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Warning UK buyers against misleading promises of guaranteed returns on Bulgaria's over-developed coastal resorts, The Sunday Times has criticized agents for promoting unrealistic yields.

In an article entitled 'Bulgaria? Beware', a feature in the Home section of the Sunday newspaper (16th July 2006) claimed that the promises of high capital growth, rental income to cover mortgage payments, and high tenant demand in long summer seasons were undeliverable. Going further to claim that the situation on the coast could even spread to the ski resorts and cities, the article said: "This summer, the consequences of Bulgaria's property boom are beginning to sink in. The frenzy of development has delivered a glut of apartments in Sunny Beach, Golden Sands and a string of other Black Sea resorts and is threatening to do the same in the mountain resorts of Bansko, Pamporovo and Borovets."

However, while concerns have been raised about over-construction on Bulgaria's coasts, many believe that prospects in the cities are better due to rising affluence among domestic buyers. The ski resort of Bansko is also positioning itself as an all-year-round tourist centre (attracting 62% more Brits in 2005) with a range of leisure activities for the summer. Moves to ban further construction in the resort will combine with improved infrastructure (roads and airports) to attract more visitors to support the rental market.

The report mainly focused on the coastal resorts, however, and went on to highlight a number of holiday home investors who had been promised returns of between 8-10%. Some, who had been offered guaranteed rents, were later told by developers this was not the case and so had been forced to advertise and market their own properties to achieve the occupancy needed to cover mortgage costs.

False guarantees
While rental guarantees have proved popular as an incentive in new markets, many view them as a gimmick, suspecting that they reflect a premium that has already been added to the cost price - or provide a false sense of the true prospects of the local rental market. However, the allegation that buyers have been verbally offered a guaranteed income for a defined period, only to find that this is not the case upon signing the contract, is extremely serious and raises a number of issues.

The difference between an outright lie and an exaggeration of market prospects is minimal if both lead to an inappropriate purchase (for example, someone buying a property that is unlikely to provide the necessary returns when they are relying on rental income to pay the mortgage). If these buyers lose out, and very publicly denounce the company that they dealt with in newspaper articles, blogs or forums, then damaged reputations will cost sales.

A number of UK based agents were named in the report as providing too rosy a view of the Bulgarian coastal market. These included Bulgarian Dreams, Bulgaria Revealed, Barrasford & Bird and MacAnthony Realty International. Claiming that the rental seasons would be supported, and extended in many cases, by new marinas or golf courses, these agents were slammed for claims that yields of up to 10% and rental periods of seven to eight months were likely.

"Worryingly, the reporter found many agents were talking up the investment case in the full knowledge that buyers are borrowing money to fund their purchase and may be relying on rental income to pay their monthly debts," the report said. "Research by The Sunday Times suggests that for most people, net returns are more likely to be in the 3%-4% range at best, that six to eight weeks' rental is optimistic, that £277 is a realistic rate for a two-bed apartment and that just a few people, with truly exceptional properties, will achieve 12 weeks' rent. With local interest rates of about 7%, this means that far from being self-supporting, some Bulgarian properties can start costing their buyers money from the start."

Bulgarian Dreams, Bulgaria Revealed and MRI were all quoted as saying that the promise of guaranteed rents were made by developers and letting agents, and merely passed on by their salespeople - although these agents can no longer plead ignorance in future now that The Sunday Times feature has raised the issue of due diligence of partners. Barrasford & Bird has confirmed since the article was published that it is no longer working with one of its partners in Bulgaria.

Let the buyer beware
The issue of false promises relating to guaranteed rents raises some very important questions that were not addressed in The Sunday Times' article: what due diligence is being undertaken by these 'investor' buyers and what are they paying their lawyers for? Tahir Ali, managing director of Bulgaria Revealed said: "We always urge clients to have an independent solicitor scrutinise a property contract, just as you would if you were buying in the UK. For some reason, some people leave their 'common sense hat' at home when purchasing overseas and instead of checking through contracts and official documents, go straight ahead with a sale, which gives unscrupulous agents a golden ticket to easy commissions."

This point is echoed by Steve Emmett, Chairman of FOPDAC, who says: "Whilst sympathising with this viewpoint I think there are two issues here: I would like to bet that most of the buyers have not engaged the services of an independent lawyer; and it would not be right for us to abandon people just because they themselves don't act with due diligence. Professionals working in this market should have the consumer's well-being in mind and should insist on the use of an independent legal adviser as well as taking care of their own customers."

The Sunday Times also makes the point that many of the buyers questioned "were not worried about rents in Bulgaria as they had bought primarily for capital growth", although analysts were also quoted as saying that if the rental income doesn't stack up, prices are likely to fall.

Again, if buyers are going into this market for pure investment they have a responsibility to check out the wider market prospects and verify a letting agent's claims on average rentals or any predictions on growth. While agents may be promoting second homes with a range of investment criteria, it's debatable whether they are setting themselves up as 'investment brokers' (although the global agents are now dealing with portfolio buyers who are looking for properties all over the world).

Commenting on the issue of whether agents should make predictions about market performance, Paul Owen from the AIPP said: "Aware of the potential for inconsistent information in the international property marketplace, the AIPP's Code of Conduct prohibits the use of '.. misleading statements or exaggerated claims in their (Members') dealings with sellers and buyers.' Furthermore, Members will imminently be bound by best practice 'Marketing Guidelines' that will further ensure that the message delivered to all buyers by Members will be fair, honest and well-qualified."

A key point made at the end of the feature is that many 'buy blind' based on sales pitches at UK property shows with 3D models and CGI presentations. With flights to Bulgaria still very cheap, and becoming more frequent, there is surely no excuse for not visiting the region to check out the local market and the level of development.

Source: OPP