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News
22.9.2006
Bulgaria’s underdeveloped land market enters growth mode
The growth of Bulgaria’s land market has been stunted by fragmentation, administrative barriers, opacity and owner passivity in anticipation of soaring prices after European Union accession. But now it is getting a boost from real estate developers, the establishment of special purpose investment trusts and EU requirements for structural funds financing.
In a society of owners, land is a valuable asset that, together with buildings, constitutes a significant share of household wealth. Bulgaria’s land ownership rate of more than 90 per cent should lead to greater access to bank financing (using all kinds of property as collateral), and create opportunities for business as well as protect many low-income families from slipping into poverty. Why, then, has this not been the case?
Fragmentation
Bulgaria’s land reform provided for restitution of about 65 million decares (1 decare equals 1000 sq m) of arable land. There are 12 million plots, meaning an average size of just above 5 decares, an area far too small to profit from cultivating it. Therefore, while almost every Bulgarian family owns a small plot of land, most owners have no serious intention of cultivating it, nor do they have any real opportunities to lease it out. There is hope that this stagnation will be eased, because of the availability of bank financing for agricultural producers and EU pre-accession funds that make it possible for producers to purchase assets needed for sustainable farming.
Land consolidation has not come easily, although the establishment of several special purpose investment trusts investing in land has resulted in strides in this direction. By buying multiple plots from disparate owners, trusts are able to begin consolidating adjacent estates.
Lack of Transparency
Cadastral information remains largely unavailable. The Cadastre and Property Registry Act came into effect in 2000. The five-year project to draw up a national cadastre was funded by the World Bank in 2001. However, until now, hardly 40 per cent of land has been included. Add to this the failures of Bulgaria’s court system, cited in the most recent European Commission report on Bulgaria, as well as burdensome procedures for change of land use, and a picture of an opaque land market emerges.
Restriction on Foreign Ownership
The existing ban on foreigners acquiring farmland in Bulgaria has had an adverse effect on the market’s liquidity. Although Parliament voted for the ban to be lifted in 2014 for EU citizens and companies, it restricts for years the opportunity of small owners to sell their land at competitive prices. This, together with speculation that joining the EU would generally lead to a hike in prices, is making owners cautious about selling their land now.
The Market’s Recent Stir
Despite existing barriers, the Bulgarian land market has picked up. Three to four years ago, land transactions amounted to about 350 decares annually. Last year, this number reached 520 000 decares. The sales translated into about
50 million leva in 2002 and 2003, 67 million in 2004 and about 85 million in 2005. Last year there were about 66 000 deals more than in 2004, an increase of more than 20 per cent.
The price of land bought for construction more than quadrupled in 2005. Most attractive and expensive were plots in southeast Bulgaria, where the price inflation on coastal property added up to more than 500 per cent in 2005.
Farmland for cultivation reached an average price of 169 leva (E86) a decare in 2005, with an annual increase of about 25 per cent. Most expensive were plots in the Plovdiv and Dobrudzha regions, which have all the right conditions for farming and where larger plots can be found. Cheapest were plots in the Vidin, Vratsa and Montana regions, where the infrastructure is poor and few people are willing to cultivate the land. The prices there average about 115 leva (E59) a decare and the number of transactions is less than 15 a year.
Three factors account for most of the market’s upward trend. The real estate market surge since 2002 has attracted many developers who have bought up urban land. Since 2004, developers have been looking beyond the urban centres, and many underdeveloped regions have become attractive locations for new projects. These include not only plots in the vicinity of cities, but in rural, far-flung parts in Bulgaria.
In addition, 2005 marked the establishment of several special purpose investment trusts, which invest in agricultural land. They have attracted significant investor interest since then. (Read “Agricultural land – the investors’ new Eldorado” on page 15)
Finally, EU funds are expected to finance farm producers and they will need bigger plots (minimum 10 decares) to comply with the requirements for financing. Farmers will receive three types of support from the EU: direct payments, market support and money for development of rural areas. For 2007 to 2010, the total funds equal E1.5 billion. These funds are distributed as follows: direct payments – E431 million for 2007-2009; market support – E388 million and rural area development – E733 million for the entire period. In 2007 alone, the agricultural sector is expected to receive about E600 million, of which direct subsides are E198 million, market support E130 million and E183 million for rural areas. The rest will come from EU structural funds for rural areas that do not qualify for direct support. It is important to know that according to EU rules, only a quarter of the funds can be used in the first year and the financing rises gradually.
To qualify for these subsidies farmers must be registered and declare the cultivated areas. Up to now, more than 60 000 out of 450 000 farmers have registered, leading to the consolidation of some farmland. Consolidation happens on a voluntary basis and is strongly stimulated by the need to register a minimum plot in order to apply for subsidies. Many farmers realise that it is better to consolidate, and use various methods to achieve this goal.
The Future
Overlooked and under-appreciated until recently, Northwest Bulgaria, dubbed the Second Dobrudzha, is emerging as the next best place to invest in land. Experts see the region’s high fragmentation as a possible blessing in disguise, since consolidation could result in high profits. The fertile soil, suitable for grains, sunflower and perennial plants, is also an advantage. But Borislav Borisov of www.selo.bg cautions that while there are definitely signs of a more dynamic market in the Vratsa and Montana regions, he remains sceptical about the Vidin region. He suggests that only if prices of land around Vratsa and Montana skyrocket will investors turn to Vidin, citing poor infrastructure and the lack of enough windmills and silos in the region às crippling factors. Finally, Borisov says that there are signs of increased investor interest in the areas around Sliven, Yambol and Haskovo, where the soil and climate are very favourable for perennial plants.
Most experts, when speaking of price hikes following EU accession, introduce an important caveat – such appreciation is only likely with large plots of land, because they are conducive for the development of efficient and profitable farming. It is important to keep in mind that the cost of land cultivation will mirror a trend of appreciation.
Overall a sound investment, land will likely follow in the footsteps of other types of real estate in Bulgaria, seeing prices increase over time. But just as the residential market hype in anticipation of EU accession is cooling off, it may turn out that for some landowners, price expectation will outshine reality.
Source: www.propertywisebulgaria.com
In a society of owners, land is a valuable asset that, together with buildings, constitutes a significant share of household wealth. Bulgaria’s land ownership rate of more than 90 per cent should lead to greater access to bank financing (using all kinds of property as collateral), and create opportunities for business as well as protect many low-income families from slipping into poverty. Why, then, has this not been the case?
Fragmentation
Bulgaria’s land reform provided for restitution of about 65 million decares (1 decare equals 1000 sq m) of arable land. There are 12 million plots, meaning an average size of just above 5 decares, an area far too small to profit from cultivating it. Therefore, while almost every Bulgarian family owns a small plot of land, most owners have no serious intention of cultivating it, nor do they have any real opportunities to lease it out. There is hope that this stagnation will be eased, because of the availability of bank financing for agricultural producers and EU pre-accession funds that make it possible for producers to purchase assets needed for sustainable farming.
Land consolidation has not come easily, although the establishment of several special purpose investment trusts investing in land has resulted in strides in this direction. By buying multiple plots from disparate owners, trusts are able to begin consolidating adjacent estates.
Lack of Transparency
Cadastral information remains largely unavailable. The Cadastre and Property Registry Act came into effect in 2000. The five-year project to draw up a national cadastre was funded by the World Bank in 2001. However, until now, hardly 40 per cent of land has been included. Add to this the failures of Bulgaria’s court system, cited in the most recent European Commission report on Bulgaria, as well as burdensome procedures for change of land use, and a picture of an opaque land market emerges.
Restriction on Foreign Ownership
The existing ban on foreigners acquiring farmland in Bulgaria has had an adverse effect on the market’s liquidity. Although Parliament voted for the ban to be lifted in 2014 for EU citizens and companies, it restricts for years the opportunity of small owners to sell their land at competitive prices. This, together with speculation that joining the EU would generally lead to a hike in prices, is making owners cautious about selling their land now.
The Market’s Recent Stir
Despite existing barriers, the Bulgarian land market has picked up. Three to four years ago, land transactions amounted to about 350 decares annually. Last year, this number reached 520 000 decares. The sales translated into about
50 million leva in 2002 and 2003, 67 million in 2004 and about 85 million in 2005. Last year there were about 66 000 deals more than in 2004, an increase of more than 20 per cent.
The price of land bought for construction more than quadrupled in 2005. Most attractive and expensive were plots in southeast Bulgaria, where the price inflation on coastal property added up to more than 500 per cent in 2005.
Farmland for cultivation reached an average price of 169 leva (E86) a decare in 2005, with an annual increase of about 25 per cent. Most expensive were plots in the Plovdiv and Dobrudzha regions, which have all the right conditions for farming and where larger plots can be found. Cheapest were plots in the Vidin, Vratsa and Montana regions, where the infrastructure is poor and few people are willing to cultivate the land. The prices there average about 115 leva (E59) a decare and the number of transactions is less than 15 a year.
Three factors account for most of the market’s upward trend. The real estate market surge since 2002 has attracted many developers who have bought up urban land. Since 2004, developers have been looking beyond the urban centres, and many underdeveloped regions have become attractive locations for new projects. These include not only plots in the vicinity of cities, but in rural, far-flung parts in Bulgaria.
In addition, 2005 marked the establishment of several special purpose investment trusts, which invest in agricultural land. They have attracted significant investor interest since then. (Read “Agricultural land – the investors’ new Eldorado” on page 15)
Finally, EU funds are expected to finance farm producers and they will need bigger plots (minimum 10 decares) to comply with the requirements for financing. Farmers will receive three types of support from the EU: direct payments, market support and money for development of rural areas. For 2007 to 2010, the total funds equal E1.5 billion. These funds are distributed as follows: direct payments – E431 million for 2007-2009; market support – E388 million and rural area development – E733 million for the entire period. In 2007 alone, the agricultural sector is expected to receive about E600 million, of which direct subsides are E198 million, market support E130 million and E183 million for rural areas. The rest will come from EU structural funds for rural areas that do not qualify for direct support. It is important to know that according to EU rules, only a quarter of the funds can be used in the first year and the financing rises gradually.
To qualify for these subsidies farmers must be registered and declare the cultivated areas. Up to now, more than 60 000 out of 450 000 farmers have registered, leading to the consolidation of some farmland. Consolidation happens on a voluntary basis and is strongly stimulated by the need to register a minimum plot in order to apply for subsidies. Many farmers realise that it is better to consolidate, and use various methods to achieve this goal.
The Future
Overlooked and under-appreciated until recently, Northwest Bulgaria, dubbed the Second Dobrudzha, is emerging as the next best place to invest in land. Experts see the region’s high fragmentation as a possible blessing in disguise, since consolidation could result in high profits. The fertile soil, suitable for grains, sunflower and perennial plants, is also an advantage. But Borislav Borisov of www.selo.bg cautions that while there are definitely signs of a more dynamic market in the Vratsa and Montana regions, he remains sceptical about the Vidin region. He suggests that only if prices of land around Vratsa and Montana skyrocket will investors turn to Vidin, citing poor infrastructure and the lack of enough windmills and silos in the region às crippling factors. Finally, Borisov says that there are signs of increased investor interest in the areas around Sliven, Yambol and Haskovo, where the soil and climate are very favourable for perennial plants.
Most experts, when speaking of price hikes following EU accession, introduce an important caveat – such appreciation is only likely with large plots of land, because they are conducive for the development of efficient and profitable farming. It is important to keep in mind that the cost of land cultivation will mirror a trend of appreciation.
Overall a sound investment, land will likely follow in the footsteps of other types of real estate in Bulgaria, seeing prices increase over time. But just as the residential market hype in anticipation of EU accession is cooling off, it may turn out that for some landowners, price expectation will outshine reality.
Source: www.propertywisebulgaria.com
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