighted with miles of apartments constructed for 'off plan' sale to speculative investors.

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The Black Sea Property Fund was one of the first 'OPFs' (overseas property funds) to launch, raising £50m on the Alternative Investment Market (Aim) in March 2005 with ease. It wasn't alone for long. Other residential floats to target Bulgaria included Engel East Europe, Lewis Charles Sofia and Bulgarian Land Development. But it was exposure to the Black Sea coast that was the sector front runner's undoing.

Activist investor QVT Fund caused boardroom drama last September, installing new directors in a last ditch attempt to realise some value from Black Sea Property. Following a strategic review, QVT decided to oust fund manager Development Capital Management, which is now working out its 12 -month notice period.

Other residential companies active in the region have also suffered. Although the bulk of Engel East Europe's residential developments are in city centres, it reported a half-year loss last August and decided not to pay a dividend. Over-estimation of sales, delayed completions and higher construction costs were all blamed, and a new management team has since been installed.

Developers, such as Bulgarian Land Development (BLD), stress that their business model targets housing for the middle classes, where prices and demands are rising. BLD reported a 25 per cent rise in net asset value last week. The model of staged payments throughout construction has also ensured a regular cashflow.

"Build costs have been rising, and that's been a problem for residential developers, particularly the cheaper end," warns Mike Foster, real estate analyst at KBC Peel Hunt. He claims that wages for construction workers have risen by 50-70 per cent in Warsaw in the last two years as a result of skilled workers emigrating and the sheer scale of development.

The credit crunch has also bitten. Mortgage debt as a proportion of GDP is incredibly low across eastern Europe, as its mortgage market is in a nascent stage. But buyers who have borrowed in non-local currencies such as Swiss francs are already suffering, showing that the region is not immune to problems affecting the property sector as a whole.

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