Bringing investors together is the essence of a Real Estate Investment Trust (REIT), says Martin Zaimov, chairman of PARK REIT. PARK REIT was one of the first such investment vehicles, registered in Bulgaria in 2005, and his experience lends Zaimov much to share about the trends and future of the market.

A REIT operates as a mutual investment scheme for real estate and the raising of funds for real estate through the issue of securities. The year 2006 was very successful for REITs in Bulgaria. At the end of 2006, the Financial Supervision Commission issued more than 20 licences for REITs, bringing the total close to 40. Zaimov sees the high level of interest in REITs as natural.

 “In 2005, when we started, it was not like that,” he recalls. “Sometimes it takes a while for people to grasp something and take an interest in it. It is very rare that a new vehicle attracts attention immediately.”

One might argue that REITs’ relatively low tax on dividends of 7 per cent is the reason for the great interest in REITs, but Zaimov disagrees.
“The tax on dividends in Bulgaria is similar to that in other EU countries,” he says.  “Actually, I think that the absence of corporate income tax is the real reason for the interest in REITs.”

Another advantage is the simplicity involved in establishing a REIT compared to setting up a normal company. If you want to bring together investors of varying scales and capacity with a range of financial possibilities, a REIT is well suited to be your financial vehicle of choice. And, it offers non-professional investors a simpler way to invest.

“It is a liquid investment; it is fashionable and recognisable by investors and is a fairly professional business, meaning that it is well regulated,” Zaimov says. “I admit that since the number of REITs has increased considerably in 2006, it has become much more difficult for us to attract new capital, but personally I love competition.”

As is true for any other business, identifying successful and profitable projects is the main challenge facing the sector, says Zaimov. Surprisingly however, he is not campaigning for a change to the regulations or the legislation, as has become very fashionable in most other sectors of Bulgaria’s economy.

“Wanting a change to regulations is more of a habit for people who are not in the business, maybe because they are not in the business, rather than people who are in the business, who are just getting on with what they want to do,” he says.

Looking at the records of Sofia Stock Exchange, one can see that REITs indeed have been en vogue last year. But are they about to go out of fashion?
“For 2007, I can say that the interests in REITs will decline,” Zaimov predicts. “Usually, it takes people a year and a half to see how other people have done something and to take advantage of it themselves. In 2006, this is what happened in Bulgaria, and in 2007 the market will calm down.”

Behind a successful REIT stands the money of investors, and Zaimov is keen to talk about ratios and the origins of investors in Bulgarian REITs.

“Let’s make one thing clear: when we talk about investors, we should make a distinction between the number of investors and the volume of investors,” he says. In terms of size of investments, Zaimov says that physical investors in Bulgarian REITs represent roughly no more than 15 per cent. In terms of volume of investments, non-professional investors are far behind institutional ones.

For example, in PARK REIT, physical investors represent no more than 10 per cent of the total value of the capital of the fund, Zaimov says. As for the ratio of domestic to foreign investors, Zaimov says that both types usually invest through intermediaries, and it is difficult to say where the money behind the investment comes from.

“I think 30 to 35 per cent of the investments would be of foreign origin one way or another,” he ventures.

Sometimes, a domestic investor would present himself as of foreign origin, for the tax benefits. If, for example, an investor based and registered in another EU country invests in Bulgaria, he could avoid payment of tax in Bulgaria if Bulgaria has signed a treaty on avoidance of double taxation with the country. This could make REITs suitable for avoidance of tax.

 “There are many ways to optimise tax, and investing in REITs is a valid and completely legal way to do so,” Zaimov says. “It is true that an investor based in another EU country could avoid or not pay tax on dividends in Bulgaria. However this does not mean that he would not to have to pay tax in the home country.”

At the end of 2006 Bulgarian Parliament cut corporate income tax to 10 per cent, making it one of lowest rates in EU.

“This just made REITs proportionally less interesting but certainly it was not a loss for us or for any other investor in REITs,” Zaimov says. “It is just the opportunities for others have been increased.”

Another change in legislation last year allowed pension funds to invest up to 5 per cent in a REIT’s capital. Zaimov expects that this change will have an impact on the stock exchange in general and presumably on the ability of REITs to raise capital as well.

PARK REIT itself plans to raise its capital from 5.2 million leva to 10.4 million leva. On January 9, the procedure of selling PARK’s rights was successfully completed. The money will go to PARK’s business complex project in Sofia’s Goroublyane neighbourhood.

Though distinguishing is difficult, Zaimov says it matters whether you have only foreign or only domestic investors in your portfolio as a company.

“When you are dealing with a complicated investment, you prefer professional investors, “ he says. “When you are willing to take a risk at the expense of the investor, you would prefer less professional investors. Sometimes when the investment is simple, you also prefer having fewer professional investors. Diversification reduces risks, but it also reduces potential for returns, so it is a question of risk versus return or the appetite for risk.  As for Park we are trying not to take risks that are not transparent and most of our investors are professional investors and we feel very comfortable with that fact.” 

Leadership
Martin Zaimov, Chairman of the Board of Directors
Maria Ivandjikova, Executive Director
Mihail Zaimov, Procurer

Assets and Investment Projects
PARK REIT invests in real estate, with the goal of building a diversified portfolio that brings a stable income to shareholders. Investments are directed to two holiday properties on the Black Sea coast, one residential gated community in Sofia and a business centre, also in Sofia.

Villa Park
Villa Park is in Santa Marina Residential village, which is on Bourgas bay. The resort is 32km south of Bourgas and includes more than 1000 apartments, a hotel with 250 rooms, 3 pools, restaurant and entertainment centres. Villa Park has 6 apartments and 10 studios on a total actual gross area of 1200 sq m. The total investment for the acquisition of land and construction of the building amounts to EUR 721 300. The funding is a joint venture with FairPlay International JSC, whereas the distribution of return is 55 per cent to 45 per cent in favour of PARK REIT.

Yunets
PARK plans another holiday development in Yunets, where it has bought a plot of land with a total area of 25 381 sq m.

The Yunets village is 40km south of the city of Varna and 2km from the main road connecting Varna and Bourgas. The nearest seaside village is Byala. The direct distance to the seashore is 5km, where Shkorpilovtsi village is located.

The actual gross area is 10 000 sq m. The expected cost of construction is about E 300 a sq m and the expected sale price is EUR 500 a sq m.

Malinova Dolina
PARK acquired a regulated real estate in Sofia’s Malinova Dolina, with total area of 879 sq m at the  price of EUR 900 000. The company plans to construct a closed housing estate with actual gross area of 15 000 sq m. The expected cost of construction is about E 400 a sq m and the expected sale price is EUR 800 a sq m.

Tsarigradsko Shosse
PARK REIT is in a process of acquiring regulated real estate in Sofia, Mladost residential area, complex Gorublyane, near to Tsarigradsko Shosse. The property’s area is 4275 sq m and the acquisition price is EUR 2 800 000. The REIT plans to build an office building with several showrooms on the ground floor with actual gross area of 15 000 sq m. Construction is projected to begin in April 2007 and to end in August 2008.

After the completion of these projects, PARK’s investments will be distributed as shown in the chart below.

Financial Results
The expectation is that the average return on investment in the next two years will exceed 80 per cent annually. The largest share of profit will be due to property sales, with income from rentals growing after the completion of the projects in Malinova Dolina and Tsarigradsko Shosse.