Mention the name of Chris Bennett in front of an investor in business properties or anyone who brokers such deals and watch their reaction. The odds that they will not sit up and listen carefully are close to zero, but if you run into an exception to this rule, tell them that he is the man from Europa Capital, the fund manager that last year raised 750 million euro for investment in real estate, of which 150 million was for deals in Eastern Europe. Even if the people you are speaking to have never heard the name, they will likely give you their full attention, given the complete drought of deals since the start of the year and the high cost of borrowing.

The fund itself is attracting interest because over recent months, its representatives have been busy scouting out investment opportunities in Bulgaria and are even on the verge of closing their first deal. The good news is that it will most likely not be the last and the even better news is that Europa Capital is not the only potential buyer on the market.

Deal or no deal
Kapital sources say that Europa Capital is actively looking at potential investment openings, but for now the only advanced talks are with Balkanstroy Holding. The prospective deal is for the holding’s building on Bulgaria Boulevard in Sofia, to which Dutch financial group ING moved its Bulgarian headquarters in June.

Balkanstroy executive director Nikolai Kaloyanov has declined to comment on the details of the negotiations, saying the company signed a confidentiality agreement with Europa Capital. Bennett, who is an independent director at Europa Capital Emerging Europe, could not be reached for comment.

People familiar with the deal said that the negotiations were about yield levels of about 10 per cent and the price offered for the few empty offices in the building was for a monthly rent of 14.5 euro for a square meter. The deal is expected to be worth about 14 to 15 million euro.

Europa Capital has looked into several projects for commercial parks. For now, the most active negotiations have been centred on Retail Park Veliko Turnovo, one industry source said. The focus of the talks is not a traditional purchase, but a joint expansion of the project.

The money people
Europa Capital’s fund is not the only one looking at the Bulgarian market. Greek fund Bluehouse Capital, which recently raised 190 million euro for investment in the region, is also close to finalising a deal, sources said. Unlike Europa Capital, it would not be the fund’s first investment in Bulgaria. The fund’s portfolio in Bulgaria includes one of the buildings in Business Park Sofia, a residential project in Boyana, acquired from Equest Balkan Properties, and the Greenville Hotel in Sofia, bought from Fairplay Properties real estate fund. The fund’s other assets in Bulgaria are two smaller office buildings.

Odessa Investments, which recently closed the deal to buy Kambanite Business Centre, home to Hewlett-Packard’s Bulgaria headquarters, is also on the lookout for more deals.
Investment consultans say that several Israeli funds are also active on the market, but are interested in deals below the market average. At the same time, they are also more flexible and do not insist on the buildings being top-class.

What investors want
One of the reasons why there have been no deals over the past year is clear – the global recession, naturally. In Western and Central Europe, there are attractive offers for the sale of business buildings rented by big-name companies. Logically, large institutional investors have turned their attention there, turning their backs on the markets of Bulgaria and Romania. Those investors that had created funds to invest in the region during its better times are still around and casting their eyes about. Additionally, there are some active Bulgarian investors and more risk-taking international companies.

Investors are mostly interested in office buildings, real estate consultants say, the reason being is that retail centres are not a stable enough segment. Office building tenants are often subsidiaries of bigger international companies, while in malls and shopping centres, the customers are either small retailers or relatively small Bulgarian or Greek franchisees.

For any deal to go through, at least 90 per cent of the leaseable space should be rented out, even better if the rental contracts are for a period of 10 years. A large number of parking spaces and a good location, either on a key boulevard or in the centre, are desired. The fewer companies rent spaces, the better – ideally, one or two companies renting the entire building.

All investors are interested in revenue-generating properties, but there the choice is limited. Most of the sellers are Bulgarian companies that built the properties and who had little idea about what investment funds are interested in, who did not sign long-term leases with any clauses stipulating damages if the contract is terminated early.

"Sellers in Bulgaria have to keep in mind that right now foreign investors are comparing the yields on offer here to those of similar properties in Western Europe, where rental contracts are for much longer terms and there is a functioning judiciary," Mihaela Lashova, investment sales manager at real estate consultancy Forton, said. There was plenty of demand on the market, but little supply that met the requirements of prospective investors, she said.

Property consultants said that the returns sought by buyers were in the 10 to15 per cent annually range, compared to between seven and nine per cent a year earlier. Expectations are that deals now being negotiated would be closed in the autumn, but no one expected record values or an avalanche of deals.

"Most likely the deals that will be announced will be few, two or three, and will be worth between 10 million euro and 20 million euro," Lashova said. Some funds, more willing to take risks, could embark on a strategy to buy many small properties, diversifying their portfolios and minimising the risk. One advantage of such an approach would be the improved odds of securing bank financing. Yet other funds are not even looking at projects estimated at less than 10 million euro to 20 million euro.

Kapital weekly, issue 29