gaia resource advisors sa. a few observations: real estate in cee was still a small sector prior to...
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Investing in Real EstateInvesting in Real EstateIn the Ukraine In the Ukraine
By Coast Sullenger of By Coast Sullenger of Gaia Resource Advisors, GenevaGaia Resource Advisors, Geneva
April 2007April 2007
Gaia Resource Advisors SA
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 upOr, 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
0
5000
10000
15000
20000
25000
Mon
aco
Prim
. Lo
nd
on
Oth
er L
ond
on
Pari
s
Am
ster
dam
Mos
cow
Rom
e
Zu
rich
Gen
eva
Mad
rid
Kyi
v
Mu
nic
h
Ber
lin
Sto
ckh
olm
Vie
nn
a
Fran
kfu
rt
Lisb
on
Ista
nb
ul
Tal
lin
Prag
ue
Bu
char
est
Bru
ssel
s
Ath
ens
Bu
dap
est
War
saw
Sofi
a
0%
2%
4%
6%
8%
10%
12%
14%P rice, USD/m2 (lhs )
Rental yield, % (rhs )
32000
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:
CompanyDate of
placement
Equity raised,
USD mlnStake,%
MCap at placement
,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 Then what makes Ukraine RE so exciting?so exciting?
Then what makes Ukraine RE Then what makes Ukraine RE so exciting?so exciting?
An opportunity to “lever up”!
0% 20% 40% 60%
U SAEU - 15C anadaEs tonia
C hinaLatvia
C roatiaHungary
C zech Rep.S lovakia
P olandBrazilI ndia
T urkeyRuss ia
0
5
10
15
20
25
'04 '05 '06E
0%
1%
2%
3%
4%
5%Mortgage loans outs .,U SD bln (lhs )
Mortgage loans ,% of GDP (rhs )
Source: World Bank Source: Ukrainian Nat. Mortgage Assoc., Concorde Capital estimates
Extreme supply & demand mis-matches: Offices
0 2,000 4,000 6,000 8,000
Brussels
London
A msterdam
Stockholm
Berlin
P aris
Milan
Madrid
P rague
Warsaw
Budapes t
Moscow
Kyiv
0% 5% 10% 15% 20%
A msterdam
Stockholm
P rague
Brussels
Berlin
Budapes t
Milan
Warsaw
London
Madrid
P aris
Moscow
Kyiv
Office stock per '000 inhabitants in 2005, m2 Office vacancy rates in 2005, %
Sources: Jones Lang LaSalle, Colliers
Mis-matches: Warehousing
0 500 1,000
P rague
Warsaw
Budapes t
Moscow
Kyiv
Stock per 1,000 Inhabitants ’06, m2
Source: Jones Lang LaSalle, DTZ
0% 5% 10% 15%
Warsaw
Budapes t
P rague
Moscow
Kyiv
Warehouse Space Prices
Source: Jones Lang LaSalle, DTZ
Absence of high quality!
A
9%
B+
23%
B
57%
C
11%
Office space by class in Kyiv, 2006
Source: Colliers
A
5% B
8%
C
41%
D
46%
Warehouse Space by Class, '05
Source: Astera
Drivers for Retail Demand
0
500
1000
1500
2000
2500
3000
3500
2000 2002 2004 2006E
Ukraine Average Annual Salary (USD)
0
10
20
30
40
50
60
70
80
2000 2002 2004 2006E 2008E 2010E
Ukraine Retail Turnover (USD bn)
0
50000
100000
150000
200000
250000
300000
2001 2002 2003 2004 2005
Disposable income (mln UAH)
High Growth-RetailHigh Growth-RetailHigh Growth-RetailHigh Growth-Retail
Retail (cont.)
P oland
Russ ia
C zech Rep
Romania
S lovakia
HungaryT urkey
Bulgaria
A rgentinaBrazil
China Ukraine
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
0% 5% 10% 15% 20% 25%Retail Sales , C A GR 03- 05
Reta
il S
ale
s p
er
cap
ita,
US
D
Ukraine’s vs. Global retail sector market
Bubble size represents retail turnover
Housing Market—what small dwellings!
0
4
8
12
16
20
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '050
5
10
15
20
25C onstruction, mln m2 (lhs )Stock per capita, m2 (rhs )
Residential real estate construction and stock in Ukraine
Source: State Statistics Committee
Even wealthy regions have low stock per capita…
0
500
1000
1500
2000
2500
3000
Kyi
v ci
ty
Don
etsk
reg
.
Dn
ipro
pet
rovs
k
Polt
ava
reg
.
Zap
oriz
hzh
ya
Ukr
ain
e av
g.
Kh
arki
v re
g.
Kyi
v re
g.
Od
esa
reg
.
Lug
ansk
reg
.
Myk
olay
iv r
eg.
Sev
asto
pol
cit
y
Ivan
o Fr
anki
vsk
Ch
erka
sy r
eg.
Lviv
reg
.
Su
my
reg
.
Ch
ern
igiv
reg
.
Cri
mea
n R
ep.
Kir
ovog
rad
reg
.
Vol
yn r
eg.
Riv
ne
reg
.
Vin
nyt
sia
reg
.
Kh
mel
nyt
sk r
eg.
Kh
erso
n r
eg.
Zh
ytom
yr r
eg.
Zak
arp
atsk
a
Ch
ern
ivts
i re
g.
Ter
nop
il r
eg.
0
10
20
30
40
50
60
70
80GRP per capita, USD
Hous ing s tock per capita, m2
5700
Source: State Statistics Committee
We have an opportunity!We have an opportunity!We have an opportunity!We have an opportunity!
Sourcing…Analysis…Structuring…Execution…Management….
“NEWCO”
Newco TeamNewco TeamNewco TeamNewco Team
Igor MazepaCEO, 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
J. Coast SullengerPartner 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
Valeriy KirilkoGeneral 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.Newco Team Cont.Newco Team Cont.Newco Team Cont.
Igor TaranHead 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
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
Investment Style: Investment Style: Leveraging the relations!Leveraging the relations!
Investment Style: Investment Style: Leveraging the relations!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 ProcessProperty Development ProcessProperty Development ProcessProperty Development Process
Project definition Project development Property management
6-12 quarters 4-12 quarters1-3 quarters
• Idea
• Research and analysis
• Decision making
• Legal documentation
• Concept
• Business plan
• Financing strategy and plan
• Detailed project design
• Property management
Construction permits Sale of businessLand lease agreement
• Financing
• Construction
Opening
• Sale of business when potential is realised
Project Checklist
Deal Screening: Project initiationDeal Screening: Project initiationDeal Screening: Project initiationDeal Screening: Project initiationSearch & Monitoring Initial Analysis
Investment Analysis
Concept Development
Incoming offers
Land auction monitoring
Public offers & announcements
Mass media monitoring
Monitoring of City Council meetings
Insider information
- General profile- Basic financials- Feasibility study- Marketing analysis- General plan- Risk assessment- SWOT analysis
Initial Investment Committee
Investment Analysis
- Legal audit- Marketing research- Financial audit- Security audit- Business plan- Deal scheme
Intermediate Investment Committee
Analysis DirectionPreliminary Agreementwith Project Owner(s)
Concept of Project
- Marketing concept- General architecture & planning- Financial scheme & business plan- Legal scheme- Development schedule
Final Investment Committee
Agreement with Project Owner(s)
Deal Screening: ImplementationDeal Screening: ImplementationDeal Screening: ImplementationDeal Screening: Implementation
ConceptDevelopment
Financing
Land Development
Approvals & Permits
Construction
Putting into operation
Planning
Advertising Campaign
Lease / Sale Agreements
Operational Management
# Description Region Format Phase
Site area (ha)
Construction size (sqm)
Project’s costs, USD
Completion date Stake
1 Hyper mall Kiev
Inter-regional trade-exhibition complex
Concept development
80 less
350 000 420 000 000 3qr.2010 17%
2 Idea KievSpecialized trade center
Concept 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%
5 Rudneva SevastopolRegional trade centre Preparation works
3 less
31 000 29 000 000 1 qr.2009 100%
6 Balka Sevastopol MultifunctionalConcept development
7 less
320 000 310 000 000 2 qr.2010 100%
7 Brigantina DonetskTrade-office centre, class B+ Projection
2 less
36 000 38 000 000 3 qr.2009 50%
8 Muravey ZaporozhyeSpecialized trade center Preparation works
2 less
26 000 26 000 000 3 qr.2008 50%
TOTAL
191
850 000 897 000 000
Projects PortfolioProjects PortfolioProjects PortfolioProjects Portfolio
Development Stage ProjectsDevelopment Stage ProjectsDevelopment Stage ProjectsDevelopment Stage Projects
Hyper Mall in Kiev Region, Trade Complex
Concept development
Site Area, ha Construction size, M2Year of
completion% stake
80 350,000 3rd Q, 2010 17%
Idea Specialized Trade Center, Kiev
Concept development
Site Area, ha Construction size, M2Year of
completion% stake
5 31,000 2nd Q, 2009 50%
Rudneva Regional Trade Center, Sevastopol
Concept development
Site Area, ha Construction size, M2Year of
completion% stake
3 31,000 1st Q, 2009 100%
Development Stage ProjectsDevelopment Stage ProjectsDevelopment Stage ProjectsDevelopment 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 ProjectsDevelopment Stage ProjectsDevelopment Stage ProjectsDevelopment 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%
Identification of dealsConstant monitoring of the market. Diversified information sources. Comprehensive evaluation of
deals. Multi-level, cost saving project initiation procedure.
Analysis of dealsIn-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-diligenceDiversified connections and cooperation with numerous professional legal companies and
architecture teams (local and international). Expertise in local construction standards.
Structuring of dealsStrong experience in corporate finance. Multiple available and tested investment instruments and
schemes. Established cooperation with local and international banks.
ExecutionConstant 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.
ManagementIn-house project management team. Multi-level control and responsibility.
Key Value AddedKey Value AddedKey Value AddedKey Value Added
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DisclaimerDisclaimerDisclaimerDisclaimer
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…
“ Right decisions for Your projects”
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UKRAINE
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