The week: Two questions about the Real Estate market, A big battery boost is coming, Casino economy

It also represents the strongest annual growth for any quarter in 2024-a year characterized by consistent double-digit increases: 16% in Q1, 15.1% in Q2, and 16.5% in Q3.

This is also the highest growth in the EU for 2024, according to Eurostat, as it outpaces the median almost 5 times.

So, to sum it up: we are back at the highest point of the previous boom-bust period (2008), and the growth seems to be speeding even more. The boom is concentrated in just a handful of places, much of it is not financed by bank loans, and it is not dictated by a sudden population boom, or serious influx of foreign capital.

Instead of answering the question, is this a bubble and is it going to burst, I want to pose two other questions: who is building and what is happening with the real estate?

I had a very insightful conversation with a friend of mine who deals with wealth management and hedge fund investment after his recent tour of some wealthy Bulgarian business people. "Almost all of them are building", he said with amazement. It is a well-known fact that anyone around here who has any real money, invests it in construction. It is a tried and tested area - you find a plot, build whatever, sell fast, make money. Repeat. One of his interlocutors even went as far as to suggest there are not many people with capital available to invest in other things, as it was mostly locked in bricks and mortar.

This is, to put it mildly, worrying if it's true. To go into economic basics here, if capital rushes into construction, it might be because it is seen as a safe, tangible store of value, especially in markets with inflationary pressure or financial system distrust. It often means people with money don't see many other opportunities or ideas for investment and are only interested in a fast gain. This either reveals a lack of imagination, or a structural problem (and is one of the reasons the capital market here is underdeveloped).

If too much capital is locked into concrete rather than productive capacity, it limits long-term economic growth. Construction creates jobs and GDP in the moment, but it doesn't usually boost productivity or exports.

As for the prices - they have doubled in the past 10 years, but that's logical for a country with a much lower base than the rest of the EU and that is playing catch-up. It will not be a bigger problem as long as demand matches supply, but that might not be the case for long.

Let's see what is happening with the apartments being bought. They are either bought for living and use, or for investment. The first proposition beggars belief. Bulgaria's population is dwindling. 2025 will be the first year in 3 decades when this is going to change. Even if we assume Sofia and Burgas and other places are booming, the amount of new stock being built outstrips the number of new people arriving.

Which leaves us with the second option - investment. But look at the rental market in Sofia and you will not see new apartments. They are basically missing. If you have a ton of new apartments being built and rented out, they should have flooded the rent market. They are nowhere to be found - just spend a day browsing the rental offers. This means many of them just stay like that, empty boxes of stored value. My investment friend noted that the yield currently on such a place in Sofia would be somewhere between 1-2%. This is lower than the amortization rate, so that's why they are not rented out.

So back to the question of overheating. With such a price increase at one point the local demand will begin to shrink. And the market is nowhere near an increase in foreign interest, which can make up for that (while in Poland only 4% of property investment capital is local, in Bulgaria it's over 80%, according to Colliers). Entry into the euro might help fix some of that.

But regardless of whether that is dirty money flooding in before the euro entry or just production money being locked in bricks, having a lot of new empty buildings in areas deprived of basic infrastructure is not helpful to anyone. Neither to the cities, nor to businesses.

Politics this week:

Bulgarian political life was fairly dormant in the run-up to the Easter holidays. That began to change on the first workday after Bright Monday when the Save Sofia movement announced it's withdrawing its support for Sofia mayor Vasil Terziev in the Sofia Municipal Council, where it partnered with WCC-DB.

Verbatim

"In practice, [former GERB mayor] Fandakova's rule continues, but the person is now Vasil Terziev," Boris Bonev of the party commented, citing alleged shady agreements by the mayor over the disposal of Sofia's garbage worth hundreds of millions of leva, as well as lack of reforms.

What it means

The withdrawal of Bonev's faction means that Mayor Terziev will have an even harder task pushing forward any changes, as even with the support of the eight Save Sofia councillors, the group that was supporting him in the Sofia City Council did not hold a majority and had a hard time fighting for even minor changes, having to negotiate with the opposition. So that's basically the end of the huge reform effort in the governance of the biggest Bulgarian city, hailed once as the forebearer of a new style of government in the country.

Economy:

A survey by the French-Bulgarian Chamber of Commerce and Industry found that businesses in Bulgaria still struggle with a lack of qualified labor, corruption, and inefficient administration, though they report facing fewer difficulties overall compared to a previous survey.

The shortage of qualified labor, corruption and inefficient administration remain the main difficulties, faced by companies in Bulgaria. These issues were cited by 54%, 33% and 25% of respondents respectively and have remained as key obstacles since the previous survey at the end of 2023.

Moody's is positive about the Bulgarian banking sector

After Moody's affirmed Bulgaria's Baa1 rating at the beginning of the year, the agency now upgraded its assessment of the outlook for the country's banking sector from stable to positive. According to the agency, solid economic growth and fairly low interest rates continue to open up business opportunities and keep the quality of portfolios good. The likely entry into the euro area from early 2026 is also highlighted as a positive factor, which will deepen integration with monetary union countries, eliminate foreign exchange risk for banks and allow the National Bank (BNB) to provide liquidity when needed, which will reduce funding risks.

On that real estate point

Moody's pointed to cyclical risks from accelerating mortgage lending and rising property prices as a danger, but said the BNB's measures have largely ended the riskier part of new home loans with high servicing costs. Capital levels are expected to remain solid and profitability to shrink in 2025 as interest rates fall, but remain well above EU levels. However, joining the euro will again boost the sector's profits as it will now be able to invest its excess liquidity, which now sits on deposit with the BNB at zero interest.

Figures:

2.4-3.1%

The range for Bulgaria's 2025 GDP growth expected by nine major domestic and international institutions in the last few weeks, including the IMF, BNB, the World Bank, EBRD and several European banks.

Business:

ESO

The Energy Systems Operator has had a good financial year. The state company reports a slight increase in its profit to 265 million levs for 2024 from 250 million levs a year earlier. With these indicators, the company maintains its position as one of the richest and most stable state-owned companies.

Startup

Lace AI

The California-based software company that analyzes performance in call centers of companies specializing in home repairs and services achieved tenfold growth in 2024 and now serves customers with annual revenues between 5 million USD and 2 billion USD. The company will now receive financial backing from the Bulgarian venture fund LAUNCHhub Ventures.

Food

SmartOrganic

Bulgarian organic food producer has acquired UK-based LoveRaw Limited. The UK company operates in the same segment and produces food without milk, palm oil, and artificial ingredients. The acquisition price was not disclosed but will be reflected in Smart Organic's Q2 report.

Energy:

The highly anticipated money for storage from the Recovery and Resilience Plan is finally here and Bulgaria is becoming one of the hottest investment spots on the energy map. The Energy Ministry has published the list of 82 stand-alone electricity storage projects with a capacity of 9,713 MWh that have been approved and will be funded under the RESTORE procedure with 1.1 billion levs (alongside 2 billion in companies' own co-financing). This, if taken as a whole, is likely to be the largest investment in the power sector in the last 15 years.

The last of the big ones

The project selection has been delayed for several months due to uncertainties surrounding the plan's payments. And now applicants will have less than a year to complete their projects - the deadline is 31 March 2026. This is also, probably, the last big measure Bulgaria will be able to push through the RRP, given the delays and problems there.

Watch out for:

Georg Georgiev

The foreign minister who haplessly failed to say much when Israel killed a Bulgarian UN worker in Gaza. Now he's once again squirming to find the proper reaction after Israel's own investigation has shown that the worker was killed by an Israeli tank. Tel Aviv should bear financial responsibility, was the best the Foreign Ministry could come up with, highlighting that the Israeli army has "apologized".

Stoyan Bratoev

The most successful Project Manager in Bulgaria - the builder of Sofia's Metro and head of Metropoliten - is once again on the firing line, with rumors that GERB and their associates in Sofia council want him out. If that happens, other cities will be foolish not to sign the best transfer deal they have in ages.

Company

Bulgarian Post

In times of overheating courier and delivery markets, the state courier is still failing. Over half of its revenue (161 mln levs) comes from the state subsidy, shows the 2024 balance sheet. This helped it step over the red line with just a little bit of profit - under 1 mln. levs.

Date

22 May

When central Sofia might once again get ruined by football fans - this time from the CSKA-Sofia team, who announced they will protest (likely violently) against the decision of the Sofia Municipal Council to not name a new metro stop after their favorite team.

Word of the week:

Betting is a national health emergency, as any drive between Sofia and Plovdiv where the highway is littered with ads from betting companies, will show you. This was highlighted in the weirdest possible way this week, when the Speaker of the National Assembly Prof Natalia Kiselova appeared in the VIP box of the national stadium to support her favorite team - CSKA-Sofia, wearing a team jersey. Unfortunately for her, the t-shirt bore the name of a betting company that sponsors the team in big letters.

This caused a wave of outrage on social networks and media, with the focus falling on the new politician herself. Kiselova herself explained that she "wanted to draw attention to the problem of addiction in society in a shocking way". The only big beneficiary from all this is WinBet who got a fair share of free publicity. As the saying goes, the casino always wins.