KDD Group is the sixth Ukrainian developer to have completed an initial public offering abroad in the past 12 months. In February, KDD raised £73.1m (€96m) in a listing on the Alternative Investment Market (AIM) of the London Stock Exchange, floating 36.5m shares, or 22.6% of the capital, at £2 a share.
The lead managers, Renaissance Capital and ING, said it was the largest amount of money raised by a Ukrainian developer on international markets. By 20 February, the shares had dipped slightly and were trading at 182p each. The proceeds will be ploughed into KDD’s expansion outside its home base of Kiev, Ukraine’s capital.
Colliers International valued its 2.7m m2 development portfolio last September at $908m. Accounting for 40% of the business by value, residential is the company’s focus. Mixed-use and retail account for 24% and 22% respectively offices are only 14% of KDD’s business.
“Our ambition is to become one of the largest developers in Ukraine. We’re looking at large, new, high-quality projects in the cities with a population of more than 1m,” says acting chief financial officer Petro Radchuk.
Diplomat-Park in L’viv
So far, the company’s only scheme outside Kiev is a development called Diplomat-Park, which is on a 7.7ha site in the historical area of L’viv. Designed by John Seifert Architects, who also created London’s iconic Centre Point, Diplomat-Park will comprise 12 buildings of three to 22 storeys and will have 1,575 apartments totalling 135,900 m2, 5,800 m2 of offices, 6,800 m2 of retail, plus 27,300 m2 of income-producing parking.
Construction will start in the third quarter of this year, and is being carried out over three phases, with the first and second stages set for completion in 2010 and 2011 respectively, and full completion planned for the second quarter of 2012.
KDD began in 1994 as an offshoot of the energy and financial services operations of its present shareholders. The main investors are six Ukrainian private individuals and a US citizen with Ukrainian origins together they own 78% of the company. The remaining free float on AIM is owned by 40 investment funds and institutions.
The company became active in real estate in 1997 after selling some of its non-core activities such as Nadra, one of the country’s top ten banks. In that year it built one of Ukraine’s first business centres, comprising 8,000 m2 of offices, on Lev Tolstoy Square in Kiev.
The company’s next landmark completion was the 33,000 m2 Vedensky residential complex in the Pechersky district of Kiev, which completed in 2003. This was followed two years later by Diplomat-Hall, a 78,000 m2 residential and office complex on Zhylianska Street.
KDD employs contractors to carry out the construction. It finances them chiefly through presales of residential apartments, but Radchuk says that the company is entertaining the sale of minority stakes up to 49% in some of its projects.
“The advantage of this is that a new investor usually brings some bank lending to the projects. We can combine our finance with their sources. Banks usually request 30% of the project cost as equity and with our large projects we need to increase our equity resources. The amount of new schemes we can do depends on our ability to secure finance,” according to Radchuk.
He says that property prices in central Kiev have risen tenfold over the past seven years. Historically, KDD’s returns have been high. “Three years ago, they were three-digit figures, especially in residential. But now returns are less, and it doesn’t make sense to make predictions. However, they would still be in double figures.”
Newly fledged WTO member
There is plenty of scope for KDD’s ambitions. Ukraine was admitted to the World Trade Organisation at the start of 2008. The country’s property market is still in its infancy and thus foreign investors’ options are limited to a very narrow choice of quality real estate.
Sellers largely dictate prices that do not meet investors’ risk/return balance. The present situation in Kiev is favourable for development, and local companies with a solid development pipeline and access to western capital stand to benefit most.
Although KDD is still relatively small, the company has eight development projects, of which three are under construction. Five, totalling 2.7m m2, are at various stages of design and development. The company will deliver 296,804 m2 of offices to Kiev’s market during the next three years. The company also has 654,750m2 of large-scale mixed-use developments in the portfolio and expects to deliver around 818,007 m2 of housing stock to the cities of Kiev and L’viv.
Renaissance Capital values the company’s equity at $1.45bn, or $9 a share, as of the end of 2007, implying that the stock is trading at a 60% discount. Once confidence returns to the credit markets, CIS real estate equities will be well positioned to rally sharply, says the investment bank.
