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Bulgarian Property Developments ("BPD")
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BPD is a new fund with a mission to invest in Bulgaria. Established recently with £1.2 million plus of seed capital from a handful of wealthy private investors, the company is now seeking to round out its capital to £3-5 million as part of an exercise which should lead to it taking an Ofex quote before year end.
Ivo Hesmondhalgh is one of two of the founders. He has a background in property, mostly in the UK where he has managed small scale property investment schemes for EIS and BES companies. Some months ago, he was asked by one of his friends, the head of a large global hedge fund, to travel to Bulgaria to investigate property related opportunities in that country. The visitors were encouraged by what they saw.
During the trip, they met Philip Pashov, a Bulgaria who had worked in various governmental departments, dealing with Tourism and attracting foreign investments. The two hit it off, and with the prinicipal backing of their hedge fund friend, decided to launch a new company focussed on property opportunities in Bulgaria. Ivo will be involved in the fundraising, the strategy, and the final selection process. And Philp Pashov, will use his Bulgarian contacts and knowledge of the local scene to source opportunities. There are also two high profile Brits, as non-executive directors to assure smooth corporate governance.
I found Ivo's views on prospective growth were somewhat less bullish than others I have interviewed. He said that the days of 30% per annum growth in property values were ending. He remains upbeat, citing a collection of reasons: low prices, location within the EU, a motivated and educated workforce, and the likely stream of future development aid, why Bulgarian property values should continue to rise in the medium to long term. A "double or triple over 6-7 years" would not surprise him, but the rate of increase, he thought, was slowing down to a more sustainable 10-15 percent per annum. Signs of a slowdown were already evident in the commercial sector, where rents have stagnated over the past 12 months, due to an excess supply of new properties around the ring road.
BPD's approach is to focus on a niche: warehouses and distribution, which has not been overbuilt, and which is expected to show promising returns in the years ahead. As to location, they intend to focus on Sofia, and possibly the ski areas. The large number of new developments on the Black Sea, and uncertainties of locking in rental returns on seasonal resort investments, makes the coastal area less attractive. Varna has good potential, but more in its central city, not its resort areas. (More about the company's focus in the Prospectus, see below.)
The biggest challenge for the company at this stage is raising capital. They are fortunate, in that they already have sufficient commitments to move forward and get the Ofex quote, but their economies of scale will improve dramatically if they hit their £3 million target. The company charges a management fee of 3%, so at the £2 million level, it pays only £60,000 annually. It also pays out a share of profits of 20%, but this will only be paid when realised, and so may be years away. Fortunately, in case the growth is slower than they anticipate, his other UK property activities should provide sufficient income for Ivo to keep his overall management business healthy.
Not surprisingly, Ivo believes that an ideal first investment for someone interested in Bulgaria investments would be to take shares in a fund like BPD. If someone buys property by himself he has the problem of finding good value in an unfamiliar market with a different language and alphabet, the need to rent and manage the investment, and the hassle of setting up a Bulgarian vehicle, since non-Bulgarians are not allowed to own land directly. The Fund structure solves these problems and gives economies of scale.
The experience and contacts of management will also help reduce the risks. Apparently, it is not unusual for Bulgarians to bump up their asking prices by a factor of 50% or more, when they discover that a foreigner wants to buy. There may also be some capital gains advantages when a UK resident buys BPD shares, and holds them, and then sells them as an Ofex or AIM quoted shares. Incidentally, an AIM quote is something that will be seriously entertained, when company NAV approaches £10 million, says Hesmondhalgh.
Best capital gains, Ivo reckons, will come from land investments. And this is where the local expertise will be critical, since many Bulgarians are wary of selling to foreigners. BPD expects to announce a significant land acquisition soon, and this would boost its immediate prospects, since the land will be suitable for almost immediate development. Further out, they want to achieve a healthy balance between land and income generating properties. While land may generate stronger gains, it costs money to carry it, and the yields on a warehouse oor distribution centre could carry the land investments through the months needed to assemble attractive land packages, and/or through to development.
It will be interesting to see how the stock market rates the BPD opportunity, since Bulgaria is certainly a hotspot for direct property investments. Those who seek to invest should know that there is a £5,000 minimum subscription, and the price is being held at 50P a share, the same level as management and founder investors have paid. And they will not need to wait forever to see a dividend. The company plans to payout 1/3rd of their distributable profits after year three.
To gain a copy of the Prospectus, or to learn more, Ivo Hesmondhagh can be contacted at the email or phone number given above at left. Or alternatively, Donald Mackinnon or Ken Vere Nicol at Matrix (phone: 0207- 734-8334) |
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