Short summary of the Bulgarian economy produced by Arceland

At the macro level, the recent performance of the Bulgarian economy has been exemplary. In September industrial production was up 9.3%, real wages grew at 9.4% and exports increased a whopping 37.1% year- over- year. As a result, unemployment has dropped from nearly 10% in January to 8.9% in October. Government debt remains below 16% of GDP, and most notably the government issued €160,000,000 in 10 year notes this week, with an oversubscription of 6.5 and a record low interest rate of 5.81%. On the basis of these trends and indices, it seems clear that the Bulgarian economy is well on its way to recovery, largely due to: commendable discipline in public finances; responsible oversight of commercial lenders by the Bulgarian National Bank; the rock -solid currency peg between the Lev and the EURO; remarkable tolerance among its citizens; a substantial cost advantage vis- a- vis its EU competitors; and the sustained impact of the EU multi - Billion EURO convergence program.

With regard to real estate, the market appears to continue to lagging the general economy by about two quarters. At the onset of the crisis in 2008, the economy entered recession a full six months before real estate prices began to decline in the spring of 2009. Similarly, we anticipate that while the general economy will continue grow over the next six months and beyond, real estate prices will remain in their current deflated state for two to three more quarters before beginning to rise in mid-2011 at rates tied to the growth in real wages. This would indicate annual appreciation of thereafter of about 7-9%, versus the 2007-9 rate of over 30% per year.

In Sofia, the market has suffered dramatic price declines of 20% or more over the past six quarters- reportedly the largest drop among all EU capitals - with variations by type. Both the retail and office sectors have experienced an even more precipitous decline in values of nearly 30% this year alone due to the delivery of enormous additional inventory delivered virtually simultaneously. While Sofia remains statistically underserved in both categories by EU standards on the basis of square meters per capita, the sudden glut of new capacity has far exceeded normal growth in demand, putting tremendous pressure on pricing in the near term. In addition, there are several new projects under construction in both categories that will likely add to this pressure through 2011 and into 2012. We see very limited retail opportunities, exclusively at the lowest end discount level, and only a small inventory of office space that feature long term leases with credit -worthy clients. In general, we are quite cautious on these sectors for through 2011.

In the Sofia residential sector, however, we see greater opportunities, largely in distressed projects that – though well located and attractively designed -remain uncompleted due to the evaporation of ‘off plan’ sales. The most important and lasting impact of the financial crisis has been the new and universal unwillingness of buyers to take construction risk. And as most residential projects were initiated in reliance on installment payments for construction financing, this shift in attitude has left a significant inventory of good products whose owners are simply unable complete them. This has created a number of opportunities to contract to purchase these projects at distressed prices below replacement cost for payment and delivery into what we expect will be a stabilized market in 2012. The owner can then take our forward contract to obtain construction financing, usually from his very grateful lender, so that we avoid construction risk. As we have explained to you in the past, Sofia continues to attract very substantial inward migration due average wages at twice the national figure and unemployment at less than 3.5%. When you add in the existing demand among owners of highly degraded communist era panel block apartments, the prospects for absorption of good quality apartments in the €50 – €70,000 range in Sofia remain excellent through the next decade.