Ben Aris in London -

Ukraine, like its giant neighbour, has seen an influx of portfolio investors looking for exposure to its burgeoning real estate market. Since the beginning of the second quarter, shares of Ukrainian real estate companies have risen by about 40%.

The old man of the market is XXI Century, which listed in London a few years ago. Its stock valuation took off at the end of March and has delivered a 43% return since then. And VK Development, a locally-listed commercial real estate developer, was also up approximately 30% in the quarter to date.

The latest addition to the group is Dragon Ukrainian Properties and Development fund (DUPD), which raised $208m on London's AIM market in May in order to invest in commercial developments and existing properties in Kyiv and the region over the next two and a half years. Since its debut, shares in DUPD had shot up 35% by the end of June, despite the fund not having spent a penny yet.

"Ukraine's real estate market still remains one of the largest unexplored property markets in Europe," say analysts at Aton Capital. "With the supply of high-quality office, retail, warehouse, residential, and hotel properties insufficient, we expect the real estate market to benefit."

Despite increasing oil and gas prices, the Ukrainian economy recorded an impressive 7% growth in 2006, far above the consensus forecast of 3.5%, and GDP growth is expected to be above 6% per year through 2010.

"Yields on Class-A Kyiv property remain highly attractive, in our opinion. At 10-15% levels, they are among the highest in Europe and in the next two years, we expect continued capital inflow into the sector and the emergence of a professional property investment market. This should put upward pressure on property prices, leading to spreads converging with the Eastern European average of 200-250 basis points and lifting prices 25-70% over a five-year period, assuming stable rental rates," says Aton.

Much of the rise in prices has been driven by foreign investment. The Ukrainian State Statistics Committee says foreign companies have invested about $1.8bn into Ukraine's real estate sector since independence and $31m in 2006 alone.

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