Nicholas Watson in Prague -

Experts say one of the biggest problems facing Central and Eastern European real estate funds is the lack of suitable properties they can invest in, so investors in Dragon-Ukrainian Properties & Development will have been cheered by the news in September it made two acquisitions worth almost $20m.

On September 5, the AIM-listed Dragon-Ukrainian Properties announced it would invest up to $9m in Pine Forest Riverside Estates, a housing project in the Kyiv Sea area of Ukraine. The fund, which is managed by Kyiv-based investment bank Dragon Capital, said the project involves the development of a gated community of up to 100 cottages and town houses.

Then on September 11, Dragon-Ukrainian Properties said its subsidiary Landzone had entered into a shareholders agreement with Bartin Management to acquire a 50.01% stake in Hindale Executive Investments for $10.75m. Hindale is a company formed to develop a shopping centre on a 1.2-hectare land plot in Kyiv.

These projects are consistent with the fund's investment strategy of focusing on the development of commercial and residential real estate in Kyiv and other main regional centers of Ukraine.

"Dragon-Ukrainian Properties is pleased to announce its first project in the retail development market - one of the most rapidly growing sectors of the Ukrainian economy," Aloysius Van der Heijden, chairman of Dragon-Ukrainian Properties, said at the time of the announcement. "We are also actively seeking similar opportunities in this sector."

The latest acquisitions mean that 64.5% of the fund, which raised $208m in May by selling 95% of its shares to a variety of hedge funds and propriety trading desks of major investment banks, is invested in real estate.

Since listing on London's AIM market, Dragon-Ukrainian Properties' shares, like those of many CEE real estate funds, have had a wild ride, though unlike many they are still trading above their IPO price. The shares were trading mid-September at around 118 pence per share, higher than the offering price of 114p, but well down from the high of 137p hit in mid-June.

Even so, analysts say the fundamentals behind the huge growth of the Ukrainian property market remain largely intact.

It's the economy, stupid

Unlike the "traditional" emerging property markets in the CEE region - Russia, Czech Republic and Romania - Ukraine's real estate market remains one of the largest unexplored property markets in Europe. The economy is powering along, seemingly oblivious to the political instability within its own borders and the credit crunch outside them; Ukraine's GDP growth for the January-August period was 7.5%, up from 5.7% in the year-earlier period. This economic growth is accompanied by rising disposable incomes, higher employment, greater capital investment and burgeoning foreign direct investment, which grew 23.7% in the first half of the year to $3.3bn.

Ironically, the problem that real estate funds have with a lack of decent properties to invest into is also one of the main reasons why analysts are so bullish on the outlook for these real estate funds like Dragon-Ukrainian Properties.

"With the supply of high-quality office, retail, warehouse, residential, and hotel properties insufficient, we expect the real estate market to benefit," says Rustam Botashev of Moscow investment bank Aton capital. "Investors in Eastern Europe and Russia can gain valuable diversification by investing in real estate companies active in Ukraine, which offer both highly attractive yields and the potential for capital appreciation."

Indeed, the fund is targeting a dividend yield of 7-10% per annum, which compares favourably with the 5-7% that Central European real estate funds in countries like the Czech Republic target.

"Yields on Class-A Kyiv property remain highly attractive, in our opinion - at 10%-15% levels, they are among the highest in Europe," says Botashev.

Over the next two years, Botashev expects money to continue pouring into the country's property market, creating a professional property investment market, which in turn will cause spreads to onverge with the Eastern European average and lift prices 25-70% over a five-year period.

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