Thousands of Israelis Bet on Ukraine's Real Estate. Then Russia Invaded

Attractive prices and amazing returns attracted many Israelis to gamble on Ukraine, despite its instability ■ They invested all their savings in the country now fighting violent Russian invasion

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A man walks in front of a residential building damaged by shelling in the city of Chernihiv.
A man walks in front of a residential building damaged by shelling in the city of Chernihiv.Credit: DIMITAR DILKOFF - AFP
Adi Cohen
Adi Cohen

“We invested in Ukraine about three years ago, after a recommendation from an acquaintance who is involved in real estate,” says Avshalom (who asked that his real name be withheld). “We were looking for an alternative to investments in Israel, in the understanding that for ordinary people like us, it’s hard to find profitable deals today.

“To tell the truth, at first I was deterred by the idea. Not because I was worried about the stability of the regime in Ukraine, but because it’s a country with a different mentality and with a less secure banking system than that of other Western countries. In spite of that, I made my calculations and decided to go for it.

“We purchased two 40-square-meter studio apartments in Kyiv, which were under construction at the time, for $50,000 each. Together with all the costs along the way, we spent a total of half a million shekels ($152,000).” Since the apartments were occupied, a few months ago, he says that he received a higher return than expected, and the value of the properties soared at double-digit rates – “until the unexpected happened, and the war began.”

Maidan Nezalezhnosti Square in Kyiv, Ukraine, before the war.Credit: Shutterstock

Avshalom is only one of the Israelis who were tempted by the high returns and increase in prices in Ukraine in recent years, and he became encouraged to invest most of his savings there. The past few years saw the eastern European country, along with some of its neighbors, become popular for Israeli investors. They saw it as an opportunity for affordable real estate holdings, at least compared to the Israeli market, and a potential for a handsome profit.

“For a year, I researched the Ukrainian economy and its politics, I collected data, and it was clear to me that it’s a good place in which to invest – in Kyiv in particular,” says Yelena (a pseudonym), who signed her first investment deal in Ukraine in the summer of 2019. So far, she has purchased three apartments in three different Kyiv projects, for sums ranging from $25,000 to $43,000 apiece.

The most expensive of them — which after all the accompanying costs, including complete furnishing and accessories, cost 230,000 shekels — Yelena now rents it out for $750 a month. “Show me where you can find a similar return in Israel,” she says with satisfaction.

Yelena sold the other two apartments immediately upon receiving them, for a price that she says was almost double her investment. “I saw a growing country that had yet to recover entirely from the crisis it experienced a few years earlier, in 2014, when Russia attacked in Donetsk and Crimea,” she says.

“As a result, the real estate prices also have yet to return to their pre-crisis level. In addition, there was a change in the country’s government, which was beneficial, as well as a trend of international companies entering Kyiv, which gave a push to the economy. It was clear to me that the scenario of another war in Ukraine existed, but there’s no total security in investments anywhere in the world. Here at least the investment is inexpensive – so the gamble is less dramatic.”

A child sits on a swing in front of a damaged residential building in Kyiv. Credit: UMIT BEKTAS/Reuters

Yoni Yirmiyahu, an accountant, gambled big on Ukraine, for the same reasons. “Together with friends and family who followed in my footsteps, in recent years we bought over 40 apartments in Kyiv that were in the initial stages of construction,” he says. “We went for a luxury project, where the cost per square meter is $2,500 to $3,000. That a relatively high price compared to standard buildings in Ukraine. But it’s still low, certainly compared to Israel. The price includes apartments that are totally furnished and accessorized, whose potential return is over 10 percent.”

Looking for exits

It’s hard to assess the extent of Israeli investments in Ukrainian real estate. Most of them, according to professionals and experts active in the country’s real estate market, are small investors looking for profitable opportunities, rather than developers. Large companies are active mainly on the margins, and for the most part prefer neighboring country. According to attorney Avraham Lalum, who represents a series of international companies and embassies operating in Ukraine, including the Israeli embassy, in recent years Israeli real estate transactions in the country have numbered at least 100 a month.

Lalum and others say the spike in Israelis’ interest in Ukraine really happened in the past two or three years, but note that the trend began already in 2014 and 2015, with the start of the recovery from Russia’s invasion of Crimea.

The city of Uman in the province of Cherkasy, which for years has been a pilgrimage site for Jews from the Bratslav Hasidic sect.Credit: igorbondarenko/Getty Images/iSto

The Ukrainian economy has experienced quite a few ups and downs in recent decades, not sparing the local real estate market. According to the Global Property Guide website for investors, from 2000 to 2007 Ukraine enjoyed substantial economic growth, with an average increase in GDP of no less than 8 percent annually. This trend was based mainly on the country’s flourishing iron exports at the time, but also on the extensive real estate activity during those years – when property values increased up to 55 percent throughout the country.

All that ended with the international financial meltdown in 2008, which crushed the value of Ukraine’s currency, weakened its economy and led to two years of dramatic decline in the value of housing property. The Ukrainian housing market stabilized in the following years, but then the crisis of 2014 struck, and from which the economy has yet to recover.

“After the 2014 Russian invasion came the Minsk Agreements [between Russia and Ukraine] – and only then in effect did the situation calm down and the decline in prices ended,” says lawyer Igal Yoffe, owner of Simple Investment, a company that specializes in working with investors in Ukraine. “However, when you compare Ukraine’s prices in the seven years that have passed since then to the pre-invasion period, and certainly prior to the major financial crisis, the prices remained very low – which created a great deal of interest on the part of Israeli investor. Most of the activity by Israeli investors is in Kyiv, followed by Odessa.” There are also “small investments” in other places, he says, including “in Lviv and in Uman – there’s a recovery centered on religious tourism.”

Eli Shirak, owner of Aleph Shin Group Business Opportunities, which markets properties in Israel and abroad, including in Ukraine, provides a glimpse into the process: “The investors have seen in recent years that the main appreciation of the property comes during the construction stage – so many come here to look for exit deals, dubbed ‘flips.’ In such a transaction, you go in when the apartment is still ‘on paper’ or in the early stages of construction, and when you get the key you can already reach value increases of 20 percent to 30 percent.”

Bratslav Hasidim in Uman, Ukraine. Credit: GENYA SAVILOV - AFP

According to Shirak, Yoffe and other players in the Ukrainian market, anyone who holds onto the property has benefited in recent years from returns of 8 to 16 percent a year. “The demand for rental apartments in Ukraine, and in Kyiv in particular, is high,” says Yoffe. “After what happened in the Crimean Peninsula, many Ukrainians fled to the capital city, left their property behind, and came to rent apartments here and to start a new life. That joins the flow of Ukrainians to Kyiv, in which they see a developing city with business opportunities that are lacking in the rest of the country.”

In the city of Uman in the province of Cherkasy, which for years has been a pilgrimage site for Jews from the Bratslav Hasidic sect in Israel and worldwide, the returns are likely to be even higher. “It’s true that most of the Israeli investors focus on Kyiv, but there’s no question that in the past 10 years there has a been a gradual and constant increase in investor interest in Uman,” says an Israeli developer, who preferred to remain anonymous.

He says that during those years people became increasingly aware of Uman, int terms of both tourism and real estate, and that it has been transformed from what was only popular destination during the Jewish holidays to a place visited by Israelis and Jews almost year round.

“The supply of hotels in Uman is limited, particularly in the area of the grave of Rabbi Nachman [the founder of the Bratslav movement]. Prices for staying there have become insane,” he says. “A hotel room on Rosh Hashanah, in a popular location, costs about $10,000 for three or four days – more than renting for a year in Ukraine. The investors and developers have also made this calculation. As of now, there are 40 to 50 projects in various stages of construction in Uman, the vast majority belonging to Israeli developers and some to Jews from other countries.

An aerial view showing a residential building destroyed by shelling, in the town of Borodyanka in the Kyiv region.Credit: MAKSIM LEVIN/REUTERS

“The project we’re building is located only four meters (13 feet) from Rabbi Nachman’s grave, and when construction is completed it will include 180 apartments. In effect, it’s the most expensive project in Ukraine today. We sell 40-square meter apartments [430 square feet] for $200,000, and the prices also reach $1 million for the largest apartments, which are right next to the grave. The demand is crazy. For the investors, it’s enough for them to rent out the property during the period of the holidays, and they have an annual return of 12 to 18 percent.”

Down the drain

Lalum explains that the laws in the Ukrainian real estate market are totally different from those on the Israeli playing field. For one thing, this is a market where the protections for buyers in extreme situations – such as the bankruptcy of developers and contractors – are far fewer and more limited. “In Ukraine there is no bank accompaniment for projects, nor is there a sales law or any other law providing protection to apartment buyers and security for their money in the event of the developer’s financial difficulties,” he says.

“In most cases, developers bring the money themselves or from the buyers, and that involves risks. In such a situation, if the developer declares bankruptcy, the buyers are likely to find themselves with nothing. However, quite a few projects, including all the projects that we accompany, operate under conditions that differ from what is common in Ukraine, and are based on the law on housing sales, in order to reduce the investors’ exposure and risks. In places where they don’t work that way, in the event of an economic crisis in Ukraine that would cause the collapse of developers, the investors will be exposed to the loss of all the money they invested.”

In addition to a difference when it comes to guarantees and protection of buyers, the case of Ukraine proves that the generally accepted equation for calculating the profitability of an investment must be changed to include geopolitical elements.

“At the moment, there’s mainly one major uncertainty,” says Motti (who asked that his name be withheld), another investor who entered the Ukrainian market in recent years. “It’s not clear who will rule there in a month, six months or a year from now, what the policy will be vis-à-vis foreign investors, and whether it will be possible to take money out of there in the coming months. This uncertainty is bad for business – and for real estate, too.”

A man leaves an apartment building damaged after shelling in Ukraine's second-biggest city of Kharkiv.Credit: SERGEY BOBOK - AFP

“Naturally, all the investors are nervous in light of the situation,” says Michael Zeltser, owner of a firm that accompanies investors in Ukraine and Georgia. “Most of the clients who speak to us aren’t afraid of a drop in prices, but they’re afraid to lose the apartment and that the investment will be wasted money. They’re also concerned about a scenario in which Russia takes control of Ukraine – and the assets. We explain to them that that’s not the situation, and even if Russia occupies Ukraine – they will remain the owners of the apartment, subject to international law.”

It’s evident that aside from the issue of ownership of the apartments in the event of a change in government, the investors are also afraid of issues relating to insurance in the event that properties are damaged, or if there are cases of looting and squatting. This all comes on top of the main economic question preoccupying the investors – how the present war will affect apartment prices.

At this point – they’re all mainly gambling. “In the long run, I’m optimistic,” says Avshalom. “Despite the present situation, I still see Ukraine as a country with lots of untapped potential. However, in the short term there are considerable fears. If we don’t receive the rental payments for these apartments – we’ll feel it not only in our reserves, but in our current accounts.”

'Naturally, all the investors are nervous in light of the situation,' says Michael Zeltser, owner of a firm that accompanies investors in Ukraine and Georgia.

“Every war affects the market, but usually it’s limited in time,” Shirak reassures us. “I estimate that here too, we’ll see a decline in prices in the short term. Uncertainty creates deterrence, and that is expressed in the prices of assets – just as we see in Israel with every round of fighting and every security incident. In the long run, on the other hand, I believe that Ukraine will return to its growth and will become stronger. On the way there will be quite a few new opportunities for investors.”

Lessons from the Israeli-Palestinian conflict

“At this stage it’s still too early to predict and to estimate how long the fighting will last, and the extent of its effect on Ukraine,” says attorney Boris Strukov, a special adviser for dispute resolution in the international law firm Taylor and Wessing. In his assessment, “The main damage, during the first stage at least, will be to commercial real estate – stores, malls and so on.

“That’s a sector that relies on customer traffic – and customers can’t visit those same areas because of the restrictions. There we will probably see a demand from the tenants to be released from the rental contracts until the restrictions are lifted, and to receive exemptions until things return to normal. All that will probably also affect the value of those properties. In the housing market I believe that we’ll also see a certain decline, but it will be smaller.”

Whatever the case, Lalum believes that for investors, possible changes in real estate prices in Ukraine do not constitute a real danger. However, scenarios in which local developers collapse are definitely likely to make them lose sleep, if they don’t adopt the required measures.

“Dramatic declines as we saw in the prices of properties in Ukraine after 2014 can’t happen now. The reason is that today the main component of apartment prices in Ukraine is construction, and not much beyond that,” claims Lalum. “In effect, many of the buyers who bought apartments ‘on paper’ or in early stages of construction are actually paying less than the construction costs that the developer will pay. Therefore, the investors’ exposure to sharp changes in this market is small, and in most cases the value of the assets can’t go lower than what they paid, certainly not significantly so.”

Lalum says that if the war ends within a short time and without regime change, Ukraine is actually likely to emerge stronger. But such speculations are still premature.

Another question being raised is whether conclusions from the Israeli-Palestinian conflict can be projected onto Ukraine.

“Over the years Israel has been a ‘laboratory’ for the way in which security events affect the real estate industry,” says Prof. Danny Ben-Shahar, director of the Alrov Institute for Real Estate Research in the Coller School of Management at Tel Aviv University. “This influence differs between the short and long term, and between areas of immediate risk and more distant areas. In studies I conducted, relating to places directly affected by the intifada of the 2000s, we found that a security incident led in the short term to a 10 percent to 12 percent decline in the value of the assets. In a prolonged event, the declines even reached 17 percent.

“That, of course, is also accompanied by a decline in the volume of transactions in those places. However, we found that the real estate market has a short memory. In most cases, the prices paid over security incidents expired after 18 months, and then returned to normal. In places that were directly hit, the effect is likely to last longer. The key point is that the market doesn’t like uncertainty, and definitely not the kind created as a result of security incidents.”

But still there are several differences. While in Israel the central government is not in danger of collapse and the economy is enjoying strong financial stability, in Ukraine the situation is much more delicate and unstable. And when likely scenarios include Russian tanks passing through the streets of the capital city, the fear of nationalization of assets, the collapse of centers of the local economy or the crushing of the central government – there are sure to be significant economic consequences.

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