Friday Letter Orange is the new green

One little known fact about the Ukraine is that it boasts a population of 46 million, making it the most populous country in Eastern Europe. By contrast, Poland only has 38 million people, yet so far it has attracted the most investment out of all countries in the region. 

This point was made last week at the Ukraine Investment Forum, held in the splendor of London’s Reform Club in Pall Mall, where the Kiev-based European Business Association invited the Deputy Minister of Finance and the Deputy Governor of the National Bank of Ukraine to extol the virtues of the country.

Under its former Soviet masters, the Ukraine suffered a turbulent past, from the Holodomor famine of the early 1930s to the nuclear power plant disaster at Chernobyl in 1986. More recently, the Orange Revolution leader Victor Yushchenko was badly disfigured by a near lethal dose of dioxin during his presidential campaign against the Kremlin-backed candidate Viktor Yanukovych.

Disasters and assassination attempts aside, however, the country is beginning to show signs of strength, particularly when it comes to foreign investment. Even though 2005 was a record year for direct foreign investment, 2006 is shaping up to be even better. Approximately $1.7 billion (€1.3 billion) was invested between January and July, outstripping the same period in the prior year by 350 percent; at the same time, GDP growth has hit 5.5 percent year-on-year despite rising energy prices caused by Russian interference in the oil markets.

So what of property?

Well, in the words of NAI Pickard chairman Terry Pickard, who has been working in the country for almost two decades, there is just one word to describe the Ukrainian real estate markets: “booming.”

He and fellow speaker Nick Cotton, a Ukrainian-based director of DTZ, both predict a bumper year in the Ukrainian capital of Kiev with almost 900,000 square meters of new office, retail and industrial space being developed in 2006 and 2007.

But, according to attendees, even this level of supply is insufficient to meet the growing demand as more foreign companies move in.

Pickard showed a map comparing the Ukraine of today with Poland in 1995, highlighting the relatively limited penetration of retail groups in each country. Today, of course, Poland has seen a substantial increase in the number of firms doing business in the country; Pickard estimates that a decade from now, as international chains like German supermarket company Metro expand into the Ukraine, retailers such as Ikea, Wal-mart and Tesco could cover the whole of the country.

But it is not just international retailers that are entering. A number of real estate funds have also been established to invest in the country’s commercial property market.

Last year, the Primeros Property Fund became the first Western-standard investment vehicle to offer investors access to the local real estate market. And more are on the way, including an industrial fund. Given its geographic location as the gateway between Europe and Russia, the Ukraine is well-positioned to become a major logistics hub going forward.

But even as investors push further East for returns, a word of warning: while Pickard and others can remember a time when returns of 30 percent were achievable in the Ukraine, those days have already passed. Even in the far-flung reaches of the Ukraine, the story remains the same as in the rest of Europe: a significant inflow of capital dampening potential returns.

“This is my message to the Ukrainian people,” Jose Manuel Barroso, president of the European Commission, said last year. “We know that Ukraine is a European country. Our doors are open.”

Real estate investors seem to have gotten the message.