The Ukraine is not a hot place to invest in right now, the uncertainty of war and an economy beset by the problems of corruption and embezzlement, not to mention the simmering conflict with separatists in the East all paint an unattractive picture. As a result of the fighting the country has seen a calamitous fall in its GDP along with many other economic and social indicators, in particular Ukraine’s industrial base has suffered greatly thanks to its proximity to the warzone.
But amid all this depressing news one entrepreneur has unearthed an exciting opportunity, namely setting up a new fund to invest in Kiev’s residential property market. I spoke to the long term Kiev resident and businessman John Suggitt who explained why he thinks real estate in the capital is an amazing niche investment.
Rise and Crash of the Ukrainian economy
The onset of the global financial crisis in 2008 ended a credit boom in the Ukraine, the subsequent crash saw residential property prices drop from around USD 9000 – 10,000 per square metre (sqm) to USD 1000 – 2000 per sqm where they stand at the present day. The recent uncertainty around the conflict and many locals need for hard cash have made Kiev even more of a buyers’ market. Overall Ukraine has seen one of the biggest drop in property prices in the world over the last few years – but as we know, a calamitous drop in prices is an opportunity for others to buy.
After a period of living in Barcelona John was drawn back to his former home in search of new opportunities. Despite his extensive knowledge of the country he viewed investments in Ukraine’s industry and the stock market with suspicion. But eyeing the state of Kiev’s property market combined with his local business knowledge led him to establish the Ukraine Real Estate Recovery Fund. There is a limited supply of good quality developments in the city – plus many local landlords are unwilling or unable to provide capital renovation and often find it difficult to meet the specific needs of foreign landlords.
Kiev: a new hub of diplomatic activity
The onset of the conflict in the East, while clearly bad for business in a general sense– has meant a growing army of embassy staff as the full array of experts in all matters diplomatic, military and economic are brought in by foreign governments to cover the ongoing situation from every possible angle.
This combination of low prices and unmet demand for high spec property was a unique opportunity which John seized with both hands, setting up the Fund with former business partners from his long years in Kiev. Now the Fund is investing in high quality residential property, refurbishing the apartments and letting them to the many embassies and other foreign institutions and corporate clients that inhabit the Ukrainian capital.
The Fund also benefits from a number of other factors:
• Kiev and its property market is increasingly seen as a safe haven within the country – as safe store of value when compared to a volatile currency or stock market.
• For outside investors the decline of the Hyrvna is an opportunity to be taken – making the price of anything in the country lower if you are purchasing from abroad.
• The Fund’s customers generally pay in hard currency, reducing some of the currency risk, which of course can be the most critical factor for foreign investors in an emerging market.
• The Ukrainian legal regime around buying and selling property is clear and relatively easy to navigate.
• Rental yields in Kiev are a strong 9% gross (above European averages) – the fund is aiming even higher and hopes to achieve 12%.
Looking to the future
The Fund has put together an impressive advisory team – all veterans of doing business in Ukraine who will help guide its operations. If the first Fund is successful, John plans on developing another larger one to follow on and reap the rewards of Kiev’s property market.
The future of the Ukrainian Economy
Many years ago when I was paid to analyse Eastern European financial institutions a few Ukrainian banks passed across my desk during a time when they were undergoing an unprecedented boom. In retrospect it was obvious that balance sheets growing by 50% a year is unhealthy and unsustainable, but during a boom in an emerging economy these problems are often overlooked. As everyone now knows the country suffered a painful correction in the wake of the world’s financial crisis, the economy fell into deep recession and an overleveraged banking system cut off credit to the rest of the economy. While the country made a recovery as it entered the next decade, the political crisis, coup and Russian invasion of Crimea last year all combined to send Ukraine back into depression.
Countries recovering from deep recessions often experience a strong bounce back as confidence recovers and the spare capacity in the economy gets taken up, but in Ukraine’s case it will have to make deep structural changes in order to sustain longer term growth. This includes making more of the country’s natural strengths in agribusiness and heavy manufacturing, but also reducing corruption and developing stronger institutions.
There have been signs of good news, a group of international creditors led by Franklin Templeton have reached an agreement with the government on the restructuring of its debt. But there is also conflict looming around debt as Ukraine has to pay back a USD 3 billion Euro bond owed to Russia. Kiev is likely to argue force majeure in an attempt to avoid paying back the funds back, which could lead to an “interesting” court battle.
So while there is room for some optimism the situation is fragile.
Things look bleak for Ukraine in many respects, the economy is still in deep recession, corruption is still widespread and the country has an aggressive neighbour to its East which has encroached onto its territory. For inspiration Ukraine could perhaps look to countries like South Korea and Taiwan which have prospered despite uncertainty and hostile neighbours.
In fact in the last 50 years few countries have enjoyed such successful economic development and a peaceful shift towards democracy as these two. Yet at the same time both nations have faced mortal danger from an aggressive and at times unpredictable neighbour (China and North Korea), so there is hope for Ukraine that it can overcome its geopolitical dilemma – but it is clear that this will require a great deal of political will.