Ben Seeder in Riga -

Nearly five years after launching at the peak of Ukraine's property market boom, Dragon Ukrainian Properties Development Trust (DUPD) is struggling to reassure its dismayed shareholders after the real estate sector tanked and a decision to spend third of the fund's money on buying small farm plots has not worked out as well as expected.

DUPD's investment manager, Chris Kamtsios, admits his decision to spend $125m of the $300m raised buying farmland outside of Kyiv has not turned out as well as the firm had hoped and the land bank investment, acquired from tiny plots of land outside Kyiv, had attracted "negative sentiment" from the Dragon trust's investors. "Initially, the land bank investment strategy was the main reason to invest for many of our shareholders," Kamtsios tells bne in a telephone interview in early February. "The idea was to buy hundreds of small plots of land from farmers and sell it on with the proper zoning in large pieces to large developers."

"Unfortunately... we have witnessed a huge collapse in land values since then, by 50% or more, and the demand now for large development property outside of Kyiv is virtually zero," he says. "We are waiting for that demand to recover, but it is hard to say when this will happen."

He explains that once the rezoning of the properties in the land bank was completed later in 2012, the fund could switch to selling it off in very small allotments instead of to developers. He says the land bank project should still generate profits for the company, but only in the long term, since currently there is not much interest for land from large-scale developers. "The rezoned land in the areas where we have bought still exceeds our acquisition prices, so we are still in the money on this one," he insists.

Don't bank on land

Real estate across all sectors plunged in Ukraine during 2009-10 as the crisis swept through the country. The number of residential transactions plummeted and retail property vacancies blew out. The global crisis on financial markets closed off Ukrainian banks' access to capital markets, and mortgage lending and project finance collapsed.

The trust began trading on the London Stock Exchange's Alternative Investment Market (AIM) in June 2007, after raising $208m in an IPO; it raised a further $100m in November that year in an additional private placement. Its shares peaked at £1.38 in December 2007, before starting a slow dive to 26 pence in March 2009. Values across all Ukrainian property sectors had dropped by between 50% and 80% as the world economic crisis took hold. At one point, the trust's assets held as cash exceeded its market capitalisation on the LSE.

In an effort to support the share price, the trust spent a portion of its cash in share buybacks, which had the shares trading at 34p in early February, with the latest in December last year. But despite the buybacks, investors holding the trust's shares are selling out. Morgan Stanley, which had bought almost 9% of the trust at IPO for $2 per share, sold its stake in 2009 at less than 50 cents on the dollar. Polar Capital followed suit, selling its 6% stake for a big loss in the same year.

During 2011, the investor exodus sped up; IPO investors Finisterre Capital, Julius Baer (now Artio) and Neon Liberty all sold their stakes. US hedge fund Weiss Asset Management bought a 4% share stake in October as the shares reached a recent low of 34p, and sold at a profit in late December for around 39p. "We have seen some of the larger investors that owned maybe 20% of the trust - they were forced to liquidate their positions in DUPD," Kamtsios says. "I think it was mainly pressure they had from redemptions in their own funds, it was their own liquidity problems, and nothing to do specifically with Dragon."

He says other investors had been supportive since the IPO, including Goldman Sachs, Spinnaker Capital and Cundill. "I think they know that Ukrainian real estate will not be the best performing sector; that it will take time to get back to the glory days of 2006-2007. That is the nature of private equity and real estate investments," Kamtsios says. Under the trust's management agreement, Dragon Capital receives around $4.4m in management fees per annum, in addition to administrative expenses.

Aside from the land bank, the trust's other assets are three gated residential developments on the outskirts of Kyiv, and seven retail projects, including shopping malls and DIY stores.

Volodymyr Tymochenko, a real estate analyst at Dragon Capital - the investment manager of the trust - says property values in retail and residential had fallen by 60-70% from their peak in 2007. While retail had almost fully recovered, the residential sector has not. "Mortgages began to recover until late last year with the European crisis. The largest share of the Ukrainian banking sector is owned by European banks, and they withdrew liquidity in the second half because of their own problems. The result was another collapse in mortgages in Ukraine," he says.

Also, some international property investors were still concerned about the effects of the legal proceedings against former prime minister Yulia Tymoshenko, and Ukraine's non-compliance with some of the bailout provisions of the International Monetary Fund.

But despite the current downturn, the fundamental investment case for residential in Ukraine remains unchanged, he insists. "Like the rest of the former Soviet Union, housing is in chronic undersupply. But the mortgage market has collapsed, that is the problem. I think once the EU sorts out its financial crisis and liquidity returns to Ukraine, the banking sector will recover and we will see the residential sector jump," he says.

Retail is in a better position, with shopping mall rents back to around $250 per square metre. "Vacancies in shopping malls are down to virtually zero, as we have seen quite a large influx of international retailers into Ukraine. New Yorker, Top Shop, Gap, New Look," he says.