Is it possible for anarchy to occur in the real estate market?
The new VAT law on new construction is at the core of market tremors
2024 bequeaths fluctuations in the real estate sector to 2025. With the new year approaching, it’s time to outline our investment plans. But won’t this be a challenging task given the tremors looming over our most preferred investment asset – real estate?
“For now, the market is stable, and we have a positive forecast,” comments Yordan Yordanov, managing director of agency “Nov dom 1”.
Still, there are several factors outlining the new year as challenging for the real estate market.
Lower foreign investor interest
The year 2024 was exceptionally good for the “Real Estate” sector and ended with a price growth of around 16% on an annual basis. We witnessed a very high demand, even at the expense of supply. This shows that the investment interest in Bulgaria is still high, but what happened to foreign investments?
According to BNB data, for the first half of last year, direct foreign investments amounted to 697.8 million euros, which is 0.7% of GDP. This is 2.4 billion euros /77.5%/ less compared to the same period in 2023. Back then, FDI amounted to 3.1 billion euros.
According to Yordan Yordanov, the reason for this is the lack of proper governance. He believes that Bulgaria cannot be seen as a predictable state for investment. “The state often does not comply with its own laws, which repels foreign investors. Inconsistent legislation, corruption, and lack of administrative accountability create an unfavorable environment for business and development,” Mr. Yordanov is categorical. “An example of this is that in Bulgaria there is not a single ‘Unicorn’ investor (a foreign investor who has invested 1 billion euros or dollars). Such investors exist in Romania and Turkey. Although the corporate tax in our country is the most favorable, instead of attracting a queue of foreign investors, an outflow is observed. For example, in Israel, there are over 60 ‘Unicorns’ and at least 5 investors with over 10 billion in investments,” he adds.
After joining the Eurozone, Yordanov expects a strengthening of air connections between cities in Western Europe and cities like Varna, Burgas, and Plovdiv. “Considering all the advantages that our country offers, such as sea and mountains, security, lack of migrants, and delicious food, a great interest and influx of small foreign investors are expected here, which would lead to a real estate market boom.” However, when Bulgaria will become part of the Eurozone remains to be seen.
“The problems in the economies of countries like Germany and France, as observed in recent months also in Bulgaria, also lead to a more difficult predictability of the real estate market. The good news is that unlike other countries like Spain, Italy, Greece, and Portugal, they have a significant growth in their economic indicators, which is a promising factor,” commented Mr. Yordanov.
VAT on new construction
Given that low tax rates in our country are crucial for investors, the good tax system in Bulgaria favors the development of the sector. However, another factor that would definitely have a negative impact on the market in 2025 is the law on VAT on new construction, which has been a hot topic in the media in the past month.
It states that anyone who buys real estate built in the last 5 years, or receives it as compensation and sells it within those 5 years, is required to register for VAT and charge VAT on the selling price. According to the owner of “New Home 1,” the text will not be accepted. “The proposed law contradicts commercial logic and existing VAT rules, making it unfair and discriminatory. We are convinced that such a law has no chance of being accepted and will not affect the market,” he commented.
When should we invest in real estate?
“Despite possible market fluctuations, real estate will remain a preferred investment asset for Bulgarians. This trend will inevitably persist if we monitor the rise of the Bulgarian economy. However, it is necessary to be cautious when buying property,” advises Yordanov.
According to him, if we are planning to invest in real estate, we should do it as quickly as possible. “After January 1st, there has been a serious increase in prices in every sector. Firstly, the increase in the minimum wage by 15%, the rise in electricity prices, and other factors will lead to price hikes, especially in basic resources, and consequently in everything else. There are inflationary processes that will inevitably lead to an increase in property prices. Additionally, there is a restriction on construction and issuance of building permits in Varna, which will significantly hinder the supply of properties – new construction. This will result in a serious deficit and consequently higher property prices. A similar measure is also considered by the mayor of Sofia, Mr. Terziev, who commented on a possible restriction on building permits for smaller buildings in favor of larger complexes.”
When planning an investment, it is crucial to analyze the current situation. During such times, seeking reliable advice from specialists who will help us make the best decision is essential. One of the leading agencies in our country with years of experience and a rich portfolio is “Nov Dom 1”, paying attention to every future investor. The company carefully monitors the real estate market and economic indicators of EU countries, analyzes, and strives to promptly inform its clients of possible changes in the property market in Bulgaria.