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Overview of the Ukrainian Real Estate Market

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Overview of the Ukrainian Real Estate Market Powered By Docstoc
					Gaia Resource Advisors SA




Investing in Real Estate
    In the Ukraine

       By Coast Sullenger of
  Gaia Resource Advisors, Geneva

               April 2007
               A few observations:

• Real Estate in CEE was still a small sector prior to 2003—but
  then it came into vogue!

• Massive capital raising over past 2 years

• Expansion, share buy backs, new listings…

• “Buy & rent” approach doesn’t offer much upside

• Lots of people are now talking about the sector

• Development is profitable but very “work intensive”
  What RE investors are looking for:
       “Yield Compression”

A Cap rate of 10% means that if you generate $100 in
  rental income the property is worth $1,000. To
  achieve a higher return:

1) Rents must rise (they may go to $130-140)
2) Capital in-flows drive cap rates down and value up
Or, leverage at low rates to increase return

But, what can go wrong?....
            We all want to avoid:
          “Yield De-compression”
i.e., what if…

•   Cap rates are based on artificially high prices…
•   Interest rates go up (no leverage or higher interest…)
•   Project risk…
•   Political and economic risk—lower growth rates…
Apartments: quality is hard to find!
Comparing prices internationally—Kiev
           is not cheap!

Elite apartment statistics, 2006
25000
32000                                                                                                                                                                                                                                                                     14%
                                                                                                                                                                        P ric e, U SD /m2 (lhs )
                                                                                                                                                                        Rental yield, % (rhs )                                                                            12%
20000
                                                                                                                                                                                                                                                                          10%

15000
                                                                                                                                                                                                                                                                          8%

                                                                                                                                                                                                                                                                          6%
10000

                                                                                                                                                                                                                                                                          4%
 5000
                                                                                                                                                                                                                                                                          2%

    0                                                                                                                                                                                                                                                                     0%
                                                                                                                              Berlin




                                                                                                                                                                                            Tallin
                                                                                   Zurich




                                                                                                                     Munich
                                                                                                     Madrid




                                                                                                                                                                                                                                                                  Sofia
                                                                            Rome




                                                                                                              Kyiv




                                                                                                                                                                                                                                                         Warsaw
                                                                                                                                                                        Lisbon
                                                                                                                                                            Frankfurt
                                                                                                                                                   Vienna




                                                                                                                                                                                 Istanbul


                                                                                                                                                                                                     Prague
                                               Paris




                                                                                                                                                                                                                                     Athens
                                                                                                                                                                                                                                              Budapest
        Monaco




                                                                                            Geneva
                                                                   Moscow




                                                                                                                                       Stockholm
                                                       Amsterdam




                                                                                                                                                                                                                          Brussels
                 Prim. London




                                                                                                                                                                                                              Bucharest
                                Other London




                                               Sources: Global Property Guide, Planeta Obolon, Concorde Capital
           Who are the players?

                  The majors:
Company                    EUR mln

ImmoEast                        6,400

Meinl Eur Land                  6,100

GTC Poland                      2,700

Orco                            1,000

Echo Poland                     1,200

Raven Russia                     730

Sparkassen Immo                  900
ImmoEast
Meinl European Land
GTC Poland
Orco
                     Local players in Ukriane:

                                                      Equity              MCap at
                                          Date of
        Company                                      raised,   Stake,% placement,
                                       placement
                                                    USD mln               USD mln



 XXI Century                               Dec'05       139       36%         389

 Cantik Dev’t                             May'06         30      100%          30

 Sablink                                   Jun'06        35       73%          48

 VK Development                           Nov'06         23       37%          62

 TMM                                       Apr'07         na      TBD          na

Sources: Bloomberg, Concorde Capital
            Which strategy—
         Yield vs. Development?

• RE sector premiums historically high (NAV +
  15% plus…vs. 10-15% discount)

• Tight market, few quality assets, low liquidity

• One must develop in Ukraine!
Then what makes Ukraine RE so
          exciting?
                      An opportunity to “lever up”!


     Rus s ia                             25                                                5%
                                                         M ortgage loans outs .,
     T urkey
       I ndia                                            U SD bln (lhs )
       Brazil                                            M ortgage loans ,
                                          20                                                4%
     P oland                                             % of G D P (rhs )
   Slovakia
C zec h Rep.                              15                                                3%
   H ungary
    C roatia
      L atvia                             10                                                2%
      C hina
    E s tonia
    C anada                                5                                                1%
    EU - 15
        U SA
                                           0                                                0%
             0%         20%   40%   60%              '0 4            '0 5          '0 6 E

 Source: World Bank                            Source: Ukrainian Nat. Mortgage Assoc.,
                                               Concorde Capital estimates
               Extreme supply & demand mis-
                     matches: Offices
Office stock per '000 inhabitants in 2005, m2                       Office vacancy rates in 2005, %

       Kyiv                                                           Kyiv
   M os c ow                                                      M os c ow
  Budapes t                                                          P aris
   Wars aw                                                         M adrid
    P rague                                                        L ondon
    M adrid                                                       Wars aw
     M ilan                                                         M ilan
      P aris                                                     Budapes t
     Berlin                                                         Berlin
 Stoc kholm                                                      Brus s els
A ms terdam                                                        P rague
    L ondon                                                    Stoc kholm
  Brus s els                                                   A ms terdam

               0   2 ,0 0 0   4 ,0 0 0   6 ,0 0 0   8 ,0 0 0                  0%   5%   10%   15%   20%


                          Sources: Jones Lang LaSalle, Colliers
      Mis-matches: Warehousing

Warehouse Space Prices                        Stock per 1,000 Inhabitants ’06, m2



      Kyiv                                          Kyiv

  M os c ow                                     M os c ow

   P rague
                                              Budapes t

Budapes t
                                                Wars aw
  Wars aw
                                                 P rague
           0%        5%           10%   15%
                                                            0        500        1 ,0 0 0

Source: Jones Lang LaSalle, DTZ               Source: Jones Lang LaSalle, DTZ
                    Absence of high quality!

Office space by class in Kyiv, 2006      Warehouse Space by
                                         Class, '05



                        C   A                           A
                    11%     9%                          5% B
                                                          8%
                                 B+
                                              D
                                 23%
                                            46%

                                                               C
                    B                                       41%
                   57%




Source: Colliers                       Source: Astera
                              High Growth-Retail
                                                                          Ukraine Average Annual Salary (USD)
     Drivers for Retail Demand
                                                            3500
                                                            3000
            Ukraine Retail Turnover (USD bn)                2500
                                                            2000
80                                                          1500
70                                                          1000
60                                                              500
50                                                                  0
                                                                        2000       2002       2004          2006E
40
30                                                                         Disposable income (m ln UAH)
20
                                                       300000
10
                                                       250000
 0
     2000     2002    2004    2006E   2008E    2010E   200000

                                                       150000

                                                       100000

                                                        50000

                                                                0
                                                                        2001    2002      2003       2004       2005
                                                  Retail (cont.)
      Ukraine’s vs. Global retail sector market
                               4 ,0 0 0
                                                            P oland
                               3 ,5 0 0
Retail Sales per capita, USD




                               3 ,0 0 0            C zec h R ep

                               2 ,5 0 0
                                                                            T urkey
                               2 ,0 0 0        H ungary
                                                                 R us s ia
                               1 ,5 0 0                   R omania
                                               B razil             B ulgaria
                               1 ,0 0 0               A rgentina
                                               S lovakia                                         Ukraine
                                                               China
                                 500

                                     0
                                          0%    5%       10%        15%         20%                   25%
                                                 R etail S ales , C A G R 0 3 - 0 5
                                                             Bubble size represents retail turnover
 Housing Market—what small dwellings!


Residential real estate construction and stock in Ukraine
20                  C ons truc tion, mln m2 (lhs )                                                          25
                    Stoc k per c apita, m2 (rhs )
16                                                                                                          20


12                                                                                                          15



8                                                                                                           10


4                                                                                                           5



0                                                                                                           0
       '90    '91    '92    '93    '94    '95   '96   '97   '98   '99   '00   '01   '02   '03   '04   '05

     Source: State Statistics Committee
                                                                                                                                                      5700




                                                                         1000
                                                                                1500
                                                                                        2000
                                                                                                    2500
                                                                                                                                                      3000




                                                              500


                                                         0
                                             Kyiv city
                                         Donetsk reg.
                                      Dnipropetrovsk




Source: State Statistics Committee
                                         Poltava reg.
                                        Zaporizhzhya
                                         Ukraine avg.
                                         Kharkiv reg.
                                             Kyiv reg.
                                          Odesa reg.
                                         Lugansk reg.
                                       Mykolayiv reg.
                                      Sevastopol city
                                     Ivano­Frankivsk
                                       Cherkasy reg.
                                             Lviv reg.
                                            Sumy reg.
                                       Chernigiv reg.
                                        Crimean Rep.
                                                                                                                                                                              per capita…




                                      Kirovograd reg.
                                           Volyn reg.
                                            Rivne reg.
                                       Vinnytsia reg.
                                     Khmelnytsk reg.
                                                                                                                                          G RP per c apita, U SD




                                         Kherson reg.
                                       Zhytomyr reg.
                                                                                                      H ous ing s toc k per c apita, m2




                                         Zakarpatska
                                      Chernivtsi reg.
                                         Ternopil reg.
                                                                                                                                                                   Even wealthy regions have low stock




                                                         0
                                                             10
                                                                    20
                                                                           30
                                                                                40
                                                                                       50
                                                                                               60
                                                                                                      70
                                                                                                                                                        80
        We have an opportunity!




                     “NEWCO”



Sourcing…Analysis…Structuring…Execution…Management….
             Newco Team
J. Coast Sullenger
Partner Gaia Resource Advisors SA
 8 yrs as head of Emerging Markets, managed 5 Eastern Europe and Resources &
Energy funds at Lombard Odier Darier Hentsch & Cie (LODH), Geneva
 Was directly responsible for AUM exceeding USD 500m
 Consistent above average market returns with LODH
 Pre-LODH headed up sales and trading for Pioneer Securities in Russia


Igor Mazepa
CEO, Concorde Capital
 Graduated from Kiev’s National Economics University, International Economics faculty
 In investment banking sector since 1997
 Previously: Managing Director of Foyil Securities New Europe & MFK Investment Bank

Valeriy Kirilko
General Director of Concorde Development
 Graduated from Kiev’s State University of Commerce and Economy, faculty of
marketing and economy
 More than five years of experience in the industry
 Previous positions: Director of the Castle Development and Real estate Solutions
   Newco Team Cont.
Volodymyr Kochetkov-Sukach
Business Development Director
 Graduated from Kiev’s Polytechnic University, Technical faculty
 More than six years of experience in real estate sector
 Previous positions: Director of S&K, KHK, Deputy Director of Ukrainian Trade Guild




Igor Taran
Head of Consulting Department
 Graduated from Donetsk’s Commerce University, Mechanical faculty
 More than 10 years of experience in marketing
 Previous positions: managerial experience in companies Castle Development
and Real Estate Solutions
             Investment Style:
          Leveraging the relations!

 Opportunistic: primarily development, across all segments
   (residential, commercial, office, warehouse space, etc…)

 Low entry cost, sourcing prime locations

 Exploit advantages such as relations with local officials, superior
   architectural and engineering capacity, vision on region, sector…)
         Property Development Process
                                         Project                    Property
    Project definition
                                    development                  management

         1-3 quarters             6-12 quarters                 4-12 quarters

• Idea                    • Concept                       • Property management
• Research and analysis   • Business plan
• Decision making         • Financing strategy and plan
• Legal documentation     • Detailed project design




  Land lease agreement         Construction permits             Sale of business


                           • Financing
                                                           • Sale of business when
                           • Construction                    potential is realised




                                      Opening
        Deal Screening: Project initiation
                                 Initial            Investment              Concept
Search & Monitoring
                              Analysis               Analysis             Development



 Incoming offers
                       Project Checklist     Investment Analysis      Concept of Project
Monitoring of City    - General profile                                - Marketing concept
                                             - Legal audit
Council meetings      - Basic financials                               - General architecture
                                             - Marketing research
                      - Feasibility study                                & planning
                                             - Financial audit
                      - Marketing analysis                             - Financial scheme &
  Land auction                               - Security audit
                      - General plan                                     business plan
   monitoring                                - Business plan
                      - Risk assessment                                - Legal scheme
                                             - Deal scheme
                      - SWOT analysis                                  - Development schedule
 Public offers &
 announcements
                        Initial Investment   Intermediate Investment      Final Investment
  Mass media                Committee              Committee                 Committee
   monitoring

                                              Preliminary Agreement       Agreement with
Insider information     Analysis Direction
                                              with Project Owner(s)       Project Owner(s)
Deal Screening: Implementation

                    Planning




  Concept                              Advertising
              Approvals & Permits
Development                            Campaign




   Land                                Lease / Sale
                  Construction
Development                            Agreements




                                       Operational
 Financing    Putting into operation
                                       Management
                                  Projects Portfolio

                                                                        Site
                                                                        area   Construction size    Project’s    Completion
#    Description     Region          Format               Phase         (ha)        (sqm)          costs, USD      date       Stake
                                Inter-regional
                                trade-exhibition    Concept
1   Hyper mall     Kiev         complex             development         80     less   350 000      420 000 000    3qr.2010      17%

                                Specialized trade   Concept
2   Idea           Kiev         center              development         5      less    31 000      32 000 000     2qr.2009      50%


3   Kiev's sea     Kiev         Cottage village     Preparation works   5      less     6 000       4 000 000     2 qr.2008    100%


4   Makar          Kiev         Cottage village     Preparation works   88     less    50 000      38 000 000     3 qr.2009    100%

                                Regional trade
5   Rudneva        Sevastopol   centre              Preparation works   3      less    31 000      29 000 000     1 qr.2009    100%

                                                    Concept
6   Balka          Sevastopol   Multifunctional     development         7      less   320 000      310 000 000    2 qr.2010    100%

                                Trade-office
7   Brigantina     Donetsk      centre, class B+    Projection          2      less    36 000      38 000 000     3 qr.2009     50%

                                Specialized trade
8   Muravey        Zaporozhye   center              Preparation works   2      less    26 000      26 000 000     3 qr.2008     50%


                                                    TOTAL               191           850 000      897 000 000
Development Stage Projects
     Hyper Mall in Kiev Region, Trade Complex
     Concept development
                                                   Year of
       Site Area, ha    Construction size, M2                  % stake
                                                 completion
            80                350,000            3rd Q, 2010    17%


     Idea Specialized Trade Center, Kiev
     Concept development
                                                   Year of
       Site Area, ha    Construction size, M2                  % stake
                                                 completion
            5                  31,000            2nd Q, 2009    50%


     Rudneva Regional Trade Center, Sevastopol
     Concept development
                                                   Year of
       Site Area, ha    Construction size, M2                  % stake
                                                 completion
            3                  31,000            1st Q, 2009   100%
Development Stage Projects
    Balka Multifunctional Complex, Sevastopol
    Concept development
      Site Area, ha    Construction size, M2   Year of completion   % stake

           7                 320,000              2nd Q 2010        100%



    Makar Cottage Village, Kiev region
    Preparation works
      Site Area, ha    Construction size, M2   Year of completion   % stake

           88                 50,000              3rd Q, 2009       100%



    Kiev’s Sea Cottage Village, Kiev region
    Preparation works
      Site Area, ha    Construction size, M2   Year of completion   % stake

           5                   6,000              2nd Q 2008        100%
Development Stage Projects
     Muravey Specialized Trade Center, Zaporozhye region
     Preparation works
       Site Area, ha    Construction size, M2   Year of completion   % stake

            2                  26,000              3rd Q, 2008        50%




     Brigantina Trade Office Center, Class B, Donetsk
     Projection
       Site Area, ha    Construction size, M2   Year of completion   % stake

            2                  36,000              3rd Q, 2009        50%
                     Key Value Added

 Identification of deals
    Constant monitoring of the market. Diversified information sources. Comprehensive evaluation of
       deals. Multi-level, cost saving project initiation procedure.
 Analysis of deals
    In-house marketing research team. In-house business planning team. Six years of real estate
        experience in local and international environment. More than 60 projects completed in all
        areas of real estate.
 Legal and technical due-diligence
    Diversified connections and cooperation with numerous professional legal companies and
        architecture teams (local and international). Expertise in local construction standards.
 Structuring of deals
    Strong experience in corporate finance. Multiple available and tested investment instruments and
        schemes. Established cooperation with local and international banks.
 Execution
    Constant supervision and monitoring of planning and construction processes. Control over quality
       and budget spending. Strong connections with local authorities. Established risk control and
       risk mitigation procedures.
 Management
    In-house project management team. Multi-level control and responsibility.
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            Conclusions:


• A focused approach is best—don’t just
  throw darts!
• Structural window of opportunity open
  for several years
• Invest for consolidation in the sector
• Invest with people you know…
Concorde Development
 “ Right decisions for Your projects”




           26 O.Gonchara Street
           Office 88 Kiev, 01034
                 UKRAINE

          Office@con-dev.com.ua
           www.con-dev.com.ua
Gaia Resource Advisors SA
            14 Rue Calvin
     1204 Geneva, SWITZERLAND
        +41 22 317 7820 office
         +41 22 317 7821 fax
       Info@gaiaresources.ch

				
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