Cost of Equity Estimation in REIT Valuation in Emerging Europe: The Case of Bulgaria

Abstract

We propose a model, which is a modification of the Salomon Smith Barney model for cost of capital determination. The model reflects the following characteristics: (1) the degree of diversification of the particular investor (imperfectly diversified); (2) the systematic country risk; (3) firm specific risks; and (4) time varying risk nature. The inputs of the model have as a source only publicly available data. An illustration of the proposed model is the case of U.S. investor who considers an investment in the most traded Bulgarian REITs.

Keywords: Real estate valuation; Emerging markets; Cost of equity

JEL Classification: R10, G10, G12