FORESTRY IDEAS, 2020, vol. 26, No 2 (60): 289–301 COMPARATIVE CHARACTERISTICS OF THE RATE OF RETURN ON INVESTMENTS IN A FOREST PLANTATION AND OTHER REAL ESTATES IN BULGARIA Nikolay Stoenchev1, Konstantin Kolev1, Nasko Iliev3, and Yana Hrischeva2* 1Department of Economics and Management of Natural Resources, University of Forestry, 10 K. Ohridski Blvd., 1797 Sofia, Bulgaria. 2Department of Real Estate Property, University of National and World Economy, Students Town, 8th December Str., 1700 Sofia, Bulgaria. *E-mail: [email protected] 3Department of Silviculture, University of Forestry, 10 K. Ohridski Blvd., 1797 Sofia, Bulgaria. Received: 23 July 2019 Accepted: 05 August 2020 Abstract A comparative analysis of the rate of return on investments in a fast-growing poplar planta- tion in South Bulgaria and in two-room residential apartments in Sofia (average area 68 sq.m.) (including a room and a bedroom), differentiated by districts has been made. The investigation is based on the concept accepted in the normative basis, which determined these kinds of estates as real. It is motivated by the necessity to reveal suitable and perspective variants for invest- ments, according to the utilities and abilities of a wide range of potential investors. Both static and dynamic methods have been applied for assessment of the rate of return on investments in a medium-period perspective. As a result of the carried out investigations it is determined that the rate of return is 4.01 % and it is expected to raise along with raising of the demand of poplar wood material. The advantage of this kind of investment is that it does not require a large amount of capital; it is ecological and allows using lands in rural areas. The rate of return of investment in residential real estates varies from 6.27 % to 15.26 % depending on the location and the result is always positive. Key words: fast-growing tree species, financial efficiency, real estates, two-room residential apartments, profit. Introduction from optimization of investment portfolios through including of real estates; results The investments in real estates are from the society activities with specific in- well-studied field of research and are of vestment purpose. The obtained results real interest for contractors from all over reveal that: the world. In a study based on 121 sourc- - The return in real estates is more eas- es covering the markets in Europe, Asia, ily to be prognosticated and higher than North America and Australia, Benjamin et the rate of return in other kinds of assets. al. (2001) pay attention to the following - Precence of real estates makes the key points: the expected risk and return investment portfolios less vulnerable from on investments in real estates, compared inflation in long-term aspect. The reason to other assets and to inflation; benefits is the high correlation with real inflation. 290 N. Stoenchev, K. Kolev, N. Iliev, and Y. Hrischeva - Investment portfolios, including real rieties in an economic turnover, some of estates, are less risky in long-term as- them until now being underestimated. pect from investments only in stocks and Usually, the investment in a real es- bonds. tate in Bulgaria is related to the purchase According to Djaparidze (2013) the of a land or estate with various functions share of real estates in the total amount of (lodging, office, shop, etc.). Less studied investments in Russia is 21 %. is the investment in perennial stands and Some authors share their point of view forest plantations as a form of immovable that the investments in residential real es- property. It gives the opportunity to obtain tates bring better return than the stocks economic benefit from the territories of ru- and at the same time are poorly volatile as ral regions, as well, where the land is the the bonds (Jordà et al. 2017). They come basic source of income. During the last 25 to this conclusion on the basis of numer- years, the world market shows deficit of ous analyses of the annual return from forest products (Glauner et аl. 2012, In- residential estates, stocks, bonds and dufor 2012). It stimulates the investments depositary bonds from 1870 to 2015 in in forestry activities and investors can dif- 16 economicaly developed countries, eg ferentiate into two groups – institutional France, Norway, Great Britain, USA, etc. and small- and medium-sized enterpris- In a research Kopf (2018) establishes es (SME). The first ones invest mainly in that in developed countries the annual plantations of fast-growing tree species in return from lodgings during the last two the southern hemisphere and the USA. decades has been about 7 % (corrected These investments are attractive because with the inflation), and the return from the have enough high rate of return. In this stocks has been a little under 7 %. Iman relation it should be mentioned that the et al. (2012) consider that in the process average return on investements in forest of selection and purchase of estate one plantations in some countries is as fol- should assess and take into account suit- lows: Argentina – 14.8 %; Brazil – 21.6 %, able characteristics of the estate to max- Uruguay – 18.0 %; USA – 14.9 % (Cam- imize the expected benefit. In this case it panale 2009, Macqueen 2013, Brotto is particularly valuable to know the char- 2015). acteristics and range of the real estates In contrast to more authors, who focus market. on the financial result from the investment Summarising the national and inter- in a forest plantation, others pay attention national experience in the determination to ecological and social contributions of of this term, Iliev et al. (2007) present a plantation forestry, underlining its signifi- classification of real estate markets, de- cance for some branches of the national pending on the kind of the target (com- economy, like agriculture, water manage- modity), in which they include the markets ment, transport, tourism, etc. (Milev et al. of: 1) land (land estates); 2) buildings and 2017). single targets in buildings; 3) facilities and As a result of their research (Campan- networks; 4) complexes; 5) perennial plant ale 2009, Macqueen 2013, Brotto 2015) stands; 6) laws of estate; 7) other targets. come to the conclusion that investments This classification allows revealing the in forest plantations are characterized range of the term ‘real estate’ and to look with lower level of investment risk, com- for possibilities for including of all its va- pared to investments in other assets, pro- Comparative Characteristics of the Rate of Return on Investments in a Forest ... 291 viding same rate of return. products. In the forest sector of Bulgaria The lower risk of the investments in the institutional investors are not present. forest plantations is a consequence of the Meanwhile investments in SME in real as- positive correlation subordination between sets are insufficient and are predominantly return and inflation and the absence of in wood processing equipment, because correlation between the return on invest- the main forest product in the country is ments in forest plantations and return on round wood (Kolev 2017). investments in financial instruments. One of the explanations about the ab- All this determines the preferences sence of enough investments in real as- of institutional investors to investment in sets in forestry in Bulgaria is the low return forest plantations in times of financial un- (Kolev 2017). As far as the return of in- certainty for diversification and reduction vestments in forest plantations in Bulgaria of the total risk of the portfolios, which is concerned, by the time being it is still they possess (Brotto 2015). The invest- insufficiently investigated. ments of SME in the field of forestry pro- It is known that poplars (Populus spp.) vide wood and non-wood products, and are recognized as the fastest-growing for- employment in poorly developed regions. est tree species at temperate continental The significance of the topic provokes nu- climate. They possess many other valua- merous investigations (Elson 2012, Mac- ble characteristics, such as easy propa- queen 2012, Davies et al. 2015). All they gation, aptitude to hybridize, pleasing ap- distinguish two categories – investments pearance and many uses (Isebrands and in real assets and enabling investments. Richardson 2014). The aim of the first ones is to establish Wang et al. (2014) present results of real assets, which would accumulate prof- their study in China, which shows that it and increase the value for SME owners. the management of poplar plantations is The aim of the second ones is to establish twice more profitable compared to nat- conditions for financially efficient invest- ural forests. It is based on the possible ments in real assets. The conditions are varying of the average annual increment, related to clearly defined rights of own- inflation percentage and rate of interest. ership on forest resources, proper man- The calculated net present value (NPV) agement and positive net money flows, is from 1024 to 6925 USD∙ha−1, the covering the investment expences. The equivalent annual income is from 120 to so-called ‘enabling investments‘ are pro- 623 USD∙ha−1∙year−1 and the internal rate vided by non-governmental organizations, of return (IRR) is from 13.2 to 29.3 %. philanthropists, governments, etc. The The aim of the present study is to com- combination of investments in real assets pare the rate of return of investments in and enabling investments should provide two different kinds of real estates – build- a balance between financial results, social ings and single targets (namely two-room fairness for local inhabitants and environ- residential apartments) and perennial mental protection (Macqueen 2013). stands (in this particular case – forest Most of the investments in real assets, plantation of fast-growing tree species).