Buying Real Estate In Ukraine
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Buying Real Estate In Ukraine
It has now been nearly a year since Russia began its disastrous invasion of Ukraine. Its plan to overtake the country and put in place a puppet government failed and now it is stuck in a war of attrition, taking huge losses, and losing a lot of its gains back to Ukraine.
Coming from Finland, I strongly side with Ukraine because we share a similar history of unjustified Russian aggression. As a quick note to those of you who may have been influenced by Russia's propaganda: just consider that Russia justified its last invasion of Finland by claiming that Finland attacked first! A small peaceful country of 5 million people! The false-flag operation fooled no one. The world understood what was going on, but Russia attacked regardless:
And you know what: Finland actually resisted the attack, despite being vastly outnumbered and getting relatively little support from other countries. This is relevant to Ukraine because it shows that the people's will is what matters the most.
Ukrainians have today the same will as Fins had back then, but Ukraine also happens to be a far bigger country with 8x the population of Finland and they are getting far more support from other countries.
The vast majority of western democratic countries have concluded that enough is enough and they are now determined to do whatever it takes to help Ukraine win this war.
Russia already lost the battle for Kyiv, Kharkiv, and Kherson, allowing Ukraine to retake about 50% of its lost territories since the beginning of 2022, and this has forced Russia to limit its military objectives to "liberating??" eastern and southern regions rather than occupying the entire nation:
The outcome of this war is still uncertain.
This could carry on for a long time to come as Russia keeps mobilizing more troops and sends them to the meat grinder with seemingly no care for their huge losses.
But eventually, this war will come to an end, and I am optimistic that the outcome will be positive for Ukraine and lead to substantial investment opportunities for foreigners willing to help the country rebuild itself.
Below we look at the most likely end scenarios, their implications, and why I plan to invest and possibly even move to Kyiv, Ukraine.
Worst- Base- and Best- Case Scenarios
The worst-case scenario at this point is that Russia regroups freshly mobilized troops, brings in Belarus, and attempts another attack at Kyiv. I think that the likelihood of this is very small. They couldn't take Kyiv when they had their best-trained troops, the element of surprise, and when Ukraine still had little support from other countries. Belarus has a relatively small, ill-trained, and ill-equipped army that would likely perform even worse than that of Russia. Such an escalation would only push other countries to provide even more support to Ukraine, possibly even more direct military support targeted at Belarus since it isn't a nuclear-power state.
The base-case scenario is that Russia keeps fighting a war of attrition, taking some small parts of Eastern Ukraine by force and eventually coming to the negotiation table when both sides feel that little further advances are likely. The rest of Ukraine remains independent and now becomes part of some defense alliances to deter Russia from ever doing this again. Russia remains isolated from the rest of the world for a long time to come, causing its energy-dependent economy and war machine to suffer. The lost territory, of course, isn't recognized as the territory of Russia, and eventually, the leadership changes, hopefully bringing better relations in the future.
The best-case scenario is that Ukraine keeps gaining more and more of its lost grounds, leading to an eventual collapse of Russia's army and a complete defeat in their war of aggression. Russia pulls back entirely, including from Crimea, after suffering massive losses and still somehow portrays this as a win for their people, claiming that they successfully defended Russia from a Western invasion... If you want to go a bit further, Russia's dictatorship collapses and the country breaks apart, leading to a long-term path to democracy for the Russian people...
I think that the base case scenario is the likeliest outcome, and while not perfect, it would potentially provide some very lucrative investment opportunities to foreign investors.
Why I Plan to Invest in Kyiv, Ukraine
In the base scenario that I mentioned earlier, I expect Ukraine to rapidly evolve into a modern Western society.
The country was already a hybrid between the West and East in many ways, and this invasion really tilted the country towards the West.
Its people have had enough of Russia and everything that comes with it, including the corruption, and I think that Ukraine is now ready to evolve into the next Poland-like European success story.
I expect the EU and other Foreign countries to pump huge amounts of money into Ukraine in the aftermath of the war to rebuild the country, taking the success of other Eastern European countries as an example.
If you study the economic development of other Eastern European countries that were formerly part of the USSR but are now part of the EU, their economic success has been nothing short of remarkable.
Estonia, Latvia, Lithuania, Poland, Czech Republic, etc. have all become some of the wealthiest countries on earth in just 3 decades of development. Estonia's economy was at the level of Columbia or Algeria back in the 90s when the USSR fell apart, but today, their GDP per capita is higher than that of countries like Portugal and Greece. They achieved that in just 30 years!
Not surprisingly, rents and real estate values of Eastern European capital cities have also exploded to the upside.
And I think that the next country in line for such economic success is Ukraine.
A lot of Ukraine's potential has historically been held back by Russia's influence and the corruption that it brought to the table. The same was true for Poland and other Eastern European countries until they westernized and became a lot wealthier.
Now it will be Ukraine's turn and the country has a lot of advantages working in its favor:
It is a big country of 40+ million people with a lot of relatively cheap, but highly-skilled and motivated labor for foreign companies to outsource production and services.
It is in close proximity to the EU and its big market of 450 million consumers.
It has one of the best talent pools of IT specialists and engineers in the world, and this has prompted companies like Google and Oracle to base or outsource some of their R&D facilities in Ukraine.
It has a big and growing start-up scene just like Tallinn in Estonia. Grammarly, as an example, comes from Ukraine.
It is the largest country in Europe by geography and has a lot of natural resources. It is called the "breadbasket of the world" and holds 20+ other critical materials like lithium.
Ukraine's government is becoming investor and business-friendly. A new wave of legislative and governmental efforts backed by international political and financial support is currently underway. Ukraine will need to rapidly attract a lot of foreign investments to rebuild and it will provide the right incentives for it.
Investing in Ukraine is an act of honor to help them rebuild and that on its own should attract a lot of capital in the aftermath of the war, especially from other Eastern European countries who went through the same struggle.
Ukraine as a country now also has a valuable brand. In a weird way, it is Russia's invasion of Ukraine and its heroic resistance that put the country on the map.
Eventually, I expect Ukraine to enter the EU. It was already granted the candidate member status and this sends a strong signal to the global business community.
And I expect economic development to happen very rapidly.
A huge amount of cash will be pumped quickly into the country to rebuild it and I think that this will lead to unprecedented investment opportunities.
The values of properties will rerate from that of a relatively poor country that's at war to that of a Western country with enormous momentum.
What Should You Invest In?
I am interested in a lot of different assets.
This includes:
Apartments
Industrial parks
Farmland
Development projects
Retail properties
Publicly listed real estate companies
Private real estate funds
How to Invest?
That's the tough question.
There are no REITs in Ukraine and this greatly limits our investment options.
But I still have four options in mind right now.
The first one is to move to Kyiv for a while myself to buy a condo to live in and potentially a few more as rentals. But I wouldn't do this unless I actually lived there, knew the market well, and had connections that could ensure that I get a fair deal. It is something that I am seriously considering as Kyiv is a really cool city and I think that it will be an exciting place to live in the aftermath of the war.
The second option is to invest with a local partner. From the work that I have done so far, I have only found one potential option for this. It is a company called Dragon Capital. It is the largest private equity player in Ukraine and it mainly invests its own money and that of Goldman Sachs and Soros. Currently, they are not fundraising for any new funds, but perhaps it could be possible to inject some equity into one of its existing vehicles. I am exploring this option at the moment.
A third option would be to invest in a publicly listed company. There are a few Ukrainian agriculture companies that are publicly listed on the Polish exchange in Warsaw and they could provide exposure to Ukrainian farmland at a steep discount. The biggest one is Kernel Holding (ISIN LU0327357389).
Finally, the last option is to simply wait for better investment vehicles to emerge. I expect many vehicles to be created in the aftermath of the war and we may even see some REITs emerge.
When the time is right, I will share more with members, and perhaps I may even try to set up a vehicle for us to invest together.
The key is to be early and this is why I am today already preparing an investment, even if it may take a while before I really pull the trigger. I have been 3x to Ukraine since 2019 and I will soon return for a 4th time to bring more supplies to the Ukrainian army.
Bottom Line
“The opportunity always lies in the middle of difficulty,” according to a quote by Albert Einstein.
While conditions are very uncertain right now, I think that Ukraine has all the ingredients to become the next European success story and this could lead to some generational investment opportunities.
As to the question of when investors should start planning their investment in Ukraine, the short answer is today.
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Sincerely,
Jussi Askola
Analyst's Disclosure: I/we have a beneficial long position in the shares of all companies held in the CORE PORTFOLIO, RETIREMENT PORTFOLIO, and INTERNATIONAL PORTFOLIO either through stock ownership, options, or other derivatives. High Yield Landlord® ('HYL') is managed by Leonberg Research, a subsidiary of Leonberg Capital. All rights are reserved. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. The newsletter is impersonal and subscribers/readers should not make any investment decision without conducting their own due diligence, and consulting their financial advisor about their specific situation. The information is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed are those of the publisher and are subject to change without notice. We are a team of five analysts, each contributing distinct perspectives. Nonetheless, Jussi Askola, the leader of the service, is responsible for making the final investment decisions and overseeing the portfolio. We do not always agree with each other and an investment by Jussi should not be taken as an endorsement by other authors. Past performance is no guarantee of future results. Our portfolio performance data is provided by Interactive Brokers and believed to be accurate but its accuracy has not been audited and cannot be guaranteed. Our portfolio may not be perfectly comparable to the relevant index. It is more concentrated and may at times use margin and/or invest in companies that are not typically included in REIT indexes. Finally, High Yield Landlord is not a licensed securities dealer, broker, US investment adviser, or investment bank. We simply share research on the REIT sector.