Bulgarian bubble

I am tempted to buy an apartment in Bulgaria as there has been so much heavy advertising both in Malta and abroad on the huge potential from investing in residential properties there. What attracts me is that Bulgaria is due to join the EU in 2008 and the amount of holidaymakers travelling to Eastern Europe suggests that one cannot lose by investing in property, especially from a high rental yield potential. Is this the case or is everyone getting carried away with unrealistic expectations?

Bulgaria, Croatia, Poland - these and other emerging Eastern European countries - have been the centre of publicity over the past couple of years as opportunities for investors to tap into a new and growing trend.

Sadly though, there are an ever increasing number of horror stories developing of misselling, unrealistic returns and - even worse - investors losing substantial amounts of capital on developments that have never been built.

Such stories have originated from the UK, where a great number of investors have seen their dreams shattered. While I firmly believe in property as a solid asset class, one must always observe the risks of investing substantial amounts of capital in unknown, emerging markets.

Below is an extract from a recent international publication, which serves as a reminder to potential investors:

"Bulgaria has suffered a dramatic change of fortunes in recent months, with the annual rate of capital growth plummeting from a remarkable 36% in 2005 to 13.9% in the year to September 2006, and possibly set to fall further.

"Some areas, such as the Blagoevgrad District including the Bansko ski region, actually experienced price falls in the second quarter, although these recovered in the third quarter. The oversupply of apartments has created fierce competition for rentals, even in the face of quickly growing tourist demand, which is being aggravated by reported poor management from local agencies.

"Stuart Law, managing director of Assetz, said: 'With the UK offering a 50 per cent return on cash invested compared to 35 per cent in Bulgaria, you would need to be a committed Bulgarian investor who is convinced of long term returns when it is possible to enjoy much greater gains on home soil.

'The UK offers a ready resale market, strong rental demand, lower mortgage rates, and a simple and reliable legal system, so in terms of a balanced investment decision taking into account both growth and potential risk, the UK wins hands down at present.

'The risk return ratio in 2003-2005 was in favour of Bulgaria but that has now reversed. Bulgarian market growth has fallen dramatically over the last three months, and it will take another six months or so for it to become clear which direction the market is heading - further down or bouncing back up again.

'Based on significant levels of supply, getting ahead of rental demand and certainly overtaking Bulgaria's untested resale market, my forecast would be that the average annual growth in Bulgaria could be in the region of 10 to 15 per cent for some time. Large deposit requirements with Bulgarian mortgages (minimum of 35 per cent of the purchase price) are the prime reason that this level of growth does not allow it to compete with the UK.'

"For property speculators, one must therefore weigh up the risks and also the alternatives available. One obvious, but often overlooked alternative is to gain exposure to property through collective investments schemes or funds.' "

Over the past 12 months, returns on UK commercial property funds have been 10-18% and returns on European property share funds have been typically 20-30%. From an investment perspective, I would be suggesting this approach, which allows easy access to your money, little or no upfront fees and usually weekly liquidity to your capital.

Otherwise, any investment into Eastern Europe must be properly researched and one must be committed to possibly longer than you might imagine to receive a real return on your investment. Like any investment - don't just listen to the sales talk - do your own homework and thoroughly.

(Source and quotes: Investment International, October 31, 2006)

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com.

www.hollingsworth.eu.com

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.