Over the past few weeks you have been invited to Join our CEO, Neil Lewis, as he travelled around New Europe in search of potential candidates for his 200% Club, via his Max Growth blog In his final entry (for now at least!) as he prepared for a well earned break, Neil looked closely at Sofia, Bulgaria's capital and a place of growing interest for Property Secrets as an investment location.

Is now the time to consider this city for your portfolio? See what Neil thinks...

10 years ago Bulgaria suffered hyper-inflation.

This was caused by economic mis-management, war in former Yugoslavia (and the subsequent loss of bridges in Serbia that broke the road trade link with Europe for Sofia) plus hyper-inflation in neighbouring Serbia (as it now is known).

This led to the IMF (International Monetary Fund) to apply strict monetary control on the country's finances and caused 10 years of austerity from which I believe the country and its capital city of Sofia are now emerging.

Bulgaria has a currency board which has operated for the past 10 years.

During this time the Bulgarian Lev (Leva in plural) has been pegged to DM (and then subsequently replaced by a fixed peg with the Euro).

This has led the Bulgarian government to achieve a surplus for the past 4 years and a forecast of a 1.8% of GDP surplus for 2007.

Now, some of the recent figures (especially the 3.5% of GDP current-account surplus in 2006) were bolstered by privatisation receipts, however, this is still very impressive. (Many Euroland goverments run deficits of upto 3%).

Let me try to put this in context and then explain why property investors should care about debt, deficits and surpluses...

Firstly, Bulgaria's GDP of 6.1% in 2006 lags that of neighbours - such as Slovakia - or other small countries such as the Baltic stats - all of whom have been achieving growth of around 9%.

But, if last years surplus had been spent by the Bulgarian Government (and assuming that the money had no further knock on effect of spending - which it undoubtedly would have) then the GDP would have been 9.6%.

Equally, a major effect of the tight control of spending has been wobbly pavements in Sofia downtown area - see my previous blog.

In essence, unlike all the other cities that I have visited, Sofia still feels like it is tight with the spending and is not going hell of leather to generate growth.

Instead, it has built a unique position as being the only government in CEE with a surplus (unless anyone knows otherwise? I think Serbia may be in a similar position?).

And this means two things

1.) The currency is absolutely fixed to the Euro and the fix is secure because of the cautious approach of the Bulgarian government (currently left leaning - but still in awe of the currency board)
2.) Local Bulgarian's have been slower to take on credit (and mortgages) given that their government has been slow to spend (but fast to save) and they themselves would have experienced hyper inflation just 10 years ago.

The other effect of hyper-inflation is to encourage investment in bricks and mortar (and gold) - as these don't disappear in value in the same way that cash does when inflation gets out of control.

However, there are now over 30 banks in Bulgaria - partly courtesy of the foreign holiday home buyer market on the coast and in the mountains - which is clearly turning its focus on the local home buyer market.

And this is good news for property investors.

It means that there is still huge pent up demand for property but that the property market probably lags that of Bucharest by 1 to 2 years whilst offering a very stable potential growth path.

In other words, whilst I think Bucharest will certainly boom 200% in the 5 years that started this time last year - but I think Sofia's growth will be more measured and last longer.

In 10 years time both cities will probably end up at the same point - but they will have quite different paths to achieve it.

Hence, Sofia still has a feeling of austerity about it, which it is shaking off slowly (although faster in the rapidly developing districts in the south of the city).

And, for the first time, there is a general loosening of the purse strings and real signs of a willingness to take on debt among the local people.

This makes it an excellent candidate for the 200% Club - but this might be acheived over 7 years but at least it will be almost without any currency risk!

Cheers
Neil

This isn't the end of Max Growth goes in search of the best investment opportunities, far from it, but Neil is now on a short break. The search, however, will continue!

Please join in by commenting on the blog, giving your opinion on his findings. Neil is also keen for you to leave your candidates for entry into the 200% Club - is there somewhere you think has the potential for 200% property price growth in the next five years? We want to know about it!

» Click here to read all of Neil's updates from his search...