Real Estate

Restoration work has completed in many historic districts

AFTER THE BOOM

It was only in 2003 that Ukraine witnessed its first substantial property asset when a group of foreign investors bought the “Artem” business center in Kyiv. Since 2004, large inflows of foreign investment have poured in, replacing venture funds with structured investment vehicles such as institutional investors and developers. Acquisition of income producing assets including “Podol Plaza”, “Leonardo”, “Piramida”, “Alladin”, “Globus”, “Ukraina” have marked the entry into Ukraine of London & Regional Properties, Quinn Group, Mayer Bergmann, Apollo Real Estate which have become among the few foreigners to succeed in acquiring assets in Ukraine. They were followed by Morgan Stanley, Citigroup and others through investments in local companies’ shares. Other big names have also been opening offices and starting deal sourcing. Backed by mother companies abroad, they were willing to pay overvalued prices for the projects focusing not only in Kyiv, but in other regional cities. The task was just to initiate penetration. The flights from Tel-Aviv, Vienna and London were fully booked by foreigners eager to partake of the lucrative and developing Ukrainian market. Due to the high returns being achieved, investors did not bother themselves with Ukrainian problems – the bureaucratic time-consuming permits process, the high risks entailed in unprotected investments, and corruption.

But not many of the potential investors actually succeeded

in closing deals in Ukraine as only few - mainly those who established JVs with local partners and who did not have to endure time-consuming procedures to obtain board approvals – understood the word “uvazhenie” (respect), as the prevailing way of leading businesses and were instead ready to take the risks of giving incredible high pre-payments that, in case of failure, might never be refunded. The quality of land and projects was low while the prices were high, in Kyiv these reached $2,500/sqm for land and $10,000/sqm for income producing assets. Locals’ self-confidence was often an obstacle

to signing deals. On one occasion I met with a local oligarch while representing an international company with assets of billions of Euros. The guy joked in reply: “You know why I am not buying a Bentley? Because in our country Bentleys now look like presents for

mistresses”. Only cash paid immediately was respected.

Domestic players, with a monopoly on land, realising

upcoming competition and rising demand for new projects, started to look for additional financing. and IPOs began. For

Investing into Ukraine: Pros & Cons

Pros

1

High Population and strategic location

(46m skilled & educated people; –7th most populous country in Europe incl. Russia. Five cities with >1M population, urban population -67%)

2 3 4

5 6

7 8 9 10

Potential for high yields on investments

(returns are higher then in CEE)

Excellent long-term perspective

Underdeveloped market

deficit in every segment and high percent of Soviet era outdated properties

Need for long term and strong market players

Coastal & mountains areas

(high potential for recreational facilities)

EURO-2012

(high potential for hospitality market and infrastructural improvements)

Distressed market offers good opportunities

(cannot increase income – increase market share)

Western-oriented young population

Demonstrated in previous elections

Presence in the market will enable investors to benefit after inevitable economic upturn

(local base allows players to react to opportunities ASAP)

11

Up to 7m working abroad

(sending approx. $20 billion to Ukraine annually)

(*) – including Russia

June 2010 UkraineBusiness insight 29

Cons

High administrative barriers

(time consuming bureaucracy, corruption)

Unreliable financial system

(Another Hryvnya devaluation would kill business)

Unpredictability

(Nobody knows what may happen tomorrow)

Tough competition

(strong local players with ambitious expansion plans and political connections)

Foreign investors & investments are not fully protected

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