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The Upside Of A Crisis
Banks in Bulgaria are starting to reap the benefits from the global financial turmoil. Within a risk-averse environment, they are increasingly looking as the lesser evil to investors on the lookout for financing.Bank loans – a first for REITs
In a latest swing of developments, a score of real estate investment trusts (REITs) announced that this year they would be turning to banks when seeking funds to finance their projects.
Previously, the investment source for REITs was always the capital market, analysts noted.
Prime Property BG, a company investing in residential and office developments in Sofia and countrywide, will avoid the bourse for the first time ever and finance 70 per cent of its 64 million leva project with a loan from a local lender, the company’s chief executive Borislav Stoyanov said at a news conference last week. The project - Business Park Plovdiv - will be among the largest mixed-use developments in Bulgaria’s second largest city.
Experts attributed the change in REITs’ source-of-financing preferences to poor conditions on the bourse, the bearish mood seen for seven months now. Fearing the downswing will persist, stock market players are reluctant to pour in new resources to the bourse, rejecting any REITs’ bond or equity offers, analysts argued.
Last week, Fairplay Properties, whose capital hike secured a mere 60 per cent of planned proceeds, said that they would also resort to borrowing from banks if extra money was needed.
The shift of public companies toward loans is a complete U-turn from the norm last year. Until autumn 2007, all new REIT equity would be snapped, despite the high prices, by small and institutional investors alike. Because of the enduring bullish sentiment, new issuers would sell the stock at a price higher than originally projected and, respectively, boast about proceeds that surpassed even their expectations.
Banks win over mutual funds…for now
The capital market lull brought a win for local banks not only on the lending side, but on the borrowing as well. Alternative investment schemes – mutual funds, among others – witnessed an outflow of clients and money since the turn of the year. Bourse declines resulted in low to negative returns for mutual funds, and retail investors – the most likely to leave on negative developments – started fleeing balanced and high-risk offerings first.
Figures speak for themselves. The total value of mutual funds alone decreased from about one billion leva as of December 31 2007 to 673 million leva at end-March to 626.7 million leva as of last week, according to data from the Bulgarian Fund Managers Association.
Statistics show that the bulk of the withdrawals flowed into banking deposit products. As the tightened purses of international lenders and highly-priced financing have also hit banks, they opted for ‘drawing’ funds locally to influence growth. This decision sent deposit interest rates to an all-time high, much to the delight of small investors.
The trend was reinforced with the offer of greater variety and more flexible deposit products. Next to standard and term deposits, new savings products now allow for the withdrawal of funds at any time, advance withdrawal of interest and zero fee on opening a savings account.
So the strong points of mutual funds - high liquidity and returns – were beaten by the attractive new deposit offerings of banks.
The end result was that the value of deposits grew by 30 per cent on the year to 20 billion leva at end-February, data from the Bulgarian National Bank shows.
Many capital market analysts, however, argue that retail investors would – at the end of the day - lose out on savings migration. In the long run deposits would eventually generate lower return than mutual funds, they said.
While deposits were unlikely to cover even inflation with the average annual interest rate between five and seven per cent, mutual funds would benefit from the expected upswing on the capital market.
Returns on mutual fund investments would be even more pronounced if investors extended their investment horizon past one year. Currently, most investors commit funds for no more than several months, which does not even cover a single investment cycle at the Bulgarian Stock Exchange, analysts said.
Time will tell whether analysts’ forecasts will prove true; nonetheless, banks are the winner of the day both on the borrowing and lending side for now.