Bulgaria Real Estate Report Q2 2012

Real GDP flash estimates released by statistics agencies across Central and South Eastern Europeancountries largely confirm our expectations for a general slowdown in economic activity across emergingEurope.

With a high degree of trade, investment and financial links to the eurozone sovereign debt crisis set tocontinue to weigh on economic activity in emerging Europe at least in the first half of 2012, we hold toour forecasts for weaker growth this year in the region.

We have revised down our forecast for Bulgaria's real GDP growth to come in at 2.7% in 2012, from3.3% . We believe that slower growth in the eurozone will filter through to a weaker recovery in domesticconsumption and a lower contribution from net exports.Bulgaria’s economy continues to improve from recession levels but this has yet to feed through intoimprovement in the real estate market.

Exports are driving the country’s growth but this has a limited effect on the commercial real estate sector,particularly in light of struggling consumer confidence and high unemployment. Property rents have,however, sunk further across all sectors and the amount of vacant space in most sectors and cities issubstantial.

Key opportunities in the real estate market:

.. The lack of new retail space coming online in 2011 means existing retail spaces will be able toposition themselves more competitively.

.. The National Statistical Institute reported in November 2011 that increased numbers of buildingpermits of all kinds were issued in Q311, compared with Q211, but that the size of residentialand administrative/ office projects was smaller.

.. Forton International reports continuing interest from the light industrial and logistics sectors forowner-occupied space.

.. This may be the time to enter the Bulgarian property market if investors have time to wait outthe recovery. Prices are extremely low but the new supply pipeline has been decimated and asthe recovery takes hold, there must come a time when vacancy levels will drop, opening up themarket to new development opportunities.

Key risks to the real estate market:

.. Property prices fell further in Q311, according to Quest Bulgaria’s report of government data.

.. Rental prices are plummeting across the office, retail and industrial sectors.

.. There is substantial vacant space in commercial sectors.