Bright future for high-quality office developments

propertywisebulgaria.com, 2008-02-08

     Supply of high-quality class A and B++ office space in 2007 was limited. Demand, by contrast, remained high, surpassing 2006's levels, said Krassimir Dimitrov, managing partner in Source Real Estate Advisers Ltd. (SREA). The office market in 2007 was dynamic, he added. Sale prices grew by 35 to 40 per cent. Demand outstripped supply by 60 to 70 per cent (80 per cent for administrative buildings). At the moment there is hardly any supply of office units in buildings due for completion at the end of the year, according to Dimitrov.
     Quality of construction, installations and equipment are among the factors influencing price appreciation. Almost 80 per cent of the new edifices are built on the so-called open space design pattern. Some of them have double floor conditioning and air-ventilation systems. Developers are already complying with clients' needs when elaborating the architecture and design projects. Location and transport communications are also considered, depending on whether employees of future tenants will come to work by car or public transport.
     A savvy entrepreneur would never start construction of high-quality class A office premises on a suburban plot because such developments command higher prices (1 700 euro a sq m). Given an unattractive location they would be unlikely to sell. The highest sale price for such districts is 1 300 euro. Investors have to bear this in mind when planning the undertaking.
     Around 85-90 per cent of office buyers are Bulgarian companies with profitable businesses, large resources and/or easy "loan access" who opt for purchasing an office as a safer and more secure alternative. Foreign entities, by contrast, are very circumspect and avoid investing in fixed assets like real estate. Most of them prefer renting. There are large distribution or retail companies, however, with stable profit growth and market share who would rather buy a plot and build a complex suiting their demands and needs. The next 7-8 months are unlikely to see any change in price level, Krassimir Dimitrov comments. Any rise will be within the 3-5 per cent range.
     Rents appreciated less than sales in 2007, registering a 25-30 per cent mark-up. SREA's executive differentiates clients into three types.
     The first (more than 80 per cent of clients) are those seeking 120-200 sq m office units in class A and B administrative buildings. These are either companies that previously located their offices in residential buildings or foreign companies entering the country and looking for smaller offices. However, supply of such developments is squeezed and prices vary from 8-10 to 13-14 euro a sq m.
     The second type of clients needs 300-600 sq m for setting up an office - medium-size Bulgarian companies (20 per cent) and foreign entities, which have already secured their positions on the local market (80 per cent of the demand). Price levels for these units are set at 11-16 euro a sq m.
     The third group seeks larger office space - 1 -4 000 sq m. Around 90 per cent of these clients are foreign companies in the IT, communications or finance sector.
     All the quoted sale and rent prices are without VAT, service and security charges, which in 95 per cent of Sofia's buildings are calculated at 1.5-2 euro a sq m excluding VAT.
     Krassimir Dimitrov forecasts that office rent supply will soar over the upcoming 2-3 years, thus tangibly outstripping demand. The office sale sector, by contrast, will see boosted demand, primarily for smaller units (150-200 sq m) located in the centre or along the main boulevards.

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