Investors look for eastern promise

Will the insatiable search for foreign bargains turn into a game of Russian roulette, asks Chris Partridge

Britain's army of property investors has swept eastward through Europe over the last decade, from Spain to the Black Sea.

Britain's army of property investors has swept eastward through Europe over the last decade, from Spain to the Black Sea.

The former Warsaw Pact countries are now crawling with Brits looking for bargains. And now they are reconnoitering the old Evil Empire itself - the countries that used to make up the USSR. But will they finally meet their match?

Russia itself is still the economic dynamo of the region and is already attracting investors, especially to the booming Moscow market. But new interest is focusing on the newly independent states, especially the Ukraine. Experts are advising caution, however. The states of the former Soviet Union are still evolving their legal and political systems, and investment is very risky.

John Miller, of surveyors and property consultants Thomas and Adamson, has been operating in the Ukraine for 10 years, from the capital Kiev. "Here we had a country with a population of 50 million, a landmass larger than France and a marketplace in which little or no development had taken place. We could see that this place had to happen," he says.

Thomas and Adamson have worked on offices, hotels and residential developments in the Ukraine, neighbouring Moldova and Russia itself. The main obstacle to development is officialdom, which still seems to operate in the traditional Stalinist manner.

"There is a huge amount of bureacracy, but the longer you are over there the better you understand it," Miller says.

It can also be difficult to borrow money, another hangover from Soviet times. "Whereas our economy is based on debt, they buy with cash or on a five-year mortgage," Miller explains. "Money tends to be hidden in a biscuit tin under the bed because they operated in the black economy for so long."

In Kiev itself, a huge rebuilding and modernisation programme has brought on a property boom.

"Kiev has a huge residential market with flats going for fairly inflated prices, currently about £100 a square foot. That is high by Ukrainian standards but you won't get much in the UK under £250 a square foot," Miller points out.

Unfortunately, British investors may have already missed the Kiev opportunity. "Someone I know bought a flat last year and has seen a 60 per cent increase in value already, but values will peak soon," Miller says.

The other area of interest to British investors is the Crimea, famous not only for the charge of the Light Brigade but as the favoured holiday destination of the Soviet élite. Now its pretty Black Sea coastline is slowly gaining attention.

"In the Crimea we are seeing a reasonable amount of development but nothing like the standard of European holiday destinations," Miller says.

Outside the Ukraine, the risks of property investment rise substantially. Belarus is currently ruled by the dictatorial Alyaksandr Lukashenka, who has just changed the law to allow him to continue in power. Belarus is definitely a no-go area until true democracy returns.

Moldova, the tiny, strife-ridden republic sandwiched between the Ukraine and Romania, has a surpisingly advanced legal system, but another feature of Soviet times has been retained - the kickback.

"In practice a lot of things are ahead of the Ukraine but they are more dogged with corruption," Miller says. "One project we were involved in was delayed for years because the relevant administrator was in jail and couldn't decide the matter until he got out." The situation gets worse the further away you go, according to Laura Brank of law firm Chadbourne & Parke, who covers all the old USSR from her base in Moscow. The areas that are next in line for investor attention are Armenia and Georgia, despite their current political turmoil and internal violence.

"Armenia and Georgia are very pretty and eventually these countries should attract people, and skiing in the Caucasus is already getting popular," Brank says. "Georgia has a young and impressive new president and if he succeeds the country could be a good place to invest."

Further away, the Asian republics known collectively as "the Stans" are moving towards Western-style legal systems, at least in theory.

"The legal systems are developing nicely in the Stans and the laws are a bit more Westernised due to extensive Western influence, but this does not necessarily translate into practice," Brank says. "You can buy an apartment but cannot buy the underlying land even though you are supposed to be able to."

The Stans aren't even very pretty, consisting mainly of windswept, treeless steppes. For most property investors, they are a step too far indeed.

Thomas and Adamson, 020-7659 0448 Chadbourne & Parke, Kyiv, +380 (44) 230 2534