Speeding up

Alexander Vrublevsky, CFO of Ukraine’s International Mortgage Bank (IMB), witnesses the wind of change in Kyiv. He talks to Colette Steckel

There is a renewed optimism in Kyiv, which is in the throes of reinventing itself as a wealthy, thriving European metropolis. Smart hotels are opening, the café and restaurant scene is burgeoning, the neglected districts of old Kyiv are being given a face-lift and the latest branded store is setting up shop. But perhaps the best indication of how prosperous this city has become is the ultimate in status symbols: the motor. Parked haphazardly along Kyiv’s steep, cobbled streets, the gleaming, foreign cars outnumber the ailing Ladas - a reminder of Ukraine’s past as a former republic of the Soviet Union - in a sign that German and Japanese cars are de rigueur among the well-off.

Alexander Vrublevsky, (34), CFO of Ukraine’s International Mortgage Bank (IMB) and Kyiv resident, observes that an affluent middle class is emerging in the city. “Unfortunately, there is still a large gap between the upper and lower classes in Ukraine, but there is a growing middle class,” he observes. “You can tell by taking a look at the streets. Ten years ago, there were only Russian cars in Kyiv. But now, there are smarter, more expensive models. My perception is that people who own those cars represent the middle class in Ukraine. They’re not driving expensive Mercedes or BMWs but VWs, Mazdas or Nissans.”

Ukraine’s economic revival has clearly led to a growing confidence in the country, with incomes rising as well as expectations of an improved standard of living. In 2004, the country marked the fifth year of consecutive growth with higher than expected double-digit figures - GDP was over 12% - and, although last year’s growth figure dropped to 7%, Ukraine is still celebrating its continued good fortune. And nowhere is this more prevalent than in the capital. Much of the country’s wealth is trickling into Kyiv where people are drawn to the prospects of better jobs, higher salaries, and more opportunities.

But the influx of potential urban residents has put a strain on the existing housing supply in the city and, while properties are far from being scarce, there isn’t enough construction of private residences to cope with demand. “In Kyiv, a lot of the residential property available is in old Soviet blocks of flats, which are very small. Residents want to move to better apartments or cottages,” notes Vrublevsky. “And despite new construction, there isn’t nearly enough property developed in Kyiv at the moment. That creates additional demand for new construction but it also, of course, puts up prices.”

Vrublevsky points to official statistics released by the city of Kyiv, which record that over one million square metres of living space became available in 2004 (and again in 2005), which was 500,000 square metres short of the amount needed to sustain the city’s growing population. The shortfall in housing prompted the Ukrainian Observer to lament the rise in property prices in the city, reporting last May that “the cost of living space in Kyiv has grown by approximately 30% -35% annually, and the trend will continue”. DTZ International Property Advisors claims that the top end of the Kyiv market goes for $10,000 to $12,000 per square metre. At the lower end of the property scale, prices range from $800 to $1,000 per square metre.

How times have changed. In the Soviet era, few Ukrainians owned their homes. Instead, they were housed in government-subsidised, apartment blocks built cheek to jowl in the cities. But since Ukraine’s split with Russia in 1991, the Government has progressively privatised the residential sector, allowing occupants to obtain legal rights on their properties under a privatisation programme introduced in 1993. Vrublevsky argues that today’s house prices in Kyiv have reached such levels that it has become extremely difficult for buyers, especially first-time home owners, to get a foot on the property ladder. In the past, he continues, savings accumulated over a period of years would be sufficient to purchase a small property. These days, savings barely cover a down payment. “People don’t have the money to purchase their own property outright so the mortgage industry is growing extremely quickly in Kyiv to meet this.”

The mortgage industry is still in its infancy, but has been kick-started by a key piece of legislation governing the industry in Ukraine that took effect from January 2004. The “Mortgage Law” regulates mortgage transactions, facilitates the development of the market and regulates real estate construction. This, coupled with the booming housing market, has spurred banks in Ukraine to develop products dedicated to financing housing investment. Few, however, have made it their entire business to provide residential mortgages, which, says Vrublevsky, is where IMB steps in. “We’re not interested in corporate clients or any products other than private mortgages for ordinary people in Kyiv. Our customers are mostly young professionals, like the people who work at IMB,” he says. “Our aim is to make their lives better.”

IMB is the first specialised residential mortgage bank in Ukraine. It was founded by Western NIS Enterprise Fund (WNISEF), a US government-sponsored private equity fund operating in Ukraine and Moldova, which provided over $11m in capital to the bank.

Vrublevsky joined the team in February 2004 to work on the bank’s registration - developing the business plan, the internal policies and procedures for the bank’s operations. By then, he already had a pedigree in banking and finance.

Vrublevsky began his financial career in the Kyiv office of Deloitte & Touche where he started specialising in the banking industry from his early days as an auditor. His work led him to a short secondment in London where he provided training on Russian and Ukrainian financial markets for major international banks in the UK, and participated in consultancy projects on risk management and control assurance for a number of financial institutions. By the time he returned to Kyiv in 1998, he was head-hunted by the Vienna-based banking giant Raiffaisen International (which recently acquired a majority stake in the second largest bank in Ukraine, Bank Aval) to focus on the risk management policies and procedures for the bank, which was establishing itself in Ukraine at the time. He later consolidated his experience as a banking expert with a stint in 2001 at Ukrgazbank, one of the oldest Ukrainian banks in the city, which Vrublevsky comments had a “very different culture” to the Western attitudes he experienced at Raiffaisen and Deloittes. Although gracious about his employer, he notes that his role as adviser to the bank’s president, and as head of risk management, proved frustrating in that his recommendations were often blocked. “I didn’t want to spend my career working with people who didn’t want to change,” he argues. A chance encounter with an IMB employee and former colleague at Raiffaisen led to an appointment at IMB, returning Vrublevsky to an international environment in which he was more at ease.

IMB received its licence in January 2005, coinciding with Vrublevsky’s promotion to CFO and his success in securing a $30m loan from the US Overseas Private Investment Corporation (OPIC). The loan allows IMB to grant US dollar mortgages over a 10 or 15-year term, and home equity loans over a five-year term of up to $250,000. Potential buyers have to demonstrate a financial commitment through a down payment of 25% for all home purchases and while interest rates are high - the market rate in February 2005 was 14% - they have since fallen in a sign of growing financial confidence.

Risks

Vrublevsky notes that, despite backing from the international financial community, he is aware of the risks that IMB is undertaking in the rapidly changing economy of a former Soviet bloc country. “There are many risks for any bank, particularly a mortgage bank because it’s affected by what goes on in the real estate market in Ukraine. If house prices fall, how damaging will this be to our business? Likewise, if the market contracts, will we be able to cover our costs? Both present major risks,” he says. There is, of course, the ongoing political instability that may or may not determine the future growth and financial health of the country. Vrublevsky won’t be drawn into making any comments on politics or the current Government but, assuming that the mortgage market develops in the same vein as it has for the past year - and all signs point to this being the case - the prospects for IMB look promising. In July 2005, the Ukrainian National Mortgage Association reported the size of the mortgage portfolio of all banks as 5.6bn hryvnia ($1,109m), which has doubled since June 2004.

Can IMB meet continued demand? Vrublevsky counters that the OPIC loan is expected to help attract capital from other international institutions, particularly as IMB actively follows Western and transparent, practices in its reporting and operations. And a law on mortgage bonds, adopted by the Verkhovna Rada of Ukraine in December 2005, will allow Ukrainian financial institutions including IMB to attract long-term funds by issuing mortgage based financial instruments.

The pace of change in the mortgage market marks a dynamic period in the country’s economic and financial development, much in the same way that Kyiv’s rapid transformation may well herald a golden age in the city’s history. As a keen gliding pilot, Vrublevsky gets a bird’s eye view of Kyiv, and beyond to the fashionable Crimea, every weekend when he heads to the nearby Buzovaya aerodrome. “I’m crazy about flying,” he exclaims, speaking enthusiastically about his love of gliding and the freedom he has to gaze upon the changing landscape of his favourite city. He claims he wouldn’t want to live or work anywhere else. “When you’ve grown up in an unstable economy and you now witness all these changes and developments going on in Kyiv, it’s incredibly interesting and exciting,” he says.