Ben Aris in Berlin -

Ukraine's real estate sector is on fire, but was the preserve of specialist investors until last summer. On June 1, 2007, Dragon Capital raised $208m by listing the first-ever fund specialising in Ukraine on London's Alternative Investment Market (AIM). The IPO marked a new era for Eastern Europe, as it made it possible for mainstream investors to get a piece of Ukraine's fast growth from the comfort of their desks in London.

The launch of the fund was a watershed and underlines the advantages of playing catch up. While Russia has a few listed funds that allow international investors to get exposure to Russia on the international exchanges, it took years for these funds to appear. Ukraine has only been a hot investment destination for little more than a year and yet the first international listed funds are already appearing.

The Dragon-Ukrainian Properties and Development (DUPD) fund was the first and targets the booming real estate sector, returning just over 30% in the first six months of its life. DUPD quickly disbursed most of the cash raised into larger real estate projects and followed on with a secondary public offering - mostly taken up by the existing investors - to raise another $100m in November.

Tomas Fiala

"Kyiv's real estate market continues to suffer from a severe shortage of commercial properties of all types, notably Class A, with near-zero vacancy rates and rents currently higher than in many Central and Western European capitals," Dragon says.

Dragon's private equity arm had been investing into real estate since about 2000, but when the market really started to boom in 2004 the deals became bigger and more complex, so management decided it was time to deepen the pool of capital. "Our real estate investments have been very successful - investments into developing or redeveloping business centres, retail, warehouses, and so on - which were earning triple-digit internal rates of return," says Tomas Fiala, co-founder and managing director of Dragon Capital. "But as the projects got bigger we were constantly looking for co-investors and it got to the point where it simply made sense to set up a vehicle and list it. This appeals to the investors too as it gives them more diversity."

The flow of capital into the Ukrainian market is still small by international standards and remains a specialists' niche. But with traditional markets yielding returns in single digits compared with the 17-18% that Dragon Capital's fund has been producing, interest in the market is rising fast.

"It's still early days for Ukraine and the growth is still accelerating," says Fiala. "The strategic and portfolio investment is growing exponentially. Ukraine is so underinvested compared to the other markets of Central and Eastern Europe that it's starting to attract real attention. People are starting to realise this is an unmissable opportunity."

Fiala also expects that the process will go much faster than in Ukraine's peer markets, as the trail has already been blazed elsewhere and most investors are expecting things to unfold in Ukraine in a similar way to, say, the Russian or Polish market. "Ukraine is easy to navigate, as the process is going to be the same as elsewhere - there will be no surprises," reckons Fiala.

The one bugbear is the unstable politics. Shortly before the end of last year, the firebrand hero of the Orange Revolution, Yulia Tymoshenko, scraped into power as the new prime minister, but her coalition rules with a razor-thin majority of only one seat in the Rada, Ukraine's parliament. The fragile coalition promises to be unstable, but fund managers are surprisingly sanguine about Ukraine's turbulent politics. "Here no one has the upper hand and so the political risks to business are much less than in somewhere like Russia. Despite the constant elections more than $10bn of foreign direct investment and portfolio investment has flowed into the country over the last year," says Fiala.

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