After the pandemic, in line with expectations of a general downturn and slowdown in the economy, assumptions about the development of the property market were rather pessimistic. The forecasts were associated with a decline - both in the number of transactions and price levels in the country. These expectations concerned all segments. In the residential sector, the forecasts failed to match reality. On the contrary, activity reached record levels and prices continued to rise at a steady pace. At the same time, the luxury segment has established itself as one of the most vulnerable in times of crisis. Luxury goods generally retain their value due to their qualities and the fact that their customers have greater financial means. They are therefore a sensible investment asset. The same trend holds true in the market for luxury houses and apartments - this market is demonstrating records greater than those achieved in mass housing.
In December 2022, activity in the luxury property market in Bulgaria reached record levels. In the second quarter, the number of transactions in the segment even surpassed the volumes recorded in 2008. At the same time, prices continue to grow, but at a more moderate pace compared to those of mass properties. The rise in the high-end segment for the period January-November 2022 is about 23% year-on-year.
At the peak of the record period - i.e. the first quarter of the year, indicators are 15% growth in prices of high-end apartments and over 70% more sales in 2021 compared to 2020.
The increased interest and active demand for luxury apartments and houses corresponds with the favorable conditions of the housing market as a whole in 2021 and the first half of 2022. Key market factors were unprecedentedly low interest rates, rising inflation and good opportunities to invest savings. The exceptional buying interest in a relatively supply-constrained environment has led advisers to describe the situation in 2021 as a classic 'seller's market'. In 2022, a trend of a catch-up between the two sides has begun, but very tentatively.
At the end of 2022, an interesting trend is reported - the forecasts from the end of 2021 that a lot of new construction will come on the market, which will lead to a glut and a drop in price levels, are not coming true. Building permits for new buildings at the end of the third quarter of 2022 have not yet reached the 2021 volumes.
In the early summer of 2022, quite a few investors froze their projects and sales, which severely limited supply. This very much compensated for the limited number of buyers who took a wait-and-see stance towards the same period. Some uncertainty has been created in the market, and many clients in the luxury segment have turned to old high-end properties. This, in turn, drove the price growth in aristocratic solid construction.
In the second half of 2022, a decline in interest begins, but a higher percentage of inquiries for luxury houses and apartments reach a real deal.
Market data points to buyers who, while fewer in number by the end of 2022, are more secure and motivated. They are looking for property for personal use and are demanding what they get for their money. Most are interested in a 2 or 3 bedroom apartment. Smart buildings with good energy efficiency systems are becoming increasingly popular. New luxury properties in gated communities are also in demand. Investment-minded buyers are currently not active on the market.
Since luxury goods are an asset with a stable value over time and much less susceptible to economic shocks, investing in luxury has always been a wise step. This is fully true for luxury houses and apartments, as long as consumers looking for a secure investment for their money have the financial ability to take such a step. Returns in this segment have traditionally been below 5% for rentals, but with the 30% growth recorded in transaction volumes for luxury rentals in 2022, these returns are expected to improve.
In the long term - in resale, it can reach much more serious levels. Property prices in the long term always go up, and those of luxury homes are even higher. The presence of trophy properties in the luxury segment is also not to be ignored. Over the last year, deals have been done at record prices. There are clients who are opting for transactions for homes that have stood at above-market levels for a long time and are now finding realization as they get closer to market realities.
All this stimulates investment in luxury buildings. People who are interested in such a product buy for the long term. Moreover, especially in Bulgaria, properties are passed down from generation to generation. Acquiring an exclusive asset cannot be a wasted or misguided investment, as such a product is scarce, is created less frequently than mainstream property and will not be built identically in the short term. Such an investment is guaranteed to ride out the inevitable shocks of ionomic cycles. Some new luxury projects in the country promise returns of over 15% when purchased early. Indeed, analyses of the luxury property market in the country show increasing customer interest in buying green, and at an early stage of construction. The key for the development of investments in luxury buildings is for Bulgarian investors to offer good payment schemes, and the final prices should be market prices. The conditions are currently screening out the forward-looking developers, which will eliminate the risk of oversupply and will be a precondition for a secure 2023 in the luxury houses and apartments sector.
Hotels and commercial buildings were among the preferred investment solutions for people with good financial capabilities before the cow pandemic. However, the series of closures, while not affecting the residential segment, had a strong negative impact on the retail, tourism, hotel and restaurant industries. Therefore, commercial properties and hotels were among the most affected, which logically reduced investment interest in them. However, there is still a lot of cash in the country and people are looking for different investment options. The residential market has established itself as the safest among the properties and the luxury segment has established itself as the most sensible and profitable option possible. Therefore, the demand for luxury houses and apartments has further increased in the years following the cow pandemic. Many buyers continue to bet on houses in the outskirts of Sofia, with quite a few clients opting for the purchase of penthouses in newly built buildings as an alternative. An additional incentive for this was the reported 2022 shortfall in the supply of luxury houses for rent - only 10% of enquiries managed to satisfy the current supply. This makes buying a luxury investment house a step with a good return.
Bargain lending in the years after the cow pandemic and record low interest rates on bank loans also affected the market in the luxury segment. Many buyers in the sector have resorted to lending on their deals, not because they do not have the ability to pay the full amount with their own funds, but because economic logic suggests these people take advantage of the banks' favorable terms. At the same time, they looked for investment opportunities for their savings that might be riskier but with better returns. This is an established business model that makes participants in the luxury segment and active borrowers in a low interest rate environment. That is why the bargain lending in the years after the COVID-19 pandemic was a catalyst not only in the mass segment but also in the luxury apartments and houses segment.