Joerg Baehren, Director Projects & Investments of RE RISE with 20 years of experience in investment fund management, told LDaily his thoughts on real estate investment opportunities and prospective in the developing countries, as well as on the specifics of investment activity in the Ukrainian real estate sector, in particular on the significant prospects and at the same time risks potential investors can expect.
LDaily: Could you please tell us about the fund: the office, location, team, capital, etc.?
J. Baehren: We are currently setting up a closed-end fund RAIF (Reserved Alternative Investment Fund) headquartered in Luxembourg. With a planned volume of €250 million, the fund will invest in real estate project developments in China, India, South Africa, Romania, Bulgaria, the Baltic countries, Georgia and Ukraine. So, it’s a multi-emerging-market fund.
Individual and institutional investors can participate with a minimum amount of €125,000 and within a term of 10 years. We expect of investors to get a return 10% IRR with different annual distributions of the delivered returns out of the projects.
Due to the European regulations, the fund must be officially managed by a Luxembourg-licensed AIFM (Alternative Investment Fund Manager). RE RISE, as an investment advisor, will be the bridge between countries/projects. And the AIFM will ensure all projects and investments are running in the right direction.
Besides our offices in Germany (Cologne and Frankfurt) and the UK (London), we are planning to be represented in each country the fund invests in. That is why we already have representatives in China (Shanghai), India (Mumbai) and Bulgaria (Sofia). Ukraine (Kyiv) and Georgia (Tbilisi) will follow soon. You should have people on the ground who will be constantly monitoring and controlling the projects and investments.
LDaily: What are the competitive advantages of your fund? What makes it unique?
J. Baehren: First, we do what other funds usually avoid – we run the development risk which is the main driver for higher returns.
Moreover, investors can select the country for investing under the risk of diversification perspective. For example, if an investor focuses on the Eastern European countries, they can choose only them. I consider our fund to be unique because inside an investment opportunity, an investor can decide where their money goes.
In general, the fund addresses only well-experienced investors who understand what they are doing after signing in and making their investment decision. That’s why the fund requires a minimum amount of €125,000 from each investor.
To calculate the returns, it is not enough to check and understand the projects only. We need to understand the entire market and, of course, the country and its people. You have to understand the mentality besides political, legal and tax environment. For example, we use lots of resources to get an overall impression. This is huge background work.
These activities let investors clearly understand how much we are involved in the process.
In fact, I have been dealing with real estate investment funds for 20 years. I used to work in a huge fund management company in Germany managing around €10 billion assets and nearly 55,000 investors. We had 660 properties spread around Germany, the UK, the USA, France, Sweden, and the Netherlands. After this great experience, I decided to focus on emerging markets and started creating investments in China, Brazil, Eastern Europe, and South Africa.
LDaily: Why have you decided to come to Ukraine? Why is the Ukrainian real estate market attractive for you as an investor?
J. Baehren: There are two key points about investing in emerging markets. The first one is ‘don’t be late’ and the second one is ‘don’t be wrong’.
I believe now it is the right time for entering the Ukrainian market. Compared to other emerging markets, Ukraine has the same or even better characteristics. People here are full of hope, they have a will to change circumstances and take actions. I have been observing that for a year already. The risks are high because of the rapid developments. Nonetheless, the returns can be extremely higher than in any other emerging market.
It is embarrassing when I come into a so-called emerging market like Ukraine, and some things turn out to be more developed than in Germany. For example, you can find the Internet everywhere while in Germany, we have ‘black holes’ even in big cities. There is no doubt that Germany is well-developed in general, but we should also look at other countries and take an example from them.
LDaily: Does the investment climate of Ukraine lack foreign investors entering its market?
J. Baehren: In my opinion, foreign investors are now in a waiting position. They see too many risks for their investment strategies in this market. They want to make sure how business is done here and then literally break in with significant deals. I think Ukraine is not ready enough for that now. If an investor asks, for example, to build one million square meter office space for future sales, nobody will be able to deliver this in due time. So, investors are just waiting for the right moment and the right deals. I am sure they will enter the Ukrainian market in a couple of years.
LDaily: What is the peculiarity of investing in real estate? In your opinion, do investors entering Ukraine understand all the market characteristics? Are they competent enough to calculate all possible risks?
J. Baehren: You cannot expect that every investor is aware of the risks of investing in real estate, developments or emerging markets. Some of them are not willing to invest abroad due to high risks. So, finding investors is a quite complex task. They usually learn about the market from the news, the Internet, from the people already involved in that market. We have to circumstantially explain the reasons for entering this market and prove why they can trust our expertise and experience. The fund is in charge of explaining the risks. Otherwise, we will not be able to work with investors.
LDaily: How are you planning to minimize risks in Ukraine?
J. Baehren: First, you need people on the ground to continuously monitor the market and control investments. That is why we are opening an office in Kyiv soon.
We carefully select our partners and try to calculate every risk, but at the end of the day, it is impossible to predict them all. A project in Brazil we have managed is a good example. During construction, there was an unexpected for this season and region heavy rainfall that blocked people’s work for quite a long time. This caused a chain of further situations, so we had to explain to the investors that they would receive their return a year later. You just cannot foresee that, but you have to handle it and find proper solutions.
Frankly speaking, I doubt Ukraine has unique risks that are not common in other countries. There is corruption, unreliable developers, and people sometimes make mistakes. Overall, these risks provide us with valuable experience and teach us how to handle these situations…
LDaily: What is a minimum anticipated return of investment in Ukraine? What percent will your investors get?
J. Baehren: We expect to receive at least a 15% return to give our investors a 10% return per year on an IRR (Internal Rate of Return) basis. This capital, which is used for calculating the interest on the capital that is computationally tied up in participation, implies not only the number of inflows and outflows of this capital but also its temporal link. This form of yield calculation is not generally directly comparable to other return calculations of investments where there is no change in committed capital (such as fixed-income securities).
LDaily: The real estate market in Ukraine is rather specific. Not all developers are reliable. How are you going to minimize the risk of asset loss?
J. Baehren: This is the reason for our cooperation with S&P Agency. I do hope they will identify and minimize risks for us.
Always check your partners and their diligence before starting a partnership. We should learn their professional path, equity in their own company and check if they have other current successful or unsuccessful projects. This has to be done in the very beginning because it is essential to know who you are going to do business with during the next three years.
LDaily: We know that you have two working models for Ukraine. The first one is investing in local objects. Could you please reveal the amount of investment planned for 2020?
J. Baehren: Yes, we have a two-model strategy for Ukraine as in almost all the countries of Eastern Europe in which our fund will invest. As a first step, we invest in developments that will bring the highest returns. Later, as a second step, we will invest in income-generating projects to set a steady income for the fund.
Assuming that the fund is filled with €250 million, we will start with a minimum amount of €25 million in Ukraine. It depends on the opportunities, but under risk diversification perspective, it would be even possible to invest up to €80 million in Ukraine. However, we won`t be able to invest in any other Eastern European country then.
Ukraine is even more attractive to me as an investor than other Eastern European countries. I see a stronger possibility of receiving a good return here.
LDaily: What kinds of projects are interesting to the fund? Could you please describe the procedure of joining and leaving the project?
J. Baehren: The fund is currently interested in residential developments due to a clear exit strategy of selling out apartments.
The first step to join the project is finding a partner with a project or an investment opportunity. Next, you should find a way to invest. For example, is it possible to invest via a joint venture with a partner?
After that, our people on the ground control the project and the partner at all stages – from the start of construction works to the sales stage. If everything goes well, the fund gets its equity back with returns. Then we pay out the returns to the investors and decide if we invest the equity in the next development. This is a brief description of the entire procedure.
LDaily: The second working model for Ukraine is to attract investors for projects implemented abroad. Could you please tell us how it works? What is the advantage of working with your fund instead of depositing funds in a Ukrainian bank?
J. Baehren: Actually, none of the banks will give you an average 10% return per year over a 10-year term. Putting money into our fund implies many advantages. A better return is the first and foremost one. The risks should also be considered.
We do not convince anyone to invest abroad. You should have a feeling for this. Ukrainian investors should understand that if they work with the fund, they also invest in their country and get better returns as they can select a country to invest in. So, the biggest advantage of our fund is that we show a better level of money management security with the help of our experience and regulations.
LDaily: You are going to stay in the Ukrainian market for the next three years. Are you going to stay here longer or switch to another emerging market after this period?
J. Baehren: The fund we are currently setting up is created for a 10-year perspective. Nevertheless, I suppose that we will stay here longer and will work with even bigger amounts. This market is very attractive. I am convinced there will be a lot of funds and more investors in the future. It will be a fantastic stable golden market thanks to its location. This is my vision of the situation.
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