The Next Big Thing: Risks Fail To Dampen Market
Published: February 27 2008
The numbers just added up, they agreed, it would be the “next Poland”. The large and increasingly affluent population clearly need offices and retail outlets, while its location with Russia to one side, and Poland, Romania and Hungary on the other, seemed neatly positioned for industrial requirements. Strategically, it is at the crossroads between Europe and Asia.
Now, these predictions seem to be coming true, with the Ukraine believed by many regional experts as an essential market to invest. The problem, however, is that the speed of acceptance of the country could mean that returns are coming down too quickly in a country where there are still risks to Western investors.
The Ukraine is the second-largest country in Europe, with a population of more than 46m people. It is still a poor country, however, with almost 40 per cent of its population below the poverty line, according to 2003 statistics.
The most obvious risk about conducting business in the Ukraine is in the political sphere following a crisis last spring that sparked an early legislative election and, by December, a new prime minister.
Analysts say that the government could do more to improve the investment outlook, including more efforts to crack down corruption, the development of the capital markets and improving the legislative framework.
On the long-term economic horizon, there is the potential threat of a reinstatement of tax, trade, and customs privileges, and a government promise to maintain restrictive grain export quotas.
But the Ukraine’s economy remains buoyant in spite of the political turmoil and background concerns about the mechanisms of government. Real gross domestic product growth reached almost 7 per cent in 2006-07, fuelled by strong consumption, which was in turn spurred by rising pensions and wages.
This is why many developers see the country as ripe for retail development, in particular, to soak up some of this money. Developers predict that the country has capacity for at least one substantial mall in every significant city. And a significant city in the Ukraine is one with several million people.
Property advisor Cushman & Wakefield says that the economy has mostly ignored the political problems, adding that “following recent elections some normality is returning to the Ukrainian market”.
The market is still relatively undeveloped outside the capital city of Kiev, which has already attracted Western companies. Investment in the country is primarily by developers at the moment, with comparatively little good quality commercial property for investors to buy even if they wanted to.
Fund managers say that Ukraine has significant scope for opportunistic strategies, despite the higher country risks and the poorly developed real estate market practices.
The market has attracted London-listed investment company Raven Russia, which recently received shareholder permission to extend its remit into the Ukraine. Although it will remain focused on Russia, the developer sees the country as an important market for future growth.
“Ukraine has great potential,” says Glyn Hirsch, executive deputy chairman of Raven Russia, “particularly logistics development. Investors need to be very sure what they are doing and do their homework, but the returns could be very good.”
Yields in Ukraine are still relatively high compared to neighbouring counties, which makes agents predict a growing investment market.
“Countries to watch are Ukraine and Turkey where a few property opportunities exist but are not well known yet,” says Simon Moore, analyst at Collins Stewart, who points to the potential for greater capital growth and possibilities in the “property development stages”.
But there are worries that the market is just not ready for the levels of capital being targeted at the Ukraine.
Mark Mogull, founder of Benson Elliot Capital Management, warns that the weight of money could cause a bubble. “The Ukraine has a relatively small economy, and so there is a limit to how much capital it can absorb before causing a dangerous liquidity bubble.”
There are more practical problems. Land ownership is key for a developer, says one local agent, and the Ukraine seems prone to having disputes about who exactly owns what.
Because of this, many developers have established relationships with local partners, which is also useful for aspects of construction such as installing utilities.
There is also a currency risk to the Ukraine, as with all countries outside the EU, and investors are advised to hedge the risk through one of the many complex instruments such as currency options and swaps, or buy currency protection through an insurer. Any hedging method is likely to cost disproportionately, which needs to be factored into any investment.
