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Friday, March 7, 2008

Ukraine: Catching Up With The Neighbours

From Financial Times By Roman Olearchyk

Published: February 27 2008

Ukraine’s hot property market has produced some superior returns over the past eight years, providing investors with double-digit annual price growth rates.But it was not until last year that structured investment instruments appeared, such as real estate funds, offering international investors exposure to this fast-growing market.Most of the benefactors over the past decade were privileged domestic investors who snapped up flats and land in a frenzy, often at very low prices.Many who managed to close several acquisitions, typically with cash, turned into millionaires overnight as annual prices surged for seven years at double-digit rates.

Residential flats that a decade ago were selling for about $50,000, have reached astronomical levels, typically more than $2,500 per sq m. That is enough to make Kiev (pictured above) one of the world’s 20 most expensive cities in terms of property prices.

The sharp surge in purchase prices and rental rates is tapering off, but Kiev real estate experts do not expect a big downward correction in the immediate future. Demand consistently exceeds supply, particularly for commercial space, where the most growth is expected in coming years.The market holds ample opportunities for large foreign investors seeking strong returns by investing in a new wave of real estate funds and property developers, some of which have listed on the London Stock Exchange’s Alternative Investment Market (Aim).

“To keep up the pace of development and raise money for future development projects and land acquisition, large local developers started to more actively explore capital raising opportunities through IPOs and private placements,” says Tomas Fiala, managing director of Kiev-based Dragon Capital.

Dragon raised one of the largest sums from an IPO on Aim when it listed Dragon-Ukrainian Properties & Development, bringing in $208m, followed by secondary private placement for $100m.One developer, TMM, raised $105m. AISI Realty raised $33m, adding to a flurry of private placements by developers and funds.“These placements raised $664m in the aggregate, or 39 per cent of the total amount of capital attracted by Ukrainian companies through IPOs/private placements last year, says Mr Fiala.“To compare, there were only two real estate company share placements in 2006 for a total of $85m.”

Cast back in time by virtue of its membership of the USSR last century, and the collapse that followed the end of the USSR, experts say Ukraine’s real estate market is about seven years behind its peers in central Europe.While the foreign investment raised thus far is small, the expectation is its growth will imitate its neighbours’. New shopping centres, office space, warehouses and residential space continue to sprout up across the country.

“Foreign capital is a latecomer to the Ukrainian real estate market, having become active in the country only in 2006 due to complex legislation and intricate legal procedures. In addition, international property buyers were restrained by a lack of available stock for sale,” says Mr Fiala.But investments in both property development and property acquisition will continue to grow as local returns are much higher than on the alternative central and east European markets, according to Mr Fiala.

Petro Radchuk, vice president, at KDD Group, the developer that raised $130m last year in an IPO on Aim, says the listing “has allowed investors to get exposure to the fast-growing Ukrainian real estate market”.Like other developers and funds, KDD Group can offer large scale investors a chance to take part directly in some of its projects.

“Real estate consultants estimate that supply will equal demand not earlier than in 2010-2011. This explains why office rent rates grew 40 per cent in 2006 and 35 per cent in 2007. Retail centres increased rates by 15 per cent in 2007,” says Mr Radchuk.Last year saw acquisitions bring new landlords to top retail and office space in Kiev.

“The simple fact is that there are opportunities to invest here, whether through direct investment or via a vehicle like one of our groups’ non-listed funds or future listings like the ones we have seen on the Aim,” says Paul Niland, director of Primeros Property Fund.