Hotel Dnipro - attracting sustainable investment via transparent privatization
The State Property Fund of Ukraine (SPFU) is actively preparing the Dnipro Hotel for privatization. The Dnipro Hotel is a unique tourist facility thanks to its location - on European Square in the very heart of Ukraine’s capital.
Ukraine is the last country in Europe to privatize its state assets. And now that the President and Government have adopted a transparent privatization agenda, unique real estate investments are going on the market.
The Dnipro Hotel is exactly such an asset. It is an exclusive offer for investors to purchase a distinctive tourist facility at an open auction, actually, in the primary market. An offer like this is no longer available in any other European country.
Although the Dnipro is formally a small-scale privatization target, the new team at the SPFU has proactively approached preparing it and applied large-scale privatization tools.
The SPFU’s logic is quite understandable: effective due diligence and marketing of the privatization asset will ensure strong competition among investors in future auctions, which will significantly increase the asset value and revenues to the state budget, while attracting a competent investor.
Investors’ great interest in the hotel at this stage is also understandable, since the price paid for the asset will be less than the future value of a successful tourist facility, providing investments in modernization and implementation of an effective development policy.
Consequently, it is a “win-win” strategy ensuring the state will receive high revenues from the sale of this privatization target, and the new owner will receive an asset that will bring a stable high income.
The U.S. Agency for International Development (USAID) is providing support to the SPFU to ensure the transparent privatization of state-owned assets to the maximum possible extent and has engaged Baker McKenzie to work on legal due diligence; DELTA Ukraine for technical due diligence and Cushman & Wakefield for a feasibility study.
Providing potential investors with the most complete information about the privatization target is an act of trust between the state and investors, an opportunity to attract a wider range of potential investors and an important step towards creating healthy demand for the privatization target. An overall assessment of the privatization target gives the investor an assurance of the actual picture of the asset, based on which the investor will offer a competitive price and the state will receive the investments.
Please find below expert comments about the companies involved in preparing the Dnipro Hotel for privatization.
Serhiy Piontkovsky, Managing Partner of the Baker McKenzie Kyiv office, expert in privatization, corporate law and corporate reorganization, energy sector, real estate, construction, and land law:
“The subject of our diligence is to conduct a legal inspection of the privatization target, verifying the rights to its property, land, and other assets of the state-owned enterprise. We also check contractual relations of the privatization target, availability of obligations, debts, loans, promissory notes, guarantees, litigations and arbitration disputes, etc. In summary, our due diligence is aimed at a complete legal diagnosis of the assets and liabilities of a potential privatization target.
Upon receiving our report on legal due diligence of the privatization target, a potential investor will be able to more quickly and objectively understand the enterprise’s assets and liabilities, as well as evaluate the potential financial, fiscal, and legal risks associated with the procurement target. In other words, a potential investor, having our report, will be confident that the company has no skeletons in the closet, which, in turn, will allow a potential investor to build a more realistic financial and business model of the enterprise’s work, cash flows, and probable economic performances. But the most important result is that an investor will be able to offer the state a fair market price for a potential object of sale. ”
Yana Lytvynchuk, Deputy Managing Director and Head of Valuations at the Cushman & Wakefield International Consulting Company:
“To perform the task of analyzing the feasibility of reformatting the Dnipro Hotel into a hotel under the management of an international brand, we involve our experts from Cushman & Wakefield’s Prague office, which specializes in hotel real estate services in Central and Eastern Europe, including consulting, transactions, operator searching, and evaluating, for both private and public sectors.
Our task was to analyze the feasibility of reformatting the Dnipro Hotel to be managed by an international brand operator. In the course of our work, we studied the asset itself and its characteristics that may affect the ability to reformat it. We focused on the analysis of the capital city’s hotel real estate market, hotel room capacity and its distribution by classes of existing hotels, and new proposals. We analyzed the competition within the segment in which the Dnipro Hotel would operate after its reconstruction. It is worth highlighting that were focusing on market averages for a particular class of hotels, which we would recommend for reformatting and modernizing. At the next stage, each hotel operator will be able to perform its own detailed survey that will include the full spectrum of specifications essential to each specific operator.
Based on our study, a wide circle of potential investors and hotel operators will be able to answer questions about this asset’s investment attractiveness and its potential for redevelopment, taking into account specific financial indicators: payback period and profitability of the hotel reconstruction project.
Our work will allow investors to understand the commercial concept of reconstruction and its financial and investment performances from a market perspective. Each of the interested investors will have the opportunity to check its investment model against our conclusions and adapt our calculations to its own investment model, for example, taking into account the value of attracted funds and the equities of each individual investor.”
Wolfgang Gomernik, Managing Director at DELTA Group and CEO at DELTA Ukraine:
“Over the last five years, DELTA Ukraine has surveyed about 530,000 square meters of Ukrainian real estate for international and domestic investors. We clearly understand what they are exactly interested in when buying a building and what information is most important.
The diligence of privatization targets is a responsible procedure that is quite difficult for a potential investor to do on its own. For conducting technical due diligence at the Dnipro Hotel, DELTA has involved about 10 different experts from our team and a project manager having many years of experience in conducting similar audits, who ‘understands’ a building and its specifics.
First and foremost, it was important for us to carefully examine the complete background of the building, its maintenance and operations, available documents, and all the peculiarities. Following that, our engineers conducted a thorough inspection of all major systems and elements of the building. Based on the information received from the study and analysis, a risk assessment was carried out. Additionally, the most detailed photo report was compiled with situ-referenced photos against a plan of the building. In this way, a potential investor is able to see everything with their own eyes. As a result, we drafted a report with complete information about the assets including photo documentation, description of the building and its systems, and the main risks for an investor from a technical perspective.
Confidence is the main result of our work for a potential investor. Confidence that the report includes all the necessary information about the asset, that it will not buy a ‘pig in a poke’ and will not have additional ‘pitfalls’ after the purchase. It is better to follow not only your intuition but also the facts, figures, and recommendations. The availability of such information will ensure a positive effect on trust and decision-making and, ultimately, on purchasing.”