Given the expected steady growth of construction in Bulgaria, it is not yet clear whether a property purchase is a better investment than one in the securities market.

Bulgaria ranks sixth worldwide in real estate investments. However, the question remains: is it wiser to buy or rent? Bulgarians tend to have a natural inclination for living in a home of their own, which makes the purchase of a flat or house one of the most popular real estate investments in the country.

The economic environment and labour migration towards big cities underlie the unflagging activity of investors and buyers. Once Bulgarians settle somewhere, they tend to stay permanently. Figures show that last year 94 per cent of people owned their own home, while almost two-thirds had more than one property. The local bias predicates the construction upsurge in all big cities. Against this backdrop, rents seem to occupy a minor market niche.

The following tables exemplify the growth rate of sale and rental prices.

Average residential sale prices in top Bulgarian cities (euro/sq m)

Source: Foros National Real Estate Company

Average residential rents in top Bulgarian cities (euro/sq m)

Source: Address Real Estate Jsc

Apparently, compared to sales prices, rental rates were sluggish. Imoti BG real estate agency owner Lyubomir Stanimirov says that the rental growth is three to four times lower than the growth of home or flat sale prices. "In other words," he says, "if sale prices increase by 100 per cent a year, rent prices will rise by only 10 to 20 per cent."

The general preference for property purchases has an impact on selling prices. Moreover, the latter are influenced by variables including credit policy, mortgage loan terms, construction material costs and labour costs. Rents depend upon personal earnings. Taking into consideration that the current market provides for relatively low wages, it is understandable that rents are kept at low levels.

The economics
Another important issue to be considered is the supply/demand ratio. It would not be exaggerating to say that new developments sprout up on a daily basis and people go on buying. Still, supply outstrips demand and keeps rents in check.

Most people assume that it is more economical to borrow money to buy an apartment and pay monthly mortgage installments than it is to pay rent. But is this true?According to Global Property Guide real estate agency, in a report published in June 2007, Bulgaria is second in South Eastern Europe in rental yields. Property prices are relatively low and rents mark 10.5 per cent returns on an annual basis.

According to Global, if yields (%) equal annual rent/value of the property*100 and flats in Varna sell at 971.62 euro/sq m and rent at 4.64 euro per month (Q3 2007), then yields equal 12* 4.64/971.62*100, or 5.73 per cent.

If one considers the capital gains, which could be derived from the flat's appreciation over time and/or the prospective increase of rent price, one could expect 10.5 per cent returns. But these are alternating quantities, which are almost impossible to predict and, evidently, rents of residential properties cannot render 10.5 per cent returns at this point.

Bearing in mind that interest rates on mortgage loans in Bulgaria are comparatively high, transaction expenses are large. So it is questionable whether buying a flat would prove lucrative. In fact, statistics show that an apartment rent could hardly cover one third or one quarter of a mortgage installment, says Margarita Lazova of WWW.IMOTI.NET. "You cannot buy a flat through a loan and rely on rental income to repay it."

Lyubomir Stanimirov of Imoti BG real estate agency agrees, saying that the annual yield of 10.5 per cent, as quoted by Global Property Guide, is overestimated. "Rentals in Bulgaria are low. They cannot pay for a mortgage installment. A monthly rental comes to 60 per cent of the monthly mortgage installment and, actually, about 90 per cent of the Bulgarian residential market is based on loans."

Vladislav Damyanov with Winslow Developments Ltd. says, "Rental returns on flats vary between seven and nine per cent. But things will soon change. There are no more plots left for sale, and construction of real estate units will soon decrease. The trend is for rentals to gain in price."

The Demand
Two-room and one-room apartments enjoy high demand because their overheads and maintenance costs are lower. Tenants prefer furnished flats, thus sparing themselves the expense and inconvenience of moving furniture. They are most likely to rent a newly constructed flat in good condition and featuring more amenities.

However, an older apartment is also an option for a number of customers looking to live closer to their workplace and pay a lower price. All in all, location emerges as the leading factor when choosing a flat to rent.

The demand for luxury units is not high. They are sought by foreigners and the relatively well-off, who make up a small percentage of the market. Those who can afford a high rent can afford to buy a home and soon do.

The price of rent
Rent levels vary substantially even within the same neighbourhood, depending upon location and surroundings, construction type (pre-fabs, brick, new construction), quality, amenities and furnishing, garages and/or basement and attic unit availability.

Also the overall management of apartment buildings varies, but mostly ranks as poor. Landlords do not look after their property, they do not take care of their rented-out flats, and tenants do not get the service they deserve.

Furnished flats might rent 20 to 30 per cent higher than their unfurnished counterparts. Flats located close to a metro or bus station command a higher rent. This follows a worldwide trend. For instance, the difference between rent prices of homes located in well-travelled areas and ones that are in remote districts stands at 40 to 50 per cent in New York.

The best investment?
Given the expected steady growth of construction in Bulgaria, it is not yet clear whether a property purchase is a better investment than one in the securities market.  Real estate prices rose by 22.6 per cent in Q3 2007, whereas the BG40 index grew by 25.8 per cent in the same period. Three months, of course, are not statistically representative and do not make for a strong argument either way.

However, many surveys prove that a real estate purchase is not a brilliant investment option in the long run when compared to the acquissition of bonds, shares, or other financial investments, though market performance can fluctuate. Research published this year in the United States shows that returns on property investments there have been lagging behind the returns on bonds and shares in each of the last five- and 10-year spans between 1963 and 2005.

Though the survey was conducted in the US,  its results can be applied to Bulgaria's economic environment as well. This is especially true when the investor does not have the whole amount needed to purchase real estate for an investment, but rather must finance it through a bank loan. This would tangibly decrease its future yields. Basically, considering real estate first when looking at how to invest one's saving and pension plans would not necessarily be the smartest move.