Funds Turn To Developing Own Projects Report

The Eastern European real-estate sector on the London Stock Exchange's alternative investment market (AIM) was so complicated, it could be "deemed a specialist subject on mastermind," Investors Chronicle magazine reported in an article named Broken Eastern promises.

There were too many companies on the market, often with confusingly similar names, and many more that have vanished without a trace after failing to raise capital.

"For every one that made it to the market, there's at least four that were stillborn," Blue Oar Securities' real-estate analyst Ian Wild said, as quoted by Investors Chronicle. "Far too many were done far too quickly."

About nine billion pounds sterling have been raised on AIM for real estate since 2005, mostly for for overseas property funds. Of the total 12.25 billion pounds sterling current market capitalisation, those focused on eastern Europe accounted for 17 per cent, according to the report.

In the early days, investors bought into property funds targeted at emerging economies with booming gross domestic product (GDP) growth that was expected to not only attract business, but also fuel consumer and residential demand. For the accession states poised to enter the EU, the prospects of yield compression were even greater. This led to a slew of AIM floats focused on Bulgaria, Romania and the Balkans.

Today, only a handful of these funds bother paying to list themselves in the Financial Times register, Investors Chronicle said. Eight stocks picked by the magazine - Equest Balkan Properties, Bulgarian Property Developments, Bulgarian Land Development, Fabian Romania, Engel East Europe, European Convergence Property Company, Lewis Charles Sofia and Black Sea Property Fund - have fallen by 37 per cent, creating a average discount to net asset value of 35 per cent, which has attracted activist investors to the sector.

Funds found their golden mine in the commercial sector, while the residential sector “has a unique set of problems”, according to Investors Chronicle. Investment vehicles originally launched with investment purpose consequently have turned to developing own projects. The vogue of shifting to development increases the investment timeframe, which could also lead to a reduction in what valuers believe developments are worth.

Established developers, such as Dawnay Day Carpathian, Plaza Centers and Atlas Estates, which have projects spread across the region, had little to fear about, since they had assets where development had been completed. But for newcomers looking for money to fund their projects, starting a tandem listing in a local market could become a new trend, the magazine forecast.

Investment vehicles originally launched with investment purpose consequently have turned to developing own projects. The vogue of shifting to development increases the investment timeframe, which could also lead to a reduction in what valuers believe developments are worth.