Arceland Management CEO Curtis Coward: Bulgaria's Success Story Requires More Aggressive Promotion
Interview of Novinite.com (Sofia News Agency) with Curtis M. Coward, CEO and Managing Partner at Arceland, an asset management fund based in Sofia, Bulgaria, and member of the the Bulgarian Land and Property Owners Association (BULLPOA).
Other companies are based abroad and your office is in Bulgaria, would you say that this is a problem or an advantage?
That's an advantage. In the early days of the transition following the fall of communism it was very customary for foreign law firms, foreign investment firms, project firms, to come, stay 10 days, go back, come stay 10 days - the economies of these areas have grown to the point where you cannot do that , you have got to be here 24/7, so we think being here full time is a practical necessity to be effective.
How does that help you?
The situation in Bulgaria is dynamic, it changes every day and if you are back in the US, or London, or some other place, you are behind, I mean it. So the ability to stay real-time, current with what is going on on the marketplace, is critical.
What is Bulgaria's biggest advantage as a place to buy real estate properties? How does it attract investors in real estate?
I think we have to be clear - it is not as attractive as it used to be 3 years ago. Three years ago there was a huge inflow of what I call "hot money" around the EU accession.
People got very excited and extrapolated that Bulgaria is going to become like the UK or something like this... Not so fast! Probably too much money came in too fast.
Then we had this catastrophic financial crisis that affected everybody, particularly in Bulgaria it affected commercial banks, so credit was dried out. Our view of that is that that period is now gone and that money is now gone.
Now the driver for values of real estate is really income levels and domestic demand of Bulgarians. The bad news is that Bulgarians are the poorest people in the EU so therefore it starts at a very low level.
But the good news is the growth in that income is one of the fastest because it is from such a low base so as a percentage it is growing much faster than in the EU generally.
Take for example the Bulgarian government's proposal to increase the minimum wage by 12.5% in September - that is an astronomical figure as a percentage.
In most countries it is 1, 2 or 3%, so that tells you that there is big room to grow for these wages and as people have more income to spend.
Then the value of things they buy goes up with it, so we think the price of real estate will stabilize at a growth rate of 5-6% and that is a reliable, understandable, and credible number for a decade, as opposed to 20% or 30% or 40% for 18 months or so.
So we think, long term, if growth rates elsewhere are at 4% or 5%, Bulgaria will be 2 or 3 points above that as a percentage.
Apart from economic factors, what else do you believe attracts investors in real estate?
You have to distinguish between types of real estate. I think probably the soundest investment in Bulgarian real estate right now is agriculture. It is farm land.
Bulgaria has an enormous potential that is unfulfilled at this point in terms of its agricultural development. This is one type of real estate.
On the other hand, if you want to talk about residential, or commercial, or office - those are very different stories.
We went along in the retail sector, we have been very underserved as a square meters per person. Now we have that huge explosion of retail space n the last year, particularly in Sofia.
There are 3 or 4 malls that have been delivered in the last year so I think we are at a balance now. I think there is more retail capacity than maybe the city can absorb quickly, so that would be a more difficult area.
The same goes for offices because so many of these complexes are office and retail together. There has been an enormous delivery of inventory particularly in the Class A level, office, and again you see a sharp drop in lease rates, rental rates, because there is so much supply competing for good tenants.
It is like a sign curve, it will go up and down, up and down. Over time, Bulgaria needs more of everything - it needs more offices, more residential. Particularly residential, especially in the big cities, and in Sofia in particular, because the housing stock is generally in such poor condition.
There is going to have to be a lot of replacement stock built and one of the challenges for the government is going to be how to transition people out of panel block apartment buildings that over time are going to become unsafe. They are really getting quite old and not that well built to begin with.
How do you get those people who own those units into new units? That I think is going to be a big public policy challenge over time but the generality is there is tremendous demand for improved housing. People who live in panel apartment buildings would like to live in nicer homes. So we think residential over time is a very solid investment and we think that will continue for at least a decade as well.
Which segment of your business is developing fastest?
Right now it would be green energy.
Has this changed over the years?
Like so many other investment funds we have been waiting for the new law to pass and the new legal regime to be established. That has now happened and now there is a very active market to buy and develop these projects and we are very focused on that right now.
What are the most common and most persisting problems that you encounter in your business?
Frankly, the things that are Bulgarian are actually in quite a good shape. Doing business here is very reasonable. There are areas to be improved, there are the courts, but the practical business environment in Bulgaria is much better than is generally considered.
I would say that the biggest obstacle we faced is not domestic. It is the fact that Bulgaria has such a terrible image internationally which we think is very removed from reality but unfortunately there is no countervailing voice.
We get concerned because we see regularly on BBC, on CNN and the Financial Times very aggressive promotion of Croatia, of Macedonia - all these neighboring countries, none of whom have as good a story as Bulgaria.
But the only thing you ever read about in those publications about Bulgaria is about crime, about the mafia, or whole stories that get recycled and recycled. So when we go to solicit investment for potential participants in the economy here they start from a very negative position. We spend an enormous amount of time educating them about the realities here.
It would be very much in Bulgaria's interest to be much more aggressive about presenting itself internationally. Because it is actually a much better story. Particularly in areas like public finance, the national bank, the currency - those things since the crisis in 1997 and 1998 have been tremendous success stories. And very little publicity or understanding about that outside Bulgaria. So we think this is a story that is not told much, and when it is told, it is told poorly. Our biggest challenge, I think, as a business attracting international investment is getting over that image issue.
Who do you think is to blame for skewing the "success story"? Is it Bulgarian or foreign media?
I think both. I think Bulgarian politicians are preoccupied, as they understandably are, with their own activities and this is not a priority for them. I wish that they were more supportive of the InvestBulgaria Agency and its efforts to outreach.
I think that foreign press is to blame because typically a reporter will come here, spend a day or two - they are looking for dramatic stories. They can surely find them and that becomes the headline, and so forth.
The burden is on the country to present itself. Nobody is going to make a special effort to pick this country out of 150 countries in the world to do special research on. The country has to be proactive about presenting itself.
That means going to the major media players and presenting themselves, trying to meet with the editorial boards, getting face to face with people and presenting the facts- the facts about 14% public debt to GDP- that is a stunning number.
The fact that inflation in Bulgaria in November 1996 was 579% was, in June 1997 it was 3%. I do not think there is any country in the world that has pulled that off. It is a phenomenal story. The discipline of the Bulgarian people not to take on debt.
One of the advantages this country has is there is no overhang. In my country, the US, there is millions, literally millions of unsold homes on the market, foreclosed homes, that are destroying the construction industry, the real estate industry, and so on and so forth, because there is just a glut on the market.
You did not have that speculation in Bulgaria. So you do not have the structural economic issues that so many of these developed countries do. This is a great, great story. But it is not being told. I would say that if I have one criticism of the politicians here it would be that they are not presenting themselves effectively and aggressively outside Bulgaria. Naturally, politicians must set priorities. But I do not think they appreciate the effect this has on foreign investment – to have this negativity surrounding the name "Bulgaria".
If you word-search the word Bulgaria on the Internet, the first thing that comes up is crime. They have got to fix that. They have to be proactive about telling the business story here.
The success of Ideal Standard, the success of Libra, the success of HP, the success of SAP, the fact that Chinese are building cars not in China for Europe but in Bulgaria for Europe. Those are terrific stories. And you can not find them on BBC, on CNN, FT, etc.
That is not going to happen unless the Bulgarian government and the Bulgarian Chamber of Commerce and other interested organizations, NGOs - everybody has a responsibility for it. But telling the Bulgarian story is the piece in my mind that is most missing from the development of the economy.
In this respect, how should all the negative local media coverage of the Bulgarian government and its policies be accounted for?
The role of the press is to keep pressure on the government. As a philosophy, I do not have a problem with that. I think it is a matter of degree. And I think where the press may be making a mistake is, when there are succeses, and they happen, they should say that. They should try to be balanced.
It is interesting to me that no Bulgarian government has been re-elected since 1991. Not one. And, according to the polls, that may happen again next year.
I was in Bulgaria in 1997 and I remember there was nothing in the stores, there was hyperinflation, the lights were off, this place was at rock bottom. To see this country now, 14 years later, and the progress it has made - getting into NATO, getting into the EU, all of the investment that has come in. Just look at the inventory of cars on the street - there used to be 15-years old cars, now there are 40-50% new cars. You can see the economy improving.
If you live in Bulgaria, it is like watching grass grow. It seems very slow. Not nearly fast enough. But if you are a foreigner like myself, who comes and goes - I live here, but I am out and around to other parts of the world - I can see how much progress has been made in 14 years.
But again, the biggest mistake public figures make is - they know this story, they know these facts, and they assume that everybody else does too. That is a huge mistake. Nobody is paying attention. Nobody in NY wakes up and thinks "I wonder what is going on in Sofia today?". It is just not happening.
If we look at Greece, it is all over the news. Well, everybody likes a train wreck. That story tells itself. But good stories are hard to get out because it is not dramatic. But somebody has to be responsible for doing this. Actually, it is not just the government - everybody has this responsibility.
I think Bulgarians have an inflated view of the rest of the world and it makes them feel a little inferior. They have no basis for feeling inferior. They are just as smart, just as capable. They have done a better job of managing their public finances. They have every reason to be completely proud of their country and completely optimistic about the future.
But I do not get that as a regular vibration. And I think a lot of that is just an inflated view from TV, or whatever, that life is so much more wonderful other places. I have been other places. It is good but it is not dramatically different or better than it is in Bulgaria.
Speaking about the environment in which you are operating, as a businessman and an investor are you satisfied with Bulgaria's legal framework and the tax regime?
I think Bulgaria's tax structure is brilliant. I wish my country had it. I think a simple flat rate is the fairest. It is also the most pro-market. The USA is very fond of talking about free market, etc, etc, and yet, it has a completely socialist tax system.
It has fourteen hundred pages telling you where to invest, where not to invest, punishing you for making this investment, rewarding you for that investment. That is government intervention. If you told the American people that this is a socialist tax system, they would go crazy. But it is the reality.
In Bulgaria, it is very simple – a flat tax of 10% - go out and spend the money intelligently. I think that is fair. I think it is more sensible. And I think it alternately produces more revenue because people are not really opposed to paying 10%. They do not like paying 63% in Greece, or whatever the aggregate now is, or some other crazy number. But 10 is a very reasonable number and I think it is a very enlightened and sensible tax policy and as a business person I think it is very attractive.
The simple, low-cost tax system is a tremendous advantage for this country and I think that they are correct to try to hold on to it against pressure from Brussels and other places to be more like them. I think it was a very good decision to do it and I think Bulgaria's tenacity in holding on to it is a strong positive.
How about Bulgaria's domestic legislation? Would you say that it is stable, favorable to business and foreign investment?
I would call the legal framework evolving. There are weak areas, there are strong areas. Some of the areas are superb.
We spend a lot of time worrying about what we call land use regulation. I would say that system is superb, it is really good, and we find it very comfortable to work in this environment on all land use issues.
Apart from that, despite all the corruption stories, nobody has ever breezed a word of that to us. Nobody has suggested such a thing. We would not do it but the important thing is, nobody has asked us to do it.
So we find the environment in Bulgaria extremely business-friendly, entirely manageable, on an operational basis.
The courts themselves need to be strengthened and efforts are made in this direction, but, at the end of the day, the contract is only as good as its enforceability. You have to believe that the contract can be enforced. Which means you have to trust the court system, to abide by the law and abide by the terms of the agreement. I think that is improving but it needs consistent upgrading over and over again. Because it is the basis for commercial activity.
What is your view of Bulgaria's recently adopted Renewable Energy Act, which has been severely critized by a number of foreign and Bulgarian investors?
It is much better than its critics suggest. In most other European countries there has been no control over the inventory, over the allocation of permits, and so forth. And they ended up with tremendous overbuilding. This has happened in Italy, in the Czech Republic.
The Bulgarian renewable energy law that came out is by no means perfect but conceptually we think it is very sensible. It is very restrictive in terms of getting permits and licenses. Bulgaria will thus never get in the position where it wakes up one morning and finds that it has got five times as much photovoltaic capacity as it needs. So I think, conceptually, it is the correct approach.
The tariff that was approved is very tight. There is a lot of arithmetic done, a lot of calculations done, a lot of guesswork done about the future price of panels and equipment, etc. They are betting that those prices will continue to come down, they have to make that rate worthwhile. But I would give the Bulgarian government, generally, high marks for the legal regime. They have done a very good job of addressing the need but not going crazy, as they have in some other countries. It is a very sensible approach.
How did the economic and financial meltdown affect your business?
It was devastating. We are big buyers of primarily residential property and the value of that property dropped significantly, so it very much affected us. We see it coming back, slowly.
We have certainly passed the bottom and now we are moving up, but we, like any real estate land owner, were very heavily impacted. Bulgaria had nothing to do with the crisis. It is an unfair fact of life that Bulgaria was overwhelmed by this tsunami while it had nothing to do with it.
Bulgaria did everything right - it did a textbook performance in terms of managing its public finances but this did not make any difference at all. The tsunami came, it wiped huge amounts of value, hurt the banks, which restricted credit, made everybody nervous. A good percentage of a crisis is psychology. When people are afraid, they stop spending. So it devastated Bulgaria. And unemployment showed it, wages showed it and it was manifested in many other ways. But it was not Bulgaria's fault. They were a victim, not a cause.
In this respect, do you believe that the sovereign debt crisis in Greece will have an impact on Bulgaria?
Only as a cautionary tale. It shows what can happen if you are undisciplined for a long period of time. I think the plain facts are that Greece has been without discipline for at least 25 years.
Bulgaria should never go there and I do not see any indication that it will go there. I think two or three years ago it would have been much more problematic because, I believe at that time Greece was the largest export market for Bulgaria. That is no longer true.
There has been a very significant transition in the Bulgarian export profile. And now it is Germany, France - countries that are much more stable and reliable as trade partners.
I think Bulgaria will weather this very well and, frankly, will have some benefit as well. You are already seeing, and I think you will continue to see relocation of Greek companies to Bulgaria. Because of the stability here, the 10% tax rate - just all the operational factors and economic factors, other than nationalism, point towards moving towards Bulgaria. I think the benefits from relocation and re-investment are going to be roughly equivalent to the losses. There will be an impact, simply because we are neighbors. But the real impact should be an example of what can happen when you lose discipline.
Where do your investors come from?
We have investors from the US, in fact our biggest investor is from the US, we have investors now from Belgium, from the Gulf States, Kuwait, UAE, Saudi Arabia, and Greece. So it is pretty diverse. And we would like to keep it that way.
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