Investing in Sunny Beach Apartments - can you handle the truth?

Sunny Beach. You haven't heard of it? It is probably the most famous Beach Resort in Bulgaria. More than 10 years ago it used to be the seaside resort that the Bulgarians themselves loved the best.

Indeed the Russians used to flock to the restaurants and hotels there regularly each summer. It used to attract the well-heeled from the communist block as well as the local bulgarians on their holidays.

That was some time ago - and my word - how things have changed...

Go to Sunny Beach today and it looks like an experiement in concrete production on steroids. I was there over the summer and spoke to one of the local waiters in a popular restaurant. He expressed alarm over Sunny Beach's growth rate; "I started working here 8 years ago and it was a nice place. Since then it's grown at least 3 times bigger than it was even 6 years ago." "Do you like it here now?", I asked. "You can still have a lot of fun here, but I preferred it as it was."

The rate of expansion has been startling. In fact so much so, that in spite of the local municipality making money on issuing building permits on what was previously agrucultural land, they have now decided to impose the much needed restrictions on apartment and hotel construction.

Since then it's grown at least 3 times bigger than it was even six years ago

A little too late perhaps.. The construction boom has not been fuelled by a massive increase in holiday makers - although that has increased - but by investors from overseas, keen to capitalise on off-plan investments - buying before they're built.

It goes like this: you see some apartments you like the look of on a website (3D visualisations of course - remember they haven't been built yet), then you put down 10% and sign a preliminary contract on your desired apartment. A few months later, you send over another 10% when the roof is being built and, the following year, when the complex is finished you pay the rest.

So what just happened here: you locked yourself in on the purchase of the flat only having put down 10% and, during its construction, it's value has increased along with the market, right? Before you were due to pay the final 80% the flat has had over a year's worth of capital appreciation. So, on the day after you pay the final amount, you go to the nearest estate agent, put the apartment on the market and sell it at the new higher market value having really only invested 20% of the original purchase price over 1 year.

Ok, let's put some figures in... for simplicity we'll omit legal and municipality fees etc.
The price of apartment is 1100 euros per square metre and the size of the apartment is 70 square metres in size. This means you're due to pay 77,000 euros. Now let's say you've heard that property prices in Bulgaria are rising 23% per year... so that means your flat will be worth 94,710 euros when it's completed. Sounds good right?

But you only pay 10% to start - that's 7,700 euros.
Six months later you pay another 10% so 1 year later you've still only paid a total of 20% (15,400 euros) and potentially made a gain of 17,710 euros! So you haven't made 23% on your money - you've actually made 115% !! You pay the final 80%, sell it on a few days later and you've more doubled your money!!

If you're even more clever you sell on the preliminary contract to the new buyer and you don;t even need to pay the final 80%. Sounds even better right!???

Wrong. Very wrong.

I'm not saying this doesn't work, I'm not saying this doesn't happen for many off-plan investors... I'm just saying that this isn't happening in Sunny Beach.

Think about it. If you are looking to buy a property in Sunny Beach, and all the developers are offering these kind of off-plan deals, why would anyone buy a re-sale apartment? Why would someone pay the full price now - and make potentially 23% when they could just invest 20% and make 115%!

You see most people aren't buying in Sunny Beach to have a vacation apartment - they're buying as an investment - and hopefully a quick one.

And so this is where the whole model falls down, becuase you can't resell your apartment in Sunny Beach - no-one wants to buy it. It doesn't matter how good it is - or how much of a sea view it has no-one will buy it becuase they want off-plan.

In fact - the truth is more subtle than that - agents make more money selling off plan than they do resale - so they don't push resale apartments. Why is that? Becuase the developers offer the agents higher commissions than an owner would be prepared to pay. This is because the building costs are cheap for developers. They have, until now maybe, had a huge profit margin. So they can afford to hand out big commissions to agents.

You see most people aren't buying in Sunny Beach to have a vacation apartment - they're buying as an investment - and hopefully a quick one.

But that's not all - add to that the increasing competition between developers - who one by one , because of the inherent profit margins, undercut their competitiors to sell their apartments quicker - and you have a recipe for disaster.

Then add in the speculation that the mafia is actually using construction in Sunny Beach (remember I said it was a favourite with the Russians) to wash their money through the system before Bulgaria joins the EU, and are knocking out apartment blocks at nearly cost price, and you have a vortex of declining prices....

Okay - the last comment is only informed speculation but you can see how an unholy combination of greed, power and slack planning laws contributes to a lot of developers making a lot of money out of a lot of foreign investors.

...and a lot of Brits owning empty apartments in Sunny Beach (remember I said that investment in Sunny Beach has not been fuelled by a corresponding increase in tourists) that can't even be resold for less than they paid for them.

Forget making 115% in Sunny Beach. Forget making 23%. Yes, prices have gone up that much in Bulgaria on average - but not in Sunny Beach. That happened in Varna. That happenend in Sofia, that happened in Bansko... but not in Sunny Beach.

In fact I heard from a source that one of the leading estate agencies held a meeting to discuss what to do about the fact that real estate prices in Sunny Beach had halved in just one year.

Not looking so Sunny now, is it.

But wait ... before you run scared from even considering Sunny Beach - look at the bigger picture. When Bulgaria is in the EU, building costs will be more expensive, it will be harder for developers to make a huge proift. Why?

Firstly there won't be any land left in Sunny Beach to build on. And any land there is, will be hugely expensive. If someone wants to buy an apartment in Sunny Beach within 50 or 100 metres from the sea - it will have to be resale. There will be a limited supply. True, a large limited supply at first, but certainly limited in the strict sense.

And tourists are now increasing. Demand for apartment lets is increasing - slowly - but it is happening.

The off-plan offers that come on the the market now are increasingly further away from the beach. They are still cheap, and if you don't visit Sunny beach before you buy - you could get landed with one of those. Be warned - take my advice - do not buy an apartment in Sunny Beach more than 150 metres from the beach. You will not resell it.

Now that the market has readjusted, prices are, in my opinion, likely to slowly increase in near beach-front complexes in Sunny Beach. But do your homework. Buy resale and know what you are getting. Go to the resort and see it for yourself. Get an apartment with a sea view. This commodity will always sell, in time.

And as I said there are now more and more tourists going to Bulgaria every year, more low cost flights opening. More package deals opening to the Resorts, especially Sunny Beach. It's a great place to have fun. Sit on the beach, sip a few cocktails, dance the night away by the pool. Just don't sign any contracts before you sober up in the morning.