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BLOC BUSTER

Former Soviet satellite Bulgaria, on track to join the EU by 2007, embraces Western-style retail development

By Curt Hazlett

Bulgaria is finally getting its first Western-style mall — and most would say the country has earned it.

When Europe’s Soviet bloc broke apart, none of its former members had a rougher time than Bulgaria. The years following the Soviet Union’s disintegration brought economic disaster to the eastern Balkan nation, including 120 percent inflation, a bank collapse and a 40 percent drop in living standards.

But Bulgaria has slowly pulled itself together, enough that the European Union has tentatively agreed to accept it as a member in 2007. Financial reforms have produced economic growth for the past seven years, and inflation has been brought under control. And though Bulgaria remains one of the poorest countries in Europe, disposable income is growing.

So it was only a matter of time before Bulgaria got its first Western-style badge of prosperity: a sleek shopping center called the Mall of Sofia, going up in an upper-middle-class area of the capital city, just a few blocks from the parliament building. The retail and office project, which is scheduled to open early next year, will cover 750,000 square feet and contain 120 stores — Benetton, Mango and Sisley among them — as well as an Imax theater, a 12-screen cinema and a Piccadilly food hypermarket.

The Mall of Sofia is being billed as the country’s first “international style” shopping center, and the residents of Sofia seem eager to experience it. “There is a lot of excitement, because many young people are looking for this kind of shopping in order to save time and do all their shopping at once,” said Dr. Anrieta Draganova, an engineering professor at George Washington University who travels back to Sofia often and keeps an apartment near the new mall. “Most people shop in small stores that are the size of a big room.”

Potential retail tenants have responded well too. “We’re close to 95 percent leased up with signed contracts and deposits, so we’re well ahead of schedule with seven months before opening,” said Atanas Garov, managing director of Colliers International in Bulgaria, which has been closely involved with the mall’s planning and tenanting.

The mall is being developed by a local company, M.O. Sofia, which is owned by the Dutch theater company Cinema City International and Israel’s Aviv Construction and Public Works. In August a consortium led by GE Commercial Finance Real Estate bought a $46 million, 50 percent stake in the joint venture. Given the country’s past economic troubles and low average incomes (just $2,130 a year, according to the World Bank), an upscale mall might seem a risky undertaking for its investors. But Garov says he believes the market is ready. In fact, he said, “it’s a little late for a mall this size.” In any case, he says, the fundamentals are in place.

“Economically, life has improved quite significantly in the last five or six years,” said Garov. “The last thing that shows up is an increase in disposable income, but even that has been happening in the last few years.”

Interestingly, three more shopping centers are in the pipeline in Sofia. One, Sofia City Center, is under construction, another is in the planning process, and a third is in the land-acquisition stage.

Sofia is not without fashionable shopping already. Luxury shops line Vitosha Boulevard, and the TsUM — the “central universal market,” a once-dreary state department store modeled after Moscow’s GUM — has been remodeled into a modern glass-and-marble shopping center by Britain’s Regent Pacific Fund, which owns a 75 percent stake.

Garov says retail development will continue. Hypermarkets, do-it-yourself centers and electronics retailers are only just beginning to enter the market, and, consequently, Bulgaria has “one of the lowest penetrations of hypermarkets” in Europe, he says. (German hypermarket chain Metro is Bulgaria’s largest foreign retailer, with seven Metro Cash & Carry stores there.)

The impending EU membership is a big reason for optimism. By some estimates, Bulgaria stands to get investment of more than €4 billion ($5 billion) in its first two years as an EU member.

“Joining the EU is definitely a nice stepping-stone, but I think a lot of the benefits are already being absorbed by investors in their decision making,” said Garov, who holds an MBA from Thunderbird: The American Graduate School of International Management, in Arizona, and who once worked for Jones Lang LaSalle’s Capital Markets Group, in New York City. “Having said that, hopefully, the long-term effect of joining is that we will continue on the path of strong economic performance, which will then create even more need for retail projects.”

Indeed, Bulgaria has begun to attract foreign investors who believe that valuations will rise sharply in the EU era. Among the largest is Equest, a London-based company that is focusing on Bulgaria’s consumer-based economy, including retail, financial services and real estate development. Since the Equest Investments Bulgaria unit was launched in 2004, it has raised €117 million ($144 million) from U.S. and European investors, among them Deutsche Bank. So far the unit has bought car-import companies, movie theaters, the Avis car rental operation in Bulgaria and land.

But this interest belies the fact that Bulgaria’s economy is still far from healthy. After Soviet influence disappeared, Bulgaria was plagued by labor strikes and political instability, culminating in the economic crash that began in 1996. A reform government did make some vital changes, but progress was slow. It was not until the former king, Simeon Saxe-Coburg, who ruled as Simeon II, became prime minister in 2001 that serious market reforms were made.

Saxe-Coburg’s goal was to strengthen the economy enough to qualify for EU membership, but Bulgaria was not among the countries chosen in 2004. Instead, it signed an “accession treaty” and agreed to make deep changes in return for membership in 2007.

Making that deadline will not be easy. In exchange for the financial help EU membership would bring, Bulgaria is expected to shut down part of its profitable but creaky nuclear energy program and to root out corruption, strengthen the rule of law and reduce the far-reaching discrimination practiced against the Roma minority, the people known as Gypsies.

The country’s politics remain difficult. Parliamentary elections this summer failed to produce a majority government, forcing a scramble among the many parties to form a ruling coalition.

Yet for all its problems, Bulgaria has plenty of appeal. Straddling the northern borders of Greece and Turkey, it has both mountain scenery and attractive Black Sea resorts. Both regions have begun to attract foreigners, mostly Britons, who in many cases are buying inexpensive vacation homes. (Fueling the trend, real estate companies have taken to calling Bulgaria “the next Spain.”)

Bulgaria is a generally peaceful country that values education. With a population smaller than New York City’s, it has 47 universities, and the World Bank ranks it fifth in the world in science education. More than 90 percent of Bulgarians own their own homes.

But as much as it has changed, most of the country has stayed in touch with the old ways. “Bulgaria has changed swiftly over the last decade, though in the villages you can still find folk who ride the donkey to work, eat homegrown potatoes and make their own cheese,” observes a Lonely Planet travel guidebook. “The difference now is that they wash it all down in front of a satellite TV.”

After a bumpy break from communism, it seems Bulgaria is finally getting a break — the chance to participate in the prosperity that has eluded it for so long.

“Life has its challenges and its difficult moments economically,” said Garov, “but in general we are on a very positive path. It seems like we’ve finally hit the path to long-term growth.”

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