Bulgaria: Overview

RENTAL YIELDS

Last Updated: Sep 17, 2009

Yields down again, despite house price collapse

Bulgaria has suffered a catastrophic drop in house prices this year (2009). The average price of dwellings has dropped from 1418 LEVs/per square metre (sq. m.) in Q3 2008, to 1075 LEVs/sq. m in Q2 2009. However the Bulgarian LEV is pegged to the Euro, so dollar-based investors will not have done so poorly.

When prices rose in Bulgaria during the boom years, there was a significant decline in gross rental yields, a fact noticed by the Global Property Guide in early 2007.

     • In 2006, central Sofia yields were over 10%.
     • By 2007, yields of 7% were more typical.
     • By 2008, yields in central Sofia were under 5%.

It is worrying that despite the significant drop in house prices, yields in central Sofia are down again this year – and are between 4.2% and 4.8%. Suburban Sofia yields have also moved slightly down to 5.2 to 6%.

Data is not available for ski resorts and the black sea coast, because rents for those types of units tend to be seasonal.

Bulgaria’s very low yields are an unhappy sign. We urge investors and buyers to wait, till things get better.

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TAXES AND COSTS

Last Updated: Sep 14, 2009

Low taxes in Bulgaria

Effective Tax Rate on Rental Income
Monthly Income	€1,500	€6,000	€12,000
Tax Rate	10%	10%	10%
Click here to see a worked example
Source:			Disclaimer

Rental Income: Gross rent earned by non-residents is taxed at a flat rate of 10%, withheld at source. Deductions are not allowed for non-residents.

Capital Gains: The sale of real estate by non-residents in Bulgaria is subject to 15% withholding tax on the net gains received. However, properties owned for more than five years are not taxable.

Inheritance Inheritance of direct descendants is not taxed. For all other beneficiaries, the inheritance tax rates vary between 3.3% and 6.6%.

Residents: Residents' worldwide income is taxed at a flat rate of 10%.

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BUYING GUIDE

Last Updated: Apr 17, 2007

Total transaction costs in Bulgaria are among the highest in Europe

Closing costs are quite high in Bulgaria. Total roundtrip transaction costs range from 24% to 26%, with the bulk of the cost going to the 20% VAT, which is payable on old as well as new building sales. An agent’s commission of 2.5% to 3% is equally borne by buyers and sellers. To these transaction costs, of course, the foreigner who is buying land will have to add the costs of forming and administering a company, see forming a company in Bulgaria.

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LANDLORD AND TENANT

The laws are pro-landlord

Bulgarian law is pro-landlord.

Rent: There are no rent controls, so rents and terms and conditions can be freely negotiated between the parties. Any method of rent increase can be agreed upon, including indexation, and periodic progressive increases.

Tenant Eviction: Bulgaria’s weakness is the inefficiency of the court system, which can, in practice, make it difficult to evict a tenant. Usually it is the landlord who initiates litigation. But the length of proceedings often dissuades them. It takes an average of 660 days to evict a tenant.

ECONOMIC GROWTH

Last Updated: Mar 11, 2009

Poorest EU country
struggles with economic slowdown

Bulgaria, with Romania, became the EU’s newest member after joining in January 2007. It is also the poorest country in the EU in terms of GDP per capita (around 40% of the EU-27’s average in 2008). As part of EU-accession conditions, the government must to take steps to fight corruption and organized crime, and to improve border-control systems and environmental safety.

The economy grew by 6% in 2008, slightly down from 2007’s 6.2% growth. Average annual growth was 6.4% from 2004 to 2006 and 4.7% from 2000 to 2003. Unemployment fell to 5.6% in 2008 from 18.2% in 2002 and 6.9% in 2007.

With the house price bust, global credit crunch and economic recessions in Europe, the economy sharply slowed during the fourth quarter of 2008 with 3.6% y-o-y growth. This was in sharp contrast to the average annual growth rate of 6.9% during the first three quarters of 2008.

Bulgaria’s economy is expected to slow further in 2009, with estimates ranging from 1% to 2%. The Economist expects the economy to contract by 0.6%. All estimates point to a mild recovery in 2010.

The main reasons for the slowdown are the dramatic fall in foreign direct investment and reduced access to finance mainly due to the global financial meltdown. Foreign direct investments in Bulgaria shrank 16.68% to €5.4 billion in 2008, from €6.5 billion in 2007 and €6 billion in 2006. Industrial production also registered an 8.8% drop in output in November 2008.

Bulgaria’s transition from communism has not been easy. Things only really started to improve when Bulgaria’s last Tsar Simeon II became the democratically elected prime minister from 2001 to 2005. His government pushed market reforms intended to ease accession to the EU.

In June 2005 elections, the Socialist Party led by Sergei Stanishev won most seats in parliament. After weeks of wrangling the main parties signed a coalition deal under which he became prime minister, but he has largely continued previous policies (partly constrained by EU membership conditions). However, the political environment remains volatile.

The next elections are due in mid-2009. The sagging economy, corruption, and organized crime will be the main issues.