There is no doubt that the market down-cycle had an abrupt impact on the real estate sector, mainly due to the lack of project and mortgage financing, not to mention the sharp contraction in demand in view of the overall economic meltdown.
Residential and commercial property markets experienced similar effects. Yields on high-quality commercial properties rose up to 15-20 percent, while prices in the residential sector decreased by over 30 percent, in year-on-year terms. Sharp contraction in demand and lack of trust from end buyers has forced developers to freeze most of the projects and focus on cost-cutting measures to enhance their liquidity.
As most of the projects were leveraged, with debt funding often times utilized to increase their land bank rather than fund the actual construction, Ukrainian developers faced problems in meeting their financial liabilities. Most market players were forced to substantially downsize their operational activity and attempted to dispose existing assets in seek of cash, which was needed to cover ongoing needs.
Volatility of the local currency led to the establishment of Ukrainian hryvnia-denominated lease agreements. This happened as tenants possessed sufficient negotiating power to transfer their currency risks onto landlords. And it marked the decisive shift from “the landlord’s market” to the “tenant’s market,” reverting the trend of the past 5 years.
Hence, a number of questions arose since the fall 2008, when the Ukrainian economy, including real estate sector, experienced the hardest impact of the meltdown. Why were developers not ready to withstand such conditions? What are the prospects for the nearest future? And finally, is there a recipe for healthy operations in the current circumstances?
I could only answer them in the view of our experience at Dragon-Ukrainian Properties & Development (DUPD), a real estate fund that has raised $308 million through a listing on the London Stock Exchange’s alternative investment market and has invested over $200 million into Ukraine thus far. We believe our strategy has proved efficient in a turbulent market environment.
In 2007, the buoyant real estate market pushed local players to intensify their investments in order to take advantage of double-digit property value growth, ultimately extending their portfolios. The widely-spread concept of pre-sales and relatively easy access to mortgage and project financing resulted in the substantial growth of projects at early development stages, which were cash-consuming rather than cash-generating, exposing its owners to the upcoming liquidity risks. While prompt delivery and quality of projects was of a lesser importance at a time of peaking demand, the first strike of the financial crisis revealed the impropriety of such policies since customers started to be more careful about their expenditures, pushing down demand for low-quality and semi-completed projects.
In that environment, we find ourselves in a more privileged position. We’ve always opted for softer, but financially correct investments adjusted for the long-term strategy, deciding to refrain from leveraging our investment projects prior to exhausting the equity capital assigned to each of them. We focused on improving our management tactics and, importantly, the quality of our portfolio. Careful selection, evaluation and hands-on approach to the development of Greenfield projects and acquisition of existing properties allowed us to hedge the risks and secure a stable financial position throughout the global crisis.
As of June 2009, DUPD has managed to remain unleveraged and holds a strong cash balance of over $88 million. Our investors are confident in our prospects, and have recently approved an investment of $16.7 million into the buy-back of DUPD’s shares. Despite the deterioration of real estate values in Ukrainian market, the valuation of our portfolio remains stable due to its high quality and fast development progress.
Since the end of 2007 we have successfully invested into 10 real estate projects in Ukraine, including three residential developments: Obolon Residential Towers on Minska square and two residential communities near Kyiv – Riviera Villas and Green Hills. We are bringing them onto the market today, despite the crisis, to give the smart option to customers: a quality product from a reliable investor.
When most out of town residential developments have frozen, we are continuing construction on our two gated communities as planned. We are keen to provide ready housing solutions to our clients. Hence we built not only the homes, but also all the due infrastructure. DUPD has already invested $25 million and will be investing $3 million more by end of 2009 into completion of the first construction phases of Green Hills and Riviera Villas investments. All the required investments are committed and reserved for their purposes on the fund’s accounts.
And here comes out another issue, equally important to the success of residential developments but widely neglected by most players during a buoyant market – innovations.
Thorough selection of projects was crucial for our investment program. We searched for outstanding concepts which would secure success in various market conditions. Riviera Villas Exclusive Residence Club came up as a completely new appearance in elite real estate, boasting a unique infrastructure and five-star service and setting a brand new trend in luxurious projects development. As for Green Hills, it has become a new word in suburban community culture and represents a Ukrainian embodiment of North-American lifestyle, offering unmatched quality for reasonable prices – a long-awaited offer for local customers. Both of them enjoy best suburban locations and unique design.
Obolon Residential Towers combine unique location on the central square of Obolon, where the Christmas tree is set each year, and quality design developed by a joint effort of local and renowned UK architects. As construction works start in 2010, the property will set the new standards of business-class residential space in Kyiv, marking the post-crisis revival and quality shift on the local residential market.
Coupled with our strong financial position the quality of these projects allows us to feel confident in offering buyers a reliable investment in high-quality real estate. Thus, if at the times of sheer growth and profits we could seem too conservative, today we afford ourselves to fetch the best opportunities and justify the trust of our clients possessing ample equity capital to continue funding the development costs throughout 2009 and construction works thereafter.
I’ve been frequently asked about my view on the background of the financial crisis. But analyzing the past, many forget about regulation of the present and generation of the future.
The meltdown created a number of unprecedented opportunities, which most of the players ignore because of their weak financial positions, and brought out unique lessons to be employed in the future strategies.
A forthcoming recovery will help many to revive, but it is important to bear in mind that no past concepts will work out any more. The market will admit only fair play – the best will get the most.
Chris Kamtsios is a senior partner and managing director of Dragon Asset Management, the asset management arm of Kyiv-based Dragon Capital. He can be reached at [email protected]
