Amid everyday reports about negative performance of the Bulgarian Stock Exchange (BSE) and the over-supply in Bulgaria real estate sector, real estate companies have shown lower price volatility during the first quarter of 2008 and have turned into a safe haven for investors, a report published by Focal Point Investments (FPI) on July 28 said.
As a result of the slight decline, most Real Estate Investments Trusts (REITs) were attractively priced. As the report shows, prices of Bulgarian equities registered dramatic declines in the first quarter of 2008. “The poor performance coincided with the falls in stock prices around the world and the negative developments in the credit sector. Sellers were particularly active in January and March.”
The big difference in the performance of real estate equities and other companies on the BSE can be seen in the performance of two of the BSE’s indexes through the year: the BG-REIT index, tracking the performance of real estate investment trusts on the BSE, and the Sofix index, which includes the 19 most liquid stocks on the BSE.
According to the report, the total market capitalisation of BG REIT companies declined by four per cent while the companies included in Sofix lost 30 per cent and the BSE’s total capitalisation decreased by 19 per cent.
Despite the 23 per cent decrease in BSE’s turnover, many REITs remained actively traded. Some companies even had a triple-digit increase of trading volumes for the quarter.
Liquidity of shares in Bulland Investments and Agricultural Land Fund Mel Invest increased the fastest. Elana’s shares were the most actively traded, while Bulgaria Real Estate Fund, FairPlay Properties, and Park showed lower trading activity.
However, in the end, the total decline of stocks on the BSE did not leave REITs unaffected, and just two REIT companies increased their capitalisation in January-April. These were Elana ALOF and Benchmark REF.
As a result of the stable prices, there were minor changes to REITs’ Price/Earnings ratios in the first quarter of 2008 despite the BSE decline. “This multiple is somewhat distorted by the different stake of revaluation revenues in REITs’ net income,” the FPI report said, adding a key point, “there are substantial differences in the accounting policies of Bulgarian REITs regarding revaluation of properties, which makes comparisons of book values very difficult. For example, companies that have agricultural land security have extremely high revaluations, while the investment assets of holiday apartments owned by Fairplay Properties REIT are accounted at cost until the properties are actually sold.”
When compared to the performance European real estate companies, Bulgarian REITs proved to be indeed one of the few exceptions on the European market.
“Prices of European real estate companies showed much higher volatility and their prices fell significantly for the quarter. They were hit by the downtrend on the Spanish housing market, the liquidity crisis and the dwindling yields in Central and Eastern Europe,” FPI said.
Foreign real estate companies have investment focus on office and retail properties and were hit by the credit crisis and the resulting increase in interest rates for real estate loans. At the end of March 2008 most of them seem attractively priced in terms of key financial ratios. On the other hand Bulgarian REITs were slightly affected by these developments due to their operations entirely on the local market and investments mainly in agricultural land, leisure and residential properties. “Moreover, real estate yield in Bulgaria is still high and rising interest rates didn’t cause a negative effect. The low volatility of Bulgarian real estate companies turned them into a safe haven for investors during the present market turmoil,” FPI said.
