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Bulgaria - Building & Construction

Bulgaria is the newest member of the European Union and has an economy with real growth potential. The UK is among the leading investors in Bulgaria, with over EUR93 million worth of investment in 2009. With a population of 7.6 million, Bulgaria presents opportunities for both large UK companies experienced in exporting and new-to-export SMEs.

Bulgaria has received EU funding of over EUR12 billion for the period 2007-2013 and is investing in infrastructure, transport, ICT, renewable energies and waste management. In addition, further opportunities in these sectors will emerge from the upcoming introduction of public private partnerships.

Market Overview

Since 2004, the construction sector is one of the most dynamic and developing sectors in Bulgaria (construction, IT, tourism, services and industry). The construction market is generating sustained growth, and is providing vast opportunities for both foreign and domestic firms. The growth is driven by the intensive work on transport infrastructure; the expansion of new developer projects for business and administrative centres; the increased housing construction work and active construction for manufacturing and other purposes. The recent promotion of mortgage lending by the major banks is also fuelling housing construction.

The industry reported over EUR4 billion in completed construction in 2006, which was about 7% of GDP. There are more than 11,500 companies in this sector, which has produced annual growth rates of 12-18% over the past few years. Firms in the construction business in Bulgaria are employing about 150,000 people. Some 10,000 Bulgarians are employed in construction in Germany, Spain, UK and in the former socialist Eastern European countries (respectively 175,000 hired in the Bulgarian construction sector in 2007).

Since 2002, Bulgaria’s booming real estate market has significantly contributed to the Construction industry’s position as one of the fastest growing sectors. Unfortunately, the Construction sector has the highest level of unregistered labour, and according to the Bulgarian Construction Chamber, Bulgaria is in need of approximately 20,000 construction workers to handle the high demand. Sofia, the capital of Bulgaria, is witnessing more development than any other city in Bulgaria. Pre-leasing activity within the major shopping centres will increase rapidly with over 180,000 m2 of new space expected in the next year.

Retail

Growing income and consumer demand have lead to a rapid development of malls, retail centres and out-of-town hypermarkets in Bulgaria, according to an Oxford Business Group report. Bulgaria continues to catch up with other developed retail markets in Western Europe. A forecast for the country predicts a doubling in the number of foreign retailers entering the market in the next five years. Throughout the country, European-style hypermarkets and international luxury stores, particularly in Sofia, are expanding to compete with traditional Bulgaria neighbourhood shops. New Western-style shopping centres, once confined to Sofia, are now operating or under construction in nearly all of the Bulgarian cities with a population of over 50,000. The German discounter Plus has announced its intention to join in the ranks of Kaufland and Lithuanian chain VP Market who are already market players in Bulgaria. Other international retailers in the country include Metro, Hit, REWE firm Billa and Ramstore. Until recently the Bulgarian consumer market was considered too small compared to that of neighbouring Romania, however now it is drawing the attention of hypermarket giants, including France's Carrefour and Germany's Lidl.

The retail boom also includes the development of local companies, such as Bulgarian supermarket operator Piccadilly, Technolux and Zora (electronics); Praktis (DIY store); Aiko, Domko, Aron, Labirint and Martineli (furniture).Major hypermarkets that have operations in the country include Carrefour (France), Praktiker (Germany), Billa (Austria), Metro Cash & Carry(Germany), Ena (Greece), Mobexpert (Romania), BauMax (Austria) and Kaufland (Germany). Shopping centres development lowered slightly high street rent levels but they are not expected to become less demanded in the short and medium terms.

Best prospects include:

• Regional shopping centres in the Sofia area;
• Specialty retail stores in downtown of Varna;
• Retail schemes, such as retail parks and retail warehousing clusters (not yet existing in Bulgaria);
• City centre retail/leisure complexes in winter resorts
• Retail outlets in airports and major railway stations

Housing

The Bulgarian housing sector is growing; however the office, retail, and industrial segments are lagging behind. For many years the housing market was held back due to a lack of family purchasing power and the comparatively undeveloped state of the local mortgage market. The prevailing family accommodation in Bulgaria is a two-bedroom flat in a city and a single generation house in the countryside. The average price for a small flat is EUR54,000- 60,000.

Current Bulgarian housing stock includes apartment buildings from the 60s-70s and single family houses, many in need of repair, as well as Soviet era panel apartment buildings. These pre-fabricated lodgings amount to 25% of all housing in Bulgaria and the brick dwellings account for 60% of the market. In the period 1959-1990 there were more than 800,000 prefabricated apartments built. The number of such apartments in Sofia exceeds 200,000 and about 90% are privately owned.

The market for new housing in Bulgaria has expanded dramatically, because tenants from state regulated housing are looking for improved accommodation. The most common type of apartment buildings is monolith construction framework - a beamless structure with bearing reinforced concrete discs and columns. Rents remain high relative to typical earnings. Bulgaria also has an aging population, which means that specialized retirement communities (still unpopular here) may become a growing market segment in the future. The market for large, luxury homes is not saturated.

The population continues a migration toward Sofia, making the capital city the area with the highest potential for growth.

Best prospects include:

• Technology, equipment and construction of sewage and wastewater treatment plants;
• Design and construction of residential gated communities;
• Restoration of historical structures for high-end market;
• Construction of small apartments and small stand-alone homes or townhouses for small families;
• Industrial Park development;
• Retirement communities for high-end consumers;
• Heavy Construction Equipment;
• Environmentally friendly building products.

In 2007, a total of 2,218 new apartment buildings were built in Bulgaria, according to data provided by the National Statistical Institute (NSI). The new construction has brought 18,204 new apartments, increasing the total number of homes in the country to 3,746,758. Of these 2,372,522 are in the cities and towns (527,916 in the capital Sofia), and 1,374,236 are located in the villages. According to the NSI, the average number of people per one home is 2.04 (down from 2.06 in 2006). The average residential area per person is 20.13 square meters, with 17.72 square meters in the cities and towns, and 25.96 in the villages. The construction industry sector offers broad opportunities as the cost of construction process (labour) and local building materials (concrete, cement, bricks, mortar, sand, etc) are fairly low, while the demand for modern and high quality commercial, residential and industrial properties is still high. Bulgarian and foreign banks are fiercely competing to lend money to businesses and households for the purchase of real estate.

Amendments to the Sofia city Master Plan also presents important opportunities for western architectural and engineering services firms. Major projects to be completed by the year 2010, include:

• Shutting down the steel plant Kremikovtzi, (for its emissions), and the building of new residential districts in the northern and north-western city areas;
• Building of a new city cemetery;
• Extended metro line connecting north-western suburban area, to Cherni Vrach Blvd.
• The new Sofia city plan includes the construction of intercity roads, highway overpasses, access roads to motorways, etc.

Infrastructure

The construction of a new container terminal, located on the northern coast of Varna lake was scheduled to begin in 2008. Varna municipality has earmarked 17.5 ha for the new terminal.

The total costs for Varna and a similar terminal in Burgas are estimated at EUR500 million. Part of the costs will be covered by a loan from the Japan Bank for International Co-operation, which agreed to extend EUR 226million to finance the construction of container terminals in Varna and Burgas.

Bulgaria is eligible for more than two billion euro from regional transport and infrastructure programs up until 2013. The GOB is planning to invest more than USD25million in improvement and rehabilitation infrastructure projects by 2011. A significant portion of the funds will be spent to overcome the recent natural calamity damages in nine municipalities. Approximately USD8 million are allocated for new road construction and rehabilitation of the existing road network, and about USD9 million is allocated for water supply equipment, water systems construction and rehabilitation. The development of an information system for administrative and municipality services will cost more than USD1 million. These financial resources are coming from the accounts of three unutilized state investment loans.

Best prospects include: establishment of the intermodal terminal in Sofia (EUR25 million), construction of Maritza motorway (EUR210 million EUR); railway network refurbishment and development (EUR 320 million); safety upgrade and modernization of the Sofia-Plovdiv train network (USD187,5 million); Vratza –Botevgrad highway construction and maintenance (USD1,027,500 million ); and second bridge over the Danube river - railway and road infrastructure development (USD339 million).

New and innovative techniques and equipment offered by western firms are held in high esteem, but it is strongly advisable to enter this market sector in association with a well-established local firm.

Market Trends

Bulgarians take great pride in purchasing their own homes therefore investing in a home is an important life experience for them. In 2008, the majority of the Bulgarian buyers are looking to buy residential property that will serve their current needs rather than purchasing a home for future profitability. The Bulgarian emigrant workers are investing back into the country, in particular the retail and housing sectors and thus providing a boost to the construction industry and the Bulgarian economy. According to World Bank, remittances from Bulgarians working abroad exceeded EUR1.5 billion in 2007.

In 2005, the Bulgarian Government stimulated the housing market by lowering mortgage interest rates, and consequently, the construction industry sector benefited from the constant upgrading of old houses and buildings. There are thousands of prefabricated apartments and lodgings in dwelling complexes, as well as old houses that are in need of rehabilitation, renovations and investment. Mortgage lending has outpaced all other banking segments.

The tourist industry is also enabling the construction industry to flourish. Bulgaria is one of Europe’s most popular destinations. Therefore, projects to modernize infrastructure are either in process or in the planning stages, such as the construction of high-speed rail links (Sofia to Varna, Sofia to Burgas and Sofia to the Greek border), the expansion of the motorway system and improving the capacity of the airports.

The basic indicators in the construction industry are: the high consumption of concrete and well developed network of ready–mix concrete units; the number of buildings raised in the last fifteen years; and the volume of civil works.

In 2008, the rate of growth in the construction sector is expected to be around 11.3%, as Bulgaria’s biggest priority will be its infrastructure. The construction industry sector always has a multiplying effect upon the rest of the economy; however it is also affected by the health of the economy. Bulgaria appears to have escaped, for now, the impact of the global credit crunch, but growth is projected at 5.5 per. While the boom in the construction of low-priced holiday homes for British and Irish investors has subsided, foreign investment still drives demand for high-quality residential and commercial property in larger cities.

Almost 60% of the total number of construction permits issued last year was for residential buildings which is a testament to the rapid growth in the residential sector. The forecast is for growth in the construction industry to moderate over the next few years however the sector should remain strong due to several factors including: migration; lending; 8 to 12% increase in household income; and home purchases by Bulgarians living abroad. At present, investments in construction amount to 42% of the total volume of investments in Bulgaria. The construction sector growth over the next four-five years will also be dependent on the Government’s ability to provide an adequate regulatory framework.

The following table represents the current average yields in different property sectors in Bulgaria and Romania.

Sales Prospects

Western construction products are well accepted and regarded within the sector. The European firms have the advantage of proximity, which means lower prices. Moreover, there is small qualified local industry which enjoys a good reputation and the ability to either produce or source raw materials needed for construction. New building standardization and security regulations that will now need to be met and a constant increase in demand for higher quality products by homeowners can strengthen market receptivity for high quality EU products. In a few years, Bulgaria will adopt the Euro as its currency, which is fuelling demand for housing construction since Bulgarians are looking to invest their savings in real estate.

The regions in Bulgaria that registered the highest growth in construction are Russe, Varna, Burgas, Blagoevgrad, Stara Zagora, Plovdiv and Sofia. There were slight increases in Veliko Turnovo, Pleven, Sliven and Dobrich.

Products which will have a very strong market position include floor and wall coverings and accessories, suspended ceilings, wood panelling, insulation, adhesives, cements, coatings, wooden and vinyl doors and windows, door and window components, iron and aluminium components, architectural and security hardware products and accessories, metal and vinyl siding, paint and seals, electrical wiring, pre-fabricated building modules, flooring, bathroom furnishings and accessories, kitchen furnishings and cabinets, plumbing fittings and pipes, sanitary plumbing, taps and fittings, ceramic tiles, roofing shingles, tiles and bricks (materials and components), heating and ventilation equipment, water and sewerage equipment, construction machinery and steel buildings and fabrications.

Housing

There was a three-fold increase in the number of construction permits issued in 2006-2007. The significant growth and upsurge in the construction industry sector is due to the housing development in Sofia, the winter resorts and the coastal cities. In Bulgaria, the share of new housing construction is approximately 50% of the overall construction process of new buildings. The residential market segment will continue developing very actively. Given the strong growth in the construction sector, Bulgarian companies are inclined to look for competitively priced collaborators from Western Europe.

Entertainment & Leisure

Tourism is a fast growing industry in Bulgaria. The architecture, construction and civil engineering services sectors are trying to keep up with the demand for new hotels, restaurants, holiday villages, amusement parks, and shopping centres. Demand for hotel rooms is constantly on the rise. Western firms specializing in the tourism and entertainment industry will experience exciting opportunities in this market niche.

The maturing of the property market over the last few years has lifted Bulgaria to the next level, which is the development of golf courses. The country offers major opportunities in the area of golf courses design and development. There are many attractive places along the Black Sea and inland that are attractive tourist sites for golf-lovers. The combination of thermal waters, their variety and purity, the moderate-to-continental climate and the Mediterranean influence, provides opportunities for spa design specialists who focus on tourism and recreation projects. During the next several years there will be a strong focus on the development of spa centres in the mountain tourist resorts and seaside areas. More than 70 four and five star hotels in Bulgaria have their own spa centres and the number is growing.

Logistic centres and wholesale stores

Bulgaria’s location is extremely favourable for investment in logistics projects, although it is not yet observed the rapid growth typical for countries like Poland and the Czech Republic. Currently such centres and stores are in short supply and this fact predetermines the high rent price per square meter. Such complexes require significant area and land, available access roads and good adjacent infrastructure. In related news, a market survey by property consultants Cushman & Wakefield show that Bulgaria offers the most expensive for-rent contemporary storage space in Central and Eastern Europe with rates starting at EUR7.00 per sq m. Most industry professionals believe that new retailers entering the market will actually accelerate the development of logistic centres. Prices for land, suitable for logistic activities in Sofia, average between EUR50.00 and EUR60.00 per sq m. Another drawback for developers is the fact that the process takes too much time from land purchase, provision of public utilities to obtaining construction permits.

Industrial Zones: No less than 100 industrial zones are planned to build under Bulgaria's export strategy for the 2008-2013 period. The effort will be backed with the disbursement of USD80 million annually. Rules concerning how the municipalities will apply for the funding have not been set.

The Ministry of Economy estimates the average cost per industrial zone at around USD4.8 million. The Bulgarian Parliament will either adopt a separate law or make the relevant amendments to the Investment Promotion Act to provide a legislative definition of the term industrial zone. The same ministry will fine-tune its treatment of investors, attaching priority to projects that create value added and products that have worldwide marketability.

Office space: The office space market is not showing any signs of a slowdown in the last two years. Some 850,000 square meters of office properties are under construction at the moment with another 800,000 square meters on the drawing boards. The undersupply of Class A office space is keeping vacancy levels at around 3%. The companies specialized in innovative and hi-tech solutions in the office building have vast opportunities in Bulgaria.

Roads and Infrastructure

The EU funding application in this field was extended to 2010-2011 with up to 75% of the expenditure covered by the EU and the remaining amount financed through the Bulgarian national budget or through loans from International Financial Institutions. The assistance is provided for large-scale transport infrastructure projects connecting the national transportation networks (railroads and highways, etc.) with the Trans-European (TEN) ones, as well as for the construction and renovation of ports and airports.

Safety

Safety in architecture, construction and in engineering is a growing concern. Security and safety products and equipment and construction risk consultants may find a good niche in Bulgaria.

Green Construction

The EU target to increase the energy efficiency by 20% by 2020 is the main driver for the development of energy efficient buildings in Bulgaria. The updated Law on energy efficiency entered into force in 2007 and transposed the EU legislation in Bulgaria.

Bulgaria is still the least energy efficient country and the need of the Bulgarian business and households to reduce the consumption of energy is obvious. The energy efficiency awareness was increased with several campaigns and programs, launched by the Energy Efficiency Agency, European Bank for Reconstruction and Development (EBRD) and 6 local banks. These institutions provided a 20% grant and a credit line for building insulations for old buildings.

Several leading foreign companies established their manufacturing facilities in Bulgaria and their sales operations. The first zero emission buildings were built in Bulgaria in 2008 and the hope is that their number will be increased. In 2007 Colliers International announced the launch of the pilot zero-emissions resort village on the Black Sea Coast. The main problem, encountered by the developer, was that the Bulgarian experts were not familiar with a significant part of these new technologies and the village was projected by foreign architects. Currently there are some local architects, which acquired a very good knowledge of the concept. The establishment of the organization Bulgarian Green Building Council (BGBC) in July 2009 was a very important step towards the promotion of green building in Bulgaria. It is supposed to create Bulgarian standards for the construction of green buildings. The main activity will be the issuance of certificates. The organization will be supported by the World Green Building Council. The German system BGNB will be used until the creation of Bulgarian standards. The main objective of the BGBC is to promote the use of sustainable and green technologies and to increase the awareness of the Bulgarian population.

Best Sales Prospects

Competitive Situation

Imports account for 36% of Bulgaria's market for construction materials. Bulgarian builders and architects are generally more knowledgeable about the advantages of imported housing building products, and they are the ones who usually make the decision to import.

For builders and construction companies, the important criteria used in determining which products and from whom they purchase are price, quality, brand recognition, variety in design, delivery lead time and after sales service. The EU countries are now Bulgaria's main export destination and a major source of foreign direct investment. The Association Agreement between Bulgaria and the EU enables most goods to move between these two parties at zero, or close to zero, tariff rates.

Domestic Production

Bulgarian production accounted for about 64% of the building materials market but products are far behind European standards. Using inexpensive labour to produce basic building materials, Bulgarian companies do not make any high-tech value-added products, and so cannot play any competitive role within the market in terms of quality or technology.

Bulgarian Imports

Imports of building technology and materials will grow over the short term because of the strong interest among Bulgarian builders and end-users. Therefore, EU manufacturers and suppliers should develop advertising and promotional materials to acquaint Bulgarian builders and homeowners with the advantages of their housing products.

End-User Analysis

The main user groups of imported building materials in Bulgaria are:

• Governmental and municipal entities;
• Private-sector building and construction companies;
• Distribution network dealers, wholesale outlets;
• Retail end-users.

Bulgarian end-users of construction materials are interested in obtaining high-tech products and technologies such as energy saving products, HVAC and energy management systems, manufactured and modular homes and security systems. Other important factors affecting purchasing decisions for building materials are quality, low price and after-sales service. Bulgarian home builders and architects are generally more knowledgeable about the advantages of imported housing building products than home buyers, and they are the ones who usually make the decision to import.

Small and medium-sized private sector companies work mostly as subcontractors and home builders. For home builders, the important criteria used in determining which products and from whom they purchase are price, quality, and brand recognition, as well as variety in design, delivery lead time and after sales service.

Distributor and Business Practices

A long-term strategy with a qualified Bulgarian partner is recommended, as are experienced country managers with Central European or other developing country experience. Also recommended is that contacts be made with industry and Government. Participation in Bulgarian trade shows, presence in demonstration projects is highly recommended. Other important strategies could be buying a local firm and using its projects as a base, committing to after-sales service. The most effective way to enter and operate successfully in the Bulgarian market is to work through local distributors who provide quick customs clearance and have good knowledge of specific local conditions.

Agents and distributors can contribute importantly to an EU company’s success on the Bulgarian market. Fortunately, well-qualified candidates exist in Bulgaria. Bulgarian specialists are educated, have a good understanding of technical matters, and, with a minimal training, can rapidly master new marketing techniques. Another way of gaining access to the local market is by working through representative office located in Sofia. At the initial stage of market exploration it is not always practical for foreign companies to open additional offices in the major cities. It is a common practice to have sales representatives travelling throughout the region.

The Government of Bulgaria generally welcomes joint-venture initiatives. This form of doing business in Bulgaria can allow the foreign company to have a range of preferences, such as exclusivity, tax incentives and other benefits. Large investment projects, approved and guaranteed by the government, create great opportunities for the export of machinery, equipment, parts, materials, consumables as well as a technical assistance. Government procurement is defined as use of central or municipal budgetary or other funds by the central governmental, municipal institution/ agency, or another entity. The intended contract can be for the purchase, supply, transportation, rent, lease, manufacturing, assembly or maintenance of personal property or real estate; for the provision of services; and for the study, design, construction, or improvement of property.