14th Mar 2005 08:02
Black Sea Property Fund Limited14 March 2005 14 March 2005 THE BLACK SEA PROPERTY FUND First Day Dealings on Alternative Investment Market £50 million raised The Black Sea Property Fund Limited (AIM: BKSA), the residential propertyinvestment fund specialising in Bulgarian properties, is pleased to announce itsflotation on the Alternative Investment Market of the London Stock Exchange ("AIM") today. A summary of key points follows: The Fund • The fund was set up to invest in early stage vacation property inBulgaria • The fund will focus predominantly on opportunities along the BulgarianBlack Sea coastline and in the ski resorts • The fund will invest "off-plan" where early stage, wholesaleacquisition offers the potential for significant returns • The fund has secured options over c.1,300 seafront properties to bebuilt in 3 separate schemes along the Black Sea coast. Under the terms of theoptions the fund will pay an average purchase price of €480 per square metre,representing a discount to open market value of c.50%. The fund will pay adeposit of 20% of the discounted purchase price upon exchange (with the balanceonly payable upon physical completion of the properties), thereby generatingsignificant debt free gearing • Tourism in Bulgaria is forecast to grow from c.4 million in 2004 toc.11 million in 2020 Flotation Statistics • The fund is fully subscribed at £50 million by the issue of250,000,000 shares of 20 pence Melvill Trimble, Chairman of the Black Sea Investment Fund, commented: "The Board believes that the Bulgarian property market represents an investmentopportunity with great potential. We are delighted with the response to our fundraising and look forward to reporting on our progress as we continue to developa profitable property portfolio." For further information, please contact The Black Sea Property Fund Andrew Gardiner / Tom Pridmore /Andrew Mitchell 020 7399 4270Buchanan Communications Charles Ryland / Isabel Podda 020 7466 5000Collins Stewart Alan Geeves 020 7523 8800 THE BLACK SEA PROPERTY FUND LIMITED (an investment company incorporated in Jersey with registration number 89392) ADMISSION TO TRADING ON THE AIM MARKET Offer of Shares at 20 pence per share Manager and Promoter Development Capital Management (Jersey) Limited Lead Distributor, Nominated Adviser and Broker Collins Stewart Limited Cash / Fixed Income Manager F&C Management Limited No public offering of the Shares or Units in any jurisdiction is being made. Noaction has been taken or will be taken in any jurisdiction that would permit apublic offer of the Shares or Units in any such jurisdiction where action forthat purpose is required, nor has any such action been taken with respect to thepossession or distribution of this document. Persons into whose possession thisdocument comes are required by the Fund to inform themselves about, and toobserve any restriction as to, the Offer and the distribution of this document. KEY INFORMATION The Fund • The Fund offers a unique, listed opportunity to invest in theBulgarian property market and more particularly properties, predominantlyholiday apartments and villas, to be built along Bulgaria's Black Sea coastline.The Fund will, however, have the flexibility to invest in residential propertyelsewhere in Bulgaria if suitable opportunities arise. Its objective is toprovide Shareholders with a high level of long-term capital appreciation. • The Fund is issuing sterling denominated Property Shares. • The Fund will have the ability to invest up to 20% of its assets (at the time of investment) in land, and in property-backed and joint venture projects (which could include ski resort and golf course projects) with local and other partners (including banks). Investment strategy • The Fund will invest ''off-plan'' i.e. it will contract to acquire residential properties that are not yet built, by committing to pay a discounted purchase price, on a future date, once the properties have been completed. • Early stage, wholesale, off-plan investment offers the potential for significant returns (while also affording a degree of protection against any future downturn in capital values). Designed to capitalise on an underdeveloped and rising market • The Black Sea property market is evolving and forecast to experience continued capital growth over the planned life of the Fund's property investments (source: Colliers International), reflecting Bulgaria's improving economic position and demand from overseas buyers. Despite recent increases, prices remain considerably lower than in other parts of Europe, owing principally to the following factors: - Prices have historically reflected the purchasing power of Bulgariannationals-GDP per capita is considerably below that of other European nations. - Mortgages were not widely available in Bulgaria before 1997 and thefledgling market still only offers a limited range of products at a relativelyhigh cost of borrowing-and only to Bulgarian nationals. - Restrictions on the foreign ownership of property have deterred overseaspurchasers. • Not only is the Black Sea property market forecast to grow from a relatively low base, it is also expected to experience increasing demand, as a result of the following factors: - Tourism has grown strongly in Bulgaria, particularly along the Black Seacoast, and is forecast to increase from c3 million in 2002 to c11 million by2020 (source: World Tourism Organisation). - Bulgaria's political and economic transformation of the last decade hasbeen dramatic and is expected to result in Bulgaria joining the EU in 2007-attracting increasing foreign direct investment and leading to an improvement inBulgaria's infrastructure and appeal. - Prior to or upon its accession to the EU, Bulgaria is expected to removeits existing restrictions upon the foreign ownership of property, harmonisingits laws with the rest of the Union. Foreign purchasers have already causedprices to rise and are likely to have a greater impact once the restrictions arelifted. • The ability and willingness of Bulgarian banks to finance residential development has increased significantly over the last 3 years. Consequently, there are a greater number of developers seeking to build a greater number of properties than at any time in the past. Owing to the relatively underdeveloped state of Bulgaria's financial markets, however, many developers are restrained by their limited access to debt and/or equity finance to fund new schemes. • Following consultation with both lending banks and developers operating in Bulgaria, the Property Investment Adviser believes that developers will be able to obtain more advantageous financing terms should they sell part of a scheme to the Fund concurrent with arranging funding-thus enabling the Fund to negotiate considerable discounts to Open Market Value and enabling developers to acquire and build-out pipelines more cost effectively. • The Bulgarian off-plan market, like the Bulgarian residential market, is relatively underdeveloped compared, for example, to that in the UK. Similar principles apply but there are a number of key differences, which the Fund will seek to benefit from. - The deposit required upon exchange of contracts is higher in Bulgaria (10%-30%), compared to the UK (5%-10%), limiting the ability of small-scale, amateurpurchasers to invest. - There are very few Bulgarian off-plan investors (the concept of buy-to-letdoes not exist) and far fewer international investors with sufficient expertiseto source investments in Bulgaria than in the UK. - UK developers seek to generate an average profit margin of between 20% and30% (subject to the relevant land acquisition price). In Bulgaria, owing to therelatively low cost of land, materials and labour, development profit marginsmight range between 100% and 300%-thereby enabling developers to grant largerdiscounts. - It is more difficult to gain access to the lending banks and developers,and therefore source investment opportunities, in Bulgaria than in the UK. TheFund will source deals via its Property Investment Adviser and its contacts inthe region. - Without strong forward sales, banks will typically only lend between 60%and 80% of building costs, which should increase the willingness of developersto sell to bulk institutional purchasers such as the Fund. • The discounts to Open Market Value to be obtained by the Fund will vary, deal by deal, depending upon a number of factors, including: - the number of properties purchased as a percentage of the entiredevelopment; - the length of time to completion; - any overage arrangement agreed with the developer, under which it mayshare in profits above agreed thresholds; - the size of the deposit; - the individual circumstances and financing requirements of the developerconcerned; and - market sentiment and macro economic prospects. The Bulgarian Black Sea coast • The Bulgarian Black Sea coast is enjoying a boom in tourist demand. It enjoys a mild and pleasant climate. The average summer air and sea temperatures are 22degreesC and 25degreesC respectively. There are more than 240 hours of sunshine in May and September and more than 300 hours in July and August. Rainfall is low and the beaches are clean (8 EU Blue Flags). • Low cost flights are becoming available to tourists visiting Bulgaria. British Airways and Bulgaria Air currently fly direct to Sofia. In addition, there are a number of carriers including Malev (the Hungarian carrier) and Czech Airways which operate indirect flights to Sofia. There are also direct charter flights to Varna, the country's third largest city and major Black Sea port. Bulgaria's political and economic transformation • Bulgaria's recent political and economic transformation has been dramatic. Only 6 years ago, following the fall of Communism in 1989, the country was still struggling to come to terms with its new free-market economy. The transition to a democracy had been difficult, hampered by political instability, corruption, a banking collapse and hyperinflation. Since 1997, however, with both international support from bodies such as the EU, IMF and World Bank and disciplined government, Bulgaria has emerged as a viable, new investment market. • Though the political landscape is still evolving, all political parties are united by a common commitment to EU accession in January 2007. This common goal has effectively determined the political and economic agenda for the next 3 years and means that, with the attention of the international community focused upon it, Bulgaria's progress is unlikely, in the Manager's view, to be de-railed. • With substantial funding available, a balanced budget, a privatisation programme promoting increased foreign investment and a strengthening economy, Bulgaria offers attractive investment opportunities and the prospect of strong investment returns over the next 5 to 7 years. Initial investments • The Manager has secured call-options in respect of c1,300 properties to be built within three separate beachfront schemes in or near the Black Sea towns of Obzor, Shabla and Kavarna. The aggregate deposit payable on exercise of these options would be a minimum of €9.3 million, representing c12% of the gross assets to be raised on issue of the Property Shares. • Pursuant to the call-options, the Fund will pay a price of €480 per square metre (increased in line with Bulgarian inflationary measures in the case of the Shabla and Kavarna developments), representing a premium to build costs of c20% and an approximate discount to Open Market Value of 50%. Under the terms agreed, the Fund will retain the first 20% of any profit generated above the Fund's purchase price and 30% of any profit generated thereafter, with the balance to be paid to the developer. • Based on an aggregate deposit by the Fund of €9.3 million (20% of purchase price) paid upon exchange of the three options, were the Fund to sell the properties prior to completion for an aggregate price of €1,000 per square metre, it would generate a gross profit retained by the Fund (before tax and costs) of €22 million. This statement should not be taken as an indication that the properties will be sold at the stated price or at all. • The Property Investment Adviser has had discussions with developers of two other Black Sea coast developments where the developers would, in principle, be willing to enter into similar arrangements with the Fund. Natural gearing on discounts • The Fund will be ''naturally'' geared because it will gain exposure to property by paying percentage deposits. This gearing, which will be substantial, both increases the risks of investment and enhances potential returns (see Part IV entitled ''Risk Factors''in the prospectus). • On exchange of contracts, the Fund will typically pay a deposit of between 15% and 25% of the discounted Open Market Value. It will then seek to use this natural debt-free gearing, as well as the discounts it achieves, to generate capital gains by selling-on properties without ever completing. • A property bought off-plan might change hands several times before completion. Having bought early, the Fund will not necessarily seek to crystallise the entire discount on a property by waiting until just before completion to sell. It may choose to sell properties at different stages throughout the development process-in the earlier stages to other professional investors, later on to companies or institutional portfolios who might require apartments to let and, nearer completion, to owner-occupiers (or long-term investors). Maximising profits while minimising risk • The Fund has three investment principles designed to ensure effective risk management: Principle 1-the ability to let The Fund will primarily acquire beachfront properties within 1 hour's transferfrom either Varna or Bourgas airports on the Black Sea coast, which, oncecompleted, will be suitable for letting (typically holiday apartments andvillas). Principle 2-the discount The Fund will maximise the discount to the ''as-if-built'' Open Market Valueagreed on exchange of contracts. Principle 3-diversification The Property Portfolio will be diversified in a number of ways, including by: - the number of apartments acquired as a percentage of each entiredevelopment; - type of property (i.e. 1 and 2 bedroom apartments and private villas); and - time to completion (a spread of completion programmes throughout the lifeof the Fund to protect against cyclical variations in the Bulgarian propertymarket). • By acquiring entire asset classes within developments, the Fund will seek to avoid competition with developers when selling-on investment properties. Borrowings • In addition to being highly geared through the effect of its deferred purchase commitments in respect of investment properties, the Fund may also be geared by mortgage borrowings to the extent that loans are drawn down to enable it to complete purchases of properties not sold prior to their completion. Mortgage borrowings will be limited to no more than 100% of the Fund's net asset value (at the time of borrowing). Investment management and advice • The Fund will be managed by Development Capital Management (Jersey) Limited, the manager of The Off-plan Fund Limited, a fund which invests in UK off-plan residential property. The property Investment Adviser will advise the Manager on the investment of the Fund's assets in the Property Portfolio. • The Fund has appointed Colliers International as Strategic Adviser. Colliers International will assess each property recommended to the Manager by the Property Investment Adviser. Having done so, it will submit a written appraisal to the Manager in respect of each proposed investment. Life and distributions • The Fund will have a life of 5 years plus up to 2 further years for the planned realisation of the Property Portfolio. The life of the Fund may be extended by special resolution of shareholders (requiring a two-thirds majority of those voting). • The proceeds realised from the Property Portfolio will be available for reinvestment into further investment property (net of any performance fee due). The Board will, however, consider the distribution of capital profits on the Property Shares after the first 3 years of the Fund's life and at any time if the Property Investment Adviser does not believe there to be further attractive investment opportunities. Following the end of the fifth year of the Fund's life, the proceeds of sale of the Property Portfolio will be returned to Shareholders as determined by the Board. Listing, valuations and the share buy-back policy • The Fund has applied to AIM for admission to trading of the Shares. • The net asset value of the Shares will be calculated quarterly with the first calculation as at the 30 June 2005. • The Fund will have the ability to buy-back Shares in order to address any imbalance between supply and demand for them. Where it believes it to be in the interests of Shareholders as a whole, the Board may choose to utilise realised capital gains to fund share buy-backs where Shares are trading at a discount to net asset value. Initial expenses and management fees • The Fund will pay the Manager a structuring fee equal to 1% of the gross proceeds of the Offer in return for the structuring advice provided in connection with the Fund's launch. In addition, the Fund will pay the Manager an amount equal to 3% of the gross proceeds of the Offer. The Manager has, in return, agreed to meet all of the costs of the launch of the Fund including the costs of Admission, and legal, taxation, property consultancy and accountancy advice (but excluding the Manager's structuring fee). • The Manager will receive a management fee quarterly in advance of 2% per annum of the amount subscribed on the issue of Shares plus capital gains retained by the Fund for reinvestment in the Property Portfolio. The fees of the Property Investment Adviser will be met by the Manager. • The Manager will also be paid a performance fee of 20% of any gains generated by the Fund's Property Portfolio in excess of a 10% compound per annum hurdle up to 100%, and 30% of any gains generated in excess of this amount. Interim payments of performance fee will be made during the life of the Fund based on cash proceeds of the sale of investment properties. In these circumstances, only 80% of the performance fee calculated will be paid, with the balance held in an escrow account pending the calculation of the overall returns on the Property Portfolio at the end of the planned 7 year life. The Offer • Up to £50 million is being raised by the Fund for investment in the Property Portfolio. • The Fund will pay commission to distributors of 5% of the Offer Price of each Share sold. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
BKSA.L