Comparative Analysis of Return on Investment in the Bulgarian Articles RealEconomic Estate Alternatives Market, 2017, Issue 4, pp. 634-650 Comparative Analysis of Return on Investment in the Bulgarian Real Estate Market Yana Stoencheva* 1. Introduction: Summary he right of free choice in investment is Ta conceptual principle of the market This article analyses the return on economy. When an individual needs to make some direct and indirect investments in a choice about a marital partner, profession, the Bulgarian real estate market, while friends or lifestyle, he or she generally feels discussing their particular characteristics calm and confident, usually guided by their and advantages. As an object of our analysis values and motivations they choose their of direct investments, we have selected proper "frame of idealism". However, when residential properties and garages for it comes to realizing a concrete business personal vehicles, due to their clearer and idea, making the right decision turns out simpler characteristics from the perspective to be a more complicated and laborious of the mass investor, as well as the lower process. The reasons for this could be barriers for entering the market and the financial limitations, a variety of restricting well-structured information available. circumstances, issues of transparency The author offers a tested methodology in conducting a transaction, insufficient which studies the return on investment by information, knowledge or qualification residential area and types of property in among the investors, as well as the difficulty the three largest cities of Bulgaria. We also to guarantee good financial results in the analyze the return on investment in the Real future. The choice of different forms of capital Estate Investment Trusts as a single form of investment like properties, shares, bonds, indirect participation in the Bulgarian real commodities, currency, precious stones, gold estate market. The resulting findings can be and etc. can meet the requirements of any of use to the individual investors, as well as preferred strategy. But in order to find what to the real estate agencies, the investment one is really seeking in terms of preferences companies, the building companies and and financial affordability, one has to exert other institutional investors. some consistency, perseverance, business Key words: investments, return, real savvy, but first and foremost one needs estate, REITs (Real Estate Investment access to objective and relevant information. Trusts), In the contemporary world the demand for profitable investment opportunities which JEL Classification: G11, R21, R32 secure good return at low risk, largely exceed *Yana Stoencheva, Ph. D. Assistant Professor in Real Estate department at the University of National and World Economy, e-mail: [email protected] 634 Economic Alternatives, Issue 4, 2017 Articles the offer of such. According to Patrizia 4. The availability of well-structured and Investment Company (2014), the highest comprehensive published information in return on average annual basis in England’s the field. investment market for the period 1982-2013 is 5. The insufficient supply of parking spaces from shares and properties, more specifically for private vehicles in the cities, which residential properties (Table 1). raises the demand for garages and Table 1. Average annual return on investment and risk in England in the period 1982 – 2013 Average return Average return Assets Risk % Assets Risk in % in % in % Real Estate Stocks 14.34 22.4 Industrial Real Estate 10.5 10.5 Bonds 7.1 3.5 Office Real Estate 8.9 11.2 Gold 5.2 16 Residential Real Estate 14.31 10.1 UK REITs 12 25.8 Commercial Real Estate 10.1 9.4 Source: https://www.patrizia.ag/fileadmin/user_upload/Research/Investment_Compass_UK/Compass_UK_ Residential_01-2014.pdf Such a large-scale and extended study further drives up the price of rent. over a lengthy period of time for Bulgaria 6. The opportunity to invest in a professionally has not been conducted or has not been run investment fund without restrictions like released. Moreover, while the Real Estate minimum requirements for invested capital. investment Funds represent a considerable The goal is to investigate the level of share of the capital market in England and attractiveness and return on investment have good profitability in other countries, in of certain types of properties, namely Bulgaria they are a recent phenomenon that residential properties, garages and REITs. has come into existence not until 2004. The present analysis will contribute by The present study examines the investments testing a methodology for the evaluation of in real estate (residential properties, personal return on investment in real estate, broken garages and shares in Real Estate Investment down by territory, size and type. Trusts). The reasons for the choice of these 2. Methodology, methods and scope particular issues to analyze are the following: of the study 1. The investment in residential properties is In terms of methodology, the study is carried one of the most popular and accessible out by applying a theoretical-empirical method. one for investors, given their everyday Theoretically, a number of static and dynamic use and vital role as shelter. methods have been reviewed, discussed and 2. The investment has relatively low purchase employed to estimate the return on investment barriers, compared to investment in in real estate. In order to conduct the research commercial and business properties in practical terms, which encompasses various (shops, restaurants, hotels), office considerations, the author has chosen the buildings, factories, etc. method of calculating the factor (multiplier) of 3. The increasing free cash flow to the purchase price. A comparative study has households in the form of bank deposits been carried out on the return for different types and falling interest rates on mortgage of properties and an attempt has been made to and consumer loans, as has been shown summarise the findings on this return through by Damyanov (2016). the coefficient of variable. 635 Comparative Analysis of Return on Investment in the Bulgarian Articles Real Estate Market Scope of research: invested capital (Yovkova, 2011). Other - time limit – considering the dynamics authors (Timchev, 1999) define return as of the sale and rent offer prices of the a measure of effectiveness of the capital analysed real estate categories, the study invested. According to the authors, the term of return on investment is conducted as "return" can be summed up as the financial of 30th October 2016. ratio measuring the benefit of a particular - information scope – the selected data for investment. Most often return is presented sale and rent property prices has been as a percentage year on year, but we can accessed exclusively through the web estimate a monthly return, considering that portal www.imot.bg. in Bulgaria any income or salary is paid on - scope of studied types of property: three a monthly basis. and four- bedroom or multi-bedroom When we talk about return on investment flats, business properties (offices, in real estate, and particularly on the shops, warehouses, eateries, among research topic of our study – residential other property) have not been examined, properties and personal garages - attention considering the shortage of accessible should be focused on the main factors that well-structured information. can influence the levels of return such as: - return on investment in real estate has - the amount of rental income1; been is analyzed along the criteria of - the expected income from a sale of a location (neighbourhood) and size of property; property (studios, one-bedroom and two- - the expenditure when acquiring a bedroom flats). property, or respectively for building it; - the present study does not aim to inform - expenditure on upkeep and renovations. prospective investors about the ratio When renting out a property there are between purchase price and return on always running expenses that go towards investment in the various categories and repair of worn-down items, like bathroom locations, nor give suggestions on how to fixtures, kitchen equipment, door knobs, increase it. furniture, painting and re-flooring. The basic motivation behind a decision - average interest rate for borrowing capital; to invest in real estate is to retain or - expense on taxes; such are property tax increase wealth by creating opportunities and rubbish tax, individual income tax on for future income. As it is the case with capital gains after the deduction of 10% every investment decision, the decision for expenses; investment in real estate is based on the - expenditure on managing a property and etc.; evaluation of the return on this particular Before taking a concrete step towards investment. There are various definitions investing in real estate, an investor needs of return in the economic literature. For to be well-informed about the target instance, profitability (return, profitableness, property, including its quantity and quality ROI) is defined as a ratio between the characteristics, the economic and social financial result of the investment and the aspects of owning a residential property 1According to the regulations for applying the law for state property, the rent for garages is determined by multiplying three times the basic rental price of 1 square meter of residential property, taking into account the indicators for a particular category of area, type of