Elsewhere: Not by Lard Alone

“The country’s investment appeal is growing,” experts at the consulting company Ukrainian Trade Guild (UTG) agree. “In the years to follow Ukraine’s economy will continue to grow at the rate of 5 to 7%, which cannot go unnoticed by foreign investors.” For the time being Russia accounts for only 5 percent of overall foreign investment in Ukraine ranking 4th, while Germany’s share stands at 31.4%, Cyprus 11.9% and the U.S. 8%.

The Ukrainian Association of Real Estate Experts (ASNU) reports that in 1Q of this year the country received $989.6 million in direct foreign investment, of which 10% arrived from investors in the former Soviet states – the CIS. On the whole, in 1Q of 2006 foreign investment exceeded the level of the same period a year ago 3.9-fold, while the total volume of foreign investment in April stood at $17.4 billion.

The year 2006 saw a number of landmark events that had direct impact on the national real estate market. In mid-January the law on shared construction came into effect. That act is analogous to the Russian law No. 214-FZ “On participation in shared construction…”, which rendered direct investment in new housing construction by companies and individuals practically impossible.

With political tensions running high and parties to the conflict adhering to opposite economic views and given numerous failures to establish a ruling coalition in Ukraine’s parliament – Verkhovna Rada – analysts could not be certain in their forecasts of the country’s economic development. The property market, too, was going through a lull. Prices remained high, mass arrival of new properties did not take place. Investors still regarded real estate as the most reliable means of preserving capital.

General director at the Ukrainian Association of Investment Business (UAIB) Yevgeny Grigorenko has reported that acquisition of real property is the most popular investment among Ukrainian nationals. A poll commissioned by UAIB has revealed that real estate measured 4.57 points on a 5-point scale, while a private business only 3.98 points. Jewelry ranked 3rd, with 3.79 points.

Konstantin Romanov, board chairman at the NOVA management company, says that the timing is quite favorable now for the arrival of Russian investors. Experts of the group of companies have developed and actively implement financial vehicles, which private investors also could make use of.

Invest With Caution

Nevertheless, in the opinion of the chairman of commercial real estate and investment committee at ASNU, Ruslan Marinutsu, the price to pay for a mistake today is high as never before while the time of investment in any property indiscriminately is gone. Alexander Bondarenko, ASNU’s president, speaking at the 9th National Real Estate Congress in Moscow, characterized Ukraine as a site that remains largely attractive both for foreign and internal investors, first and foremost, given the potentially large capacity of the development and property market. At the same time, Bondarenko believes, Ukraine still has not developed a single real estate market. Rather, several regional segments have been formed, in Kiev, western and eastern Ukraine, Crimea and Odessa.

“Compared to the situation in Russia, property prices here are still knockdown. Investors may find that interesting. The same is true for plots of land in Transcarpathian, Odessa and Nikolayev regions. Even at a distance of 40 km from Kiev it is still possible to buy a plot for development of a countryside compound at $300 per 0.01 ha of a hectare,” he reports. “In terms of returns land is the most lucrative investment target,” says Andrei Sknar, head of consulting department and chairman of investment and management department at the company IGK Ukraine Audit. “The most attractive partners in Ukraine are to be found among the developers who work on their sites from the moment they arrive on the market till the beginning of realization of property.”

Ukrainian market operators have not reached such a level where they would feel comfortable both during construction stages and also in terms of raising investment, the expert believes. “Today most Ukrainian developers are short of cash. There are, of course, complicated and well thought-out projects but examples where local developers managed to go all the way on their own from the design studio to the final stages of realization of the project are scarce. They have enough knowledge but no financial basis, while our market is not ready to finance all risks yet,” Sknar admits.

The best option for developers is to join projects in tandem with Ukrainian investors who are already past the early stage of the project and experience no problems with securing a plot of land for construction. The number of projects, which needs such cooperation, is quite high. “It is possible to say that European investors and developers regard Ukraine as a fashionable investment target, and Russians are no exception,” holds Vassily Boiko, deputy general director at UTG consultancy. Investors from Poland are most active in Ukraine, given similarities in mentality and approach towards doing business, Boiko says. Investors from the Baltic States are also present, as well as European giants from France, Britain, Germany and Ireland who examine investment opportunities in Ukraine.

“The situation on the housing property market does not differ much from the state of affairs in Russia,” Boiko says. “Incomes in Kiev – albeit lower than in Moscow – are higher than in the capitals of Russian regions.”

Commercial Real Estate Holds the Lead

A.T. Kearney advises retail chains to consider Ukraine not as a country “worth being watched” but as a country that should be entered immediately. Unlike Moscow, where the cost of entering the market is high, Kiev offers a chance to enter projects at much lower cost, while returns on projects in the Ukrainian capital remain higher than in Moscow. UTG puts the annual rate of return on retail real estate in Kiev at 20%, as compared to 14% in Moscow, office real estate 18% vs 10 % in Moscow.

According to UTG forecasts, within the next two years the total area of retail centers in Ukraine is likely to increase by 3.9 million square meters (over 125 new developments). UTG has prepared building projects measuring nearly 2 million square meters of retail space and the guild’s experts are convinced that their experience of operations in Ukraine could help the Russians adapt to the local market conditions. “Conditions for arrival of Russian retail operators and developers in Ukraine are obvious. Those are the enormous market potential, no language barriers, similar mentality, similar ways of making business, efficient partners who are able to offer the widest possible choice of retail properties and financing projects,” Boiko is convinced.

Shopping centers in Ukraine are growing rapidly although some of the Russian operators who work in Ukraine experience certain difficulties. That happens to those who overrate their own potential and brands, as well as due to the strong standing of local operators. At the same time, Ukraine has already seen examples of successful projects by Russian chains Paterson, Pyaterochka and Eldorado.

The Island of Crimea

Ukraine’s main holiday resort – the Crimea Peninsula – ranks only 8th among Ukraine’s regions in terms of foreign investment received, after the capital, Dnepropetrovsk, Odessa, Kievskaya, Donetsk, Zaporozhye and Kharkov provinces. The main statistics department of the autonomous republic of Crimea reports that in 1Q of 2006 the Crimean economy received $12.7 million in direct foreign investment, including $5.6 million (44.2%) from the CIS countries and $7.1 million (55.8%) from other parts of the world.

Russia, Germany, the Virgin Islands, Cyprus, the U.S., Uzbekistan, Switzerland, Great Britain and Latvia account for the largest volumes of investments, made within the framework of inter-governmental cooperation treaties. Those countries taken together account for 87.3% of overall foreign investment in Crimea. Foreign cash is most often used to finance projects in construction, hospitality and catering, and support companies involved in property services.

Private investors are increasingly active in purchasing what they call their “second homes” in Crimea, just as it happens in resort areas of Bulgaria, Croatia, Spain and Portugal where holiday homes are snapped up Germans, Britons and Scandinavians, Bondarenko says. According to some reports as many as 70 to 80% of Scandinavia residents have already purchased villas and apartments in southern Europe. Bondarenko believes that Russian investors could find interesting offers in Evpatoria, Feodosiya and Odessa. For example, a 2-hectare plot located at a distance of 7 km from Evpatoria and 200 meters from the waterfront is available for $170,000 whereas a private home that could be converted into a small hotel in Yalta, measuring 270sqm, on a plot of 0.4 of a hectare is offered for $350,000.

Russians Are Coming. Slowly

Konstantin Aprelev, vice-president of the Russian Guild of Realtors, believes that the acute shortage of vacant building sites in Moscow and St. Petersburg forces Russian construction firms and investment companies to enter Ukraine’s property market. “Ukraine’s market will still be growing for some time, while in Moscow it has already stabilized. Clearly, it is better to invest where the market is growing and where investing in risky projects is still possible.”

Ukraine’s property market offers Russian investors an opportunity to diversify their business. Aprelev says that Alfa Bank, for example, has shown interest in projects in Kiev, Odessa and Yalta but warns against making large investments in a hurry. The main risk, he says, is of political nature. Other major Russian developers, too, are becoming increasingly active in Ukraine. Not long ago Alexei Adikayev, vice chairman of Mirax Group, took part in the session of the joint work group of high-rise construction experts of Moscow, St. Petersburg and Kiev. The event was also attended by experts from Belarus and Kazakhstan.

The session was aimed at sharing experience in drafting legal acts governing high-rise construction. Mirax Group’s press-service refused to elaborate on the projects discussed at the session. Yet, it is no secret that Ukraine’s government is working on the plan of high-rise development. Kiev’s chief architect Vassily Prisyazhnyuk says that Ukraine treats high-rise development with all responsibility and that is why no high-rise projects will be launched in the country until international experience is examined thoroughly.

The company Inteko has begun a development project in Kiev, where the company plans 110,000 to 150,000sqm of apartments. The project is estimated to be worth a total of $80 million. Last fall the Moscow-based construction company Barkli opened its office in Kiev, where the company is working on the plan for redevelopment of industrial estates. Barkli plans construction of prime residential estates, Slavic Culture centers and hotels in the city. The Moscow Investment and Construction Company (MISK) plans a micro-district in Lugansk.

Some of the Moscow companies, however, were forced to suspend their projects in Ukraine due to difficulties with securing building sites. The Konti corporation had mulled its participation in a project to rebuild Soviet-era residential areas along with Kievgorstroi holding, which holds the monopoly on the local construction market. But the project was suspended, just as the SU-155 residential project, Konti’s press service has reported. The company’s spokesperson would not elaborate on the reasons but gave to understand that the delay was brought about by unstable political situation in Ukraine.

Ukrainian market appeals not only to major development firms but also to smaller Moscow-based investment and construction companies. Several joint Russia-Ukraine companies are operating in Kharkov, the second biggest city of Ukraine. The Moscow-Ukraine construction company is building what is to become the country’s first international commercial center Yevropa (Europe). The joint firm Batris is working on a project to redevelop several residential areas in Levada District.

Given the lack of financing the municipal government is also working on a plan that will allow young families to receive apartments in dilapidated residential blocks under a special agreement whereby newly married couples will assume an obligation to renovate apartments at own expense, whereupon they will secure a title to the property. Admittedly, that project is yet to be examined by the lawyers and approved by the municipal legislature.

The average area of a Ukrainian apartment in newly built residential blocks is 105.7sqm, in rural areas 146.9sqm and 97.3sqm in urban areas. Three-room apartments account for 31.5% of all newly built apartments, 1-room apartments make up 15%, 2-room apartments 25.9%, while apartments with 4 and more rooms account for 27.6%.

Orange Illusions

“No matter how attractive the market is ethnic tensions and political risks play a significant role for foreign investors. Although, in truth no matter who is at the helm there are always officials who have considerable interest in real estate,” Boiko assumes. In addition to political risks investors in Ukraine face the same difficulties as in all other post-Soviet countries.

“What is it that holds back the development? Lack of transparency on the land market, ambiguities in legal status of municipally-owned lands, mismanagement of land resources and widely spread use of title to permanent use of plots,” says Bondarenko. “Ukrainians pinned great hopes on the Orange Revolution. They thought they would live like Europeans. But it is not that simple. In the long run, investors do not care whether the government is orange or of some other color. What they care about is political stability, transparency and predictability of tax legislation.”

“Ukrainian realtors had hoped that the Orange Revolution would bring about long-awaited positive changes to land-use legislation, for that was what the leaders of the revolution had pledged to do. Nothing has changed ever since. Moreover, the situation is even worse now,” Bondarenko complains. “We realize that under the previous regime many building plots were allocated in violation of law, but in the wake of the events on Maidan (Independence Square in Kiev), a new line of business emerged in Ukraine, i.e. blocking building sites (with a view to disrupt construction works). Of course, there are cases where construction of a new property may be damaging to residents of neighboring buildings, but much more often the building sites are blocked at the initiative of those who have nothing to do with local residents. They hire trained staff, mostly women. We call them “black pantyhose”. They spend all day near the fence, harassing security guards. To have the site unblocked the developer is offered to transfer $50,000 to an obscure charity account.”

“As I was consulting a large investment fund registered in the Virgin Islands I noticed those misgivings on the part of investors,” Bondarenko says. “Originally, the fund had planned to launch operations on April 1, i.e. immediately after the parliamentary elections, but then the move was postponed till May 1, and then again till June 1. They waited for the coalition to be formed in the Rada. Now their arrival has again been postponed till fall, but I am not sure if the work will begin or not, although projects are ready to be launched and cash is available.”

Ukraine’s priority tasks are to adopt a new housing policy, streamline land-use and town-planning operations and rebuild engineering and road infrastructure in the cities. Artur Oganesyan, vice-chairman of ASNU and CEREAN president, agrees: “Corrupt officials block allocation of sites, the archaic system of licensing prevails. Foreign investors simply do not understand and fail to cope with such conditions; that is why they shun Ukraine. Only by changing the system it is possible to boost construction and lower prices.”

The International Monetary Fund expects Ukraine’s GDP to grow 2.3% in 2006. In 2004, that figure stood at 12.1% and dropped to 5.2% in 2005. Inflation is forecast to be 13%. As a result, Ukrainians will find it harder to repay their bank loans. Marinutsu anticipates a postponed demand for real property. All that will bring about problems with sale of new developments and lower returns on investment.