Fighting For An Office

Like other sectors of the property market, the office sector displayed stable growth during 2007.  Large cities - and Sofia in particular - remained the hub for most business investors.

Cheap office rentals in major cities, such as the 12 euro a sq m charged in Business Park Sofia, would appear to be history. Monthly office rentals in Sofia and Varna were about 15 to 16 euro a sq m and unlikely to fall, according to Tanya Kosseva, executive director of Landmark Properties Bulgaria. 

Sofia Overview

Many prestigious developments will emerge in the capital city over the next couple of years. One is Sofia Airport Centre, developed by Tishman International and GE Real Estate CEE, set to add a further 100 000 sq m of Class A offices to the city. Units will rent at 16 euro a sq m a month. Karim Habra, managing director of GE Real Estate for Central and East Europe, said that Bulgaria's office sector was heavily under-supplied and that continued investment in the sector could only pay off.  

(The following graph illustrates the rise in the number of offices in Sofia). The number of class A and B offices in the capital has grown steadily, reaching 735 650 sq m at the end of September. The third quarter of the year recorded an 8.5 per cent rise, equalling the aggregate supply of the first half of 2007. The trend continued in the fourth quarter of 2007 with a delivery of 75 000  to 80 000 sq m in office space, according to Source Real Estate Advisers Ltd. (SREA) data.

A MBL survey reveals a record delivery of newly built office spaces in the capital during the third quarter of 2007. Hence a slight overload - and consequent fall in prices - is not inconceivable during 2009. This year, however, is likely to see a continuation of current trends. Sofia will see 45 000 sq m in new offices during the first quarter, many of which are already absorbed. Many offices due to receive a habitation certificate during the second quarter are also pre-let. Demand will continue to outstrip supply by about 30 to 35 per cent and saturation will not be achieved before 2009, says SREA.

Many ambitious projects are underway, embracing a total 450 000 sq m area. Most are in four suburban regions: Bulgaria Blvd, Tsarigradsko Chausse Blvd, Nikola Vaptsarov Blvd and Sofia Airport. Building in central city locations, by contrast, is subdued because of a lack of suitable land.

Most large developments are scheduled for completion by 2009 or 2010. Several projects, set to deliver a significant amount of office space, will start within a year.

The abolition of the 10-year restriction on lease contracts between businesses, approved in November 2007, would encourage companies to conclude long-term rental office contracts, according to Pepi Dimitrova, Tishman International's operations manager. Analysts say that sale and lease-back arrangements will be popular in the commercial real estate sector.

Office sector yields have declined recently but are still higher than other established and emerging European markets. The current level of return in occupied buildings is 7-7.5 per cent, and in some cases, 7.8-8 per cent. Yields for vacant buildings are estimated at nine to 10 per cent.

Some observers foresee a possible decline in foreign investor interest because of tightened lending policies and the US credit market crunch. Up until now, speculative investors have sought higher returns, notwithstanding risk levels, whereas emerging players seek stability. Consequently, yields are likely to drop until they reach levels of mature west European markets - 4-5 per cent.

The following graph illustrates office rental levels in Sofia: Currently, Class A units rent at 15 to 30 euro a sq m, depending on quality and location. Class B offices fetch between 13 and 15 euro a sq m for central locations and nine to 13 euro for suburban ones. Vacancy rates for the CBD (Central Business District) stand at 2.3 per cent, lower than in midtown areas (four per cent) and suburban markets (6.6 per cent). The capital's offices sell at an average 1300-1500 euro a sq m. In the heart of the city, asking prices could reach 3000 euro a sq m.

'Modest' office growth on the Black Sea

In contrast to Sofia where large companies rent spacious offices, Black Sea cities are recording modest growth. 

In Varna, companies usually rent spaces of between 50 to 100 sq m. More than 100 000 to 120 000 sq m of office space is planned for Vladislav Varnenchik Blvd alone - a considerable volume for one street in Bulgaria's second city. Consequently, during the first half of 2008, there could be vacancies of more than 10 000 sq m, according to SREA forecasts. The maximum asking rental price in Varna is 15 euro a sq m. However, high-class units are normally pegged at 10 to 12 euro due to moderate demand. Business Park Varna, for instance, rents at 10 euro. Most analysts predict that prices in Varna's office market will remain steady.

In Bourgas, new business buildings rent at five to 10 euro a sq m, according to MBL data.  
"Most office supply is in the centre, near Bourgas Free University and at the Industrial zone. Selling prices range between 900 and 1500 euro a sq m. Supply has not yet surpassed demand," according to the Yavlena real estate office in Bourgas.

Plovdiv

Plovdiv's office market is stable but less auspicious. Prices are lower than in Sofia and Varna. New business buildings let at five to eight euro a sq m, according to MBL statistics.

However, Georgi Dimitrov, owner of Plovdiv's RE/MAX Advantage office, believes that, unlike in Sofia, supply exceeds demand: "Some buildings that are half-empty. Others are unoccupied, awaiting tenants. Rental levels are about seven to10 euro a sq m (excluding VAT) and sales prices of office units start from 850 euro a sq m. Office stock is clustered primarily in the centre. Projected developments will hardly be absorbed by the market." Dimitrov hopes that more companies will open an office in the city. Yet other agents note that Sofia-based firms would not wish to open another office two hours away.

Demand for well located office space is high, vacancy rates are comparatively low and quality stock is still limited. As the supply/demand imbalance continues to play out, further rental growth is expected and yields are likely to compress further.

Sale prices of office areas in Sofia, December 31