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Bulgaria's real estate trusts lure investors to the Black Sea

Date: 10.11.2005

Financial Times


Popular television programmes have encouraged thousands of UK investors to buy a holiday apartment on Bulgaria's Black Sea coast or at a ski resort for half the price of a similar property in Spain.

But the country's fledgling real estate market is moving beyond the second-home construction boom.

Bulgaria, which is due to join the European Union by 2008 at the latest, has launched eastern Europe's first US-style real estate investment trust (Reit). These trusts are tax-friendly property funds that have to pay out most of their income to shareholders. The aim is to broaden and deepen the real estate market.

Already well established in France and Turkey, Reits are likely to be introduced as early as next year in the UK and Germany. In both countries, concerns about possible tax losses have delayed the legislative process.

Reits may be listed or non-listed, and are not liable for corporation tax. Tax is only paid on the shareholders' dividends.

Bulgaria's finance ministry has opted to give up tax revenues in favour of persuading investors to accept professional management of real estate assets. Its Reits legislation, part of financial market reforms launched by a liberal government, is based on similar frameworks in the US and France.

"As long as the appetite is there for people to buy these things, one of the attractions for government is that you create transparent and free-flowing equity in and out of property markets," says Mike Prew of Citigroup.

Bulgaria's fledgling Reits market is still too small to attract attention from big international players. But Reits have become popular with Bulgarian pension and mutual funds, as well as increasing numbers of retail investors, according to local brokers.

The 10 funds listed on the Sofia stock exchange have a combined market capitalisation of around Lev100m, equivalent to about 1 per cent of the bourse total.

"Reits are a bridge between the capital market and the booming real estate market. It's a narrow one for the time being but this is just the start of the process," says George Draychev, the bourse executive director. Another six Reits are preparing to list, he says. The sector has gained 44 per cent this year, with daily trading volumes sometimes exceeding Lev2m.

"These funds give good downside protection because of the real assets they hold," says Vassil Karavainov of BAC-IP, a Sofia-based investment group. The two biggest funds, Prime Property and Bulgaria Reit, both with net asset values of about Lev20m, have already attracted strategic investors from abroad.

Immoeast, a subsidiary of Austria's Immofinanz which has more than ?500m of investment in central and east European real estate markets, acquired 42 per cent of Prime Property earlier this year. Prime Property was set up as a joint venture between Israel's TBIH, which owns pension funds in Slovakia and the Balkans and Balkan Advisory Company, a Bulgarian investment banking firm.

"Asset prices in Bulgaria are lower than central Europe, so there's a decent amount of room to grow," says Alex Bebov, portfolio manager at Prime Property.

Estonia's Hansa Bank and Danski Bank of Denmark have both taken stakes in Bulgaria Reit, which was set up by First Investment Bank, a Sofia-based private bank.

Todor Breshkov, the chairman, says the fund decided to build a broad-based portfolio, including agricultural land and sites for industrial development "because in a small economy like Bulgaria it's risky not to spread the investment".

The local construction industry's focus on resort developments means that, in contrast with Reits elsewhere, Bulgarian vehicles allocate funds for residential as well as commercial and retail investment.

"Property development in Bulgaria will continue to be based mostly on coastal and ski resorts. But there's growing demand for modern commercial and office space in Sofia and other cities," says Robert Jenkin of Bulgarian Dreams, a UK-based property company with resort projects on the Black Sea coast and office developments in Sofia.

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