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Tuesday, August 14, 2007

Optimism Amid The Confusion In Ukraine

Optimism Amid The Confusion In Ukraine by Yuri Bender, Financial Times

A man can have a beautiful woman or a good horse, but never both, according to an old Ukrainian proverb. The choice between the two most valuable assets of old-style Ukrainian rural life is today mirrored by the choice between what seem to be two mutually exclusive national goals: political stability and economic growth.

However, investment markets have continued to perform well against an often volatile political undercurrent, says Alexander Tarabukhin, director at Kiev-based brokerage and asset manager On-Line Capital. "Stock and real estate markets have grown dramatically, in spite of the political situation," says Mr Tarabukhin, pointing to the PFTS index doubling from 500 to more than 1,000 in six months, during a period of political, and occasional physical, skirmishes between the central and west Ukrainian court of President Viktor Yushchenko and the eastern, industrial powerbase of Viktor Yanukovich, prime minister.

On-Line Capital has established the Amadeus funds house, which runs two closed-ended Ukrainian funds, one UAH17m (€2.5m, £1.7m) actively managed fund and a $1.6m (€1.2m, £802,000) index tracker, and is in the process of launching a real estate fund. The company is already handling real estate projects worth $90m.

As well as investing in Kiev's business centres, the fund will seek commercial real estate opportunities to the east of the capital, in the industrial cities of Dnipropetrovsk and Kharkiv and the Black Sea port of Odessa to the south.

According to Yuri Nartov, managing director of Colliers International in Kiev, such vehicles will not have problems raising money from institutions, with an estimated $10bn in international capital seeking a Ukrainian home.

The problem, when making an investment, is that the playing field is not a level one, according to Alex Frishberg, partner at Kiev law firm Frishberg & Partners. "Ukrainian real estate is not based on open competition, where you can be judged on your reputation and assets when you bid for a tender," Mr Frishberg told investment banks attending a recent London seminar organised by solicitors Olswang and the Ukrainian-British City Club. As important as your purchasing power, says Mr Frishberg, whose clients include BT, Hewlett Packard and KLM Royal Dutch Airlines, are who you know and what you know.

"Retailers, who are mainly Russian and Polish franchisees of London-based tenants, are making huge profits, starting in Kievand moving to the regions," says Alex Podell, who setup the 1849 PLC property company to buy up and lease out Ukrainian shopping centres.

While new developments in Luhansk, a poor city next to Ukraine's eastern frontier with Russia, are leased out at a monthly rent of $100 per square metre, rents in "really bad Soviet shopping centres" in Kiev are nudging $350.

Among contracts being closed is a $180m deal by the London and Regional Investment Fund to buy the underground Globus Centre, based on Kreshchatik, Kiev's premier shopping thoroughfare. This is Ukraine's most expensive real estate.

Market participants also cite the "football factor" as grounds for optimism. "We are very excited about the 2012 European football championships coming to Ukraine," says architect Genadiy Shulga. Mr Shulga's practice has received commissions to design hotels in the proposed stadium complex in Lviv, west Ukraine's historic regional capital and one of the host cities for the championships.

Mr Shulga has also finished the blueprints for Eagle Valley, a block of high specification apartments near the so-called Carpathian "resort" of Slavsk, a growing, picturesque but neglected settlement.

Alex Abramovych, who is marketing the development through his estate agency, says property prices in Kiev and Donetsk are beginning to stabilise, after annual gains of 150 per cent two years ago halved last year, and are grinding to a halt. "In Kiev, we are not seeing growing prices at the moment, due partly to the political situation, although there are signs of a resolution."

While both sides have been fighting for assets and power, early elections are now scheduled for September. "More importantly, they are agreed on a code of how to handle foreign investors, so the economy is still growing," says Mr Abramovych.