A couple of years ago I interviewed the intrepid investor John Suggitt who was developing a major real estate fund in the Ukrainian capital at the height of tensions with Russia. Recently I revisited Jon and his Kiev Real Estate Recovery Fund to see how business had panned out for him in the last couple of years and how the investment climate in the Ukraine had changed in this time.
The Fund recently closed its first round and will soon start more fundraising. Despite a string of bad news from the country along with continued uncertainty and conflict in the Donbass region the Fund has been a major success, achieving a gross yield of 13 percent this year through its strategy of servicing the top end of the Kiev property market with high quality apartments.
John has carved a niche, he pounds the streets of Kiev looking for hidden gems, overlooked and underdeveloped property in premium locations, once purchased he transforms run down grotty flats with mismatching rooms, decrepit bathrooms and furry floors into airy, modern, well located apartments. These finely upholstered living spaces are highly prized by the ex-pat community of diplomats, bankers and business people that still flock to Kiev.
Lack of competition, attention to detail and a strong understanding of what tenants require has made the business a big success. Now the Fund is looking to expand and there are many signs that investing in Kiev real estate and the Fund is worth considering.
- Real estate although inexpensive thanks a recent crash is a good long term investment as a lack of strong capital markets and stock exchange makes property a safer bet for both locals and investors in the Ukraine.
- The Fund have long standing connections within the country and excellent knowledge of the market, not to mention a highly experienced management team.
- The target market of ex-pats is relatively stable and less affected by economic vagaries than the general population and have the ability to pay in hard currency, which helps hedge against currency risk.
While it is impossible to ignore that Ukraine as a whole remains in flux, the efforts of reformers appear to be making head way and there are signs of economic recovery following the loss of Crimea. Other investors have been stung by the painful experience of corruption in Ukraine which of course will not disappear overnight, despite the country’s efforts to combat the problem.
As John found out through some new tenants Kiev is also a slightly unlikely tech start up hub, with many companies locating there thanks to Ukrainian tech workers “awesome programming skills”, this combination of high skill levels, low wages and low costs – particularly following the collapse of Hryvnia have made the country a magnet for entrepreneurs at the cutting edge of the internet of things and other tech fields.
However despite some bright spots overall foreign investment in Ukraine has fallen a long way since the onset of conflict and what investment there is often comes via offshore centre Cyprus, which often means money recycled from the Ukraine.
The conflict in the Donbass is off putting to investors, political instability is naturally a major factor in outsiders avoiding the country. However the conflict is only directly affecting around 10 percent of the Ukraine, across most of the country life and business goes on as normal. Investors often lump a country together forgetting that while parts of it are no go areas, others remain unscathed.
All this presents an opportunity for those willing to take a risk, an absence of many foreign investors means that many areas or sectors can be monopolised due to lack of competition, as the KRER fund has done to an extent. These factors means that returns on FDI in fragile states are 50 percent higher than other countries, (of course the risk is also higher), but crucially the perception of risk is usually higher than the reality.
The Ukrainian economy has started a nascent recovery hitting 2.3% growth in the last quarter of 2016, inflation is relatively low and keeping it that way is the NBU priority. The country has steered a path towards a stronger recovery, but the situation remains fragile, shocks in the world economy or of course a resumption of the “frozen” conflict with Russia are the two factors which could derail the economy.
It appears that right now Kiev property represents hidden value, the combination of low property prices but excellent long term value, overstated political risk and a weak Hyrnvia are a classic sweet spot of where long term value has been obscured by a recent crisis.
The KRER fund offers a good way to gain exposure to the market, but as ever any investment in a volatile emerging market has to be treated with caution and care, anyone considering this should have an appropriately high risk appetite for such an undertaking.