Hryvnias for everyone

Emil Górecki

A country of great needs and optimism. All that is needed is outside finance and an understanding of the complex workings of the market and administration. Strong nerves are also needed. The very best of luck!

In 2007, the amount of real estate investment in Kiev totalled more than USD 800 mln. This was much greater than the previous year, when the figure reached only USD 200 mln. Two years earlier, there was no trace of foreign investment. The attractiveness force of Kiev is obvious. It is the capital and largest city of the country, with a population of 3.3 mln. Other interesting cities include the ‘millionaires’: Kharkov, Dnipropetrovsk, Donetsk and Odessa. The properties in these cities are certain to generate substantial profits, but investors are currently looking for challenges in even smaller cities. There are several reasons for this: in Kiev and the other large cities there exists huge demand with practically zero supply, together with the absence of investment possibilities and land on which to develop new buildings.

Orest Sarakhman, the commercial director of TKS Holding – one of the largest property developers and construction companies in western Ukraine – observes that: “We have seen a large influx of developers to the southwest of the Ukraine, indicating that there are profits to be made in that region – and both Ukrainian and foreign market players are now taking note of this.”

Solid foundations

The healthy state of the national economy is also bolstering the rapid growth of the Ukrainian real estate market. Data supplied by the State Statistics Committee (Ukraine’s office of statistics), indicates that the real gross national product in 2007 grew by 7.3 pct. The Goldman Sachs investment bank ranked Ukraine’s economic development even higher than that of India. AT Kearney, the American consulting company, in 2006 rated Ukraine among the top five countries attracting the most capital in the commercial properties sector. Ukraine was much further down the list in 11th place a year earlier. And this is one of the reasons why real estate market analysts expect a substantial or even more impressive transformation in the next three to four years, assuming the current huge demand and insufficient supply.

Rates held down

Yields for prime commercial properties were between 9 and 9.5 pct last year, providing a major incentive for western developers. In 2006, according to Colliers International’s Ukrainian office, they accounted for 73 pct of all investors. A further 15 pct were Russians and 12 pct were Ukrainians. But these proportions are changing to the benefit of eastern operators. Only 40 pct of projects recently announced are western, Russians are to develop 35 pct, with the remaining 25 pct being Ukrainians.

Marta Kostiuk, the head of research at the Ukraine branch of consultants DTZ, puts it this way: “The Ukrainian language and way of doing business are almost identical to Russia, but the national economy is growing along Polish lines. International investors planning to expand into our market are interested not just in commercial real estate, but also in the housing market, and it is for the latter sector that we are being asked for advice, despite it being almost entirely closed to foreigners.”

Development companies can expect profits of between 30 and 100 pct, though those are not real, hard data. The general practice is to reduce prices for taxation purposes.

A large part of the market has been taken over by several large, local develoeprs: Kievgostroi, Pozniaki-Zhylstroi, Korporacja Stolica, Solstroi, Domstroi-Kombinat, TMM, Konmsol, Trest-Kievgostroi, Osnova-Solsif and XXI century. Local investors know how to obtain building permits and they find it easier to purchase development plots. But western companies are gradually making their presence felt on the market, which is substantially enhancing the standards of finished buildings. At the beginning of the year, the Ukrainian office of statistics revealed that more than 85,800 development companies are active on the market, only 733 of which belong to local government and 592 to the state. Wadim Nieposedov, the managing director of the Ukrainian Trade Guild – a consulting company for development projects – remarks that: “Our development market is not moving in the same way as those of Poland, Bulgaria and Romania, where local developers have been pushed out of the market by foreign operators. Such a trend will not take root in the Ukraine for the next ten years, one reason being that we will still not have become a member of the European Union.”

Shopping suction

Rents for office and retail facilities, as well those for warehouses, rose in the best locations by as much as 100 pct in the past year. The market is not and will not be saturated for a very long time, since not very much is being built. A better situation exists in smaller centres, where demand can be satisfied by developing two or three large projects.

The Ukrainian market for shopping centres is still at a very early stage. The first modern mall – the Globus centre in Kiev (more than 19,000 sqm total space and more than 9,000 sqm leasable space) – was completed as late as 2001. It is situated on Majdan Nezalezhnosti (Independence Square), and houses such retail outlets as Ecco, Esprit, Brocard, Beggon, MoDaMo, Carnaby, Polo Garage, Tally Weijl and Yves Rocher, as well as several banks, restaurants and cafés. Foreign operators entered the fray a few years later, in 2004. One year after this, the expansion of modern shopping centres outside Kiev began: in Odessa, Kharkov and Dnepropetrovsk with populations of 1 mln, and then in Lvov, Zaporozhe and Mikolaiv with a few hundred thousand inhabitants.

The absence of large, high-quality shopping centres is most painfully felt in the largest cities. In Odessa there is 70 sqm of such space per 1,000 citizens, in Moscow 312 sqm, in Warsaw 422 sqm and in Prague 476 sqm. According to the Ukrainian branch of DTZ, if pipeline shopping centre developments are completed, then 1.6 mln sqm of space should appear on the market by 2011 – but it has to be remembered that such projects are often delivered behind schedule. According to DTZ’s figures, the average monthly rent per sqm for such space in Kiev amounts to USD 50-150. Smaller tenants in the most attractive locations have to pay even as much as USD 200-250 per sqm. There are at least several dozen modern shopping-entertainment centres planned or under construction throughout the country, usually by Ukrainian and Russian companies. There are 14 such projects planned for Kiev with a combined area of almost 270,000 sqm. Outside Kiev, around 80 centres with 1.7 mln sqm are being developed, coming online in the next 2 to 3 years. Since existing regulations make it difficult for foreigners to purchase real estate, local investors frequently buy the land first and later, during the design stage, turn to international funds, established developers and real estate agents to get the project up and running.

Orest Sarakhman points out that: “Multifunctional shopping-entertainment centres connected with office facilities are what are most needed in our country. This is fine for developers, who can diversify their portfolios of properties. Large companies have discovered another profitable approach: dividing their portfolios between commercial and residential properties. TKS Holding uses housing development to help facilitate the commercial projects which dominate our portfolio. The rapid selling of homes gives us the finance we need for further investment.”

Start of an office spring

The KIev office market is also the most developed, with almost 40 business centres currently in existence, which with all the planned developments is soon to increase to 62. Market experts, however, are forced to admit that there will be only 100,000-150,000 sqm of high-quality offices coming online in 2008 of the planned 250,000 sqm, most of which was scheduled for delivery one or two years earlier. New office investment outside Kiev will see another 60 buildings developed in the next one to two years, with the total space amounting to 313,000 sqm.

    Kiev also has the highest rents. According to DTZ, these stand at USD 50-70 per sqm per month for class ‘A’ space and USD 38-55 for class ‘B’ space. It must also be noted that there is very little vacant office space on the market, DTZ’s Kiev branch estimated the vacancy rate to be 1.4 pct in mid-2007.

East or west?

The history of the commercial property market in Ukraine so far is an almost exact facsimile of those of Poland and the Baltic states – the only difference being that these countries grew several times quicker than western European markets. So if Ukraine wants to make up for lost time, it will have to make progress at a much faster pace. Foreign investors are already becoming interested in the market, especially the retail sector, which is still in the hands of Ukrainians - at least for the moment. Russians are also present among the operators since Ukraine is more “comprehensible” to them than to western companies. The number of construction companies is steadily rising which has a very healthy influence on the market.

Hotel worries

Ukraine has nothing much to boast about as regards the number and quality of its hotels. A Jones Lang LaSalle hotels report states bluntly that Kiev is 10 years behind comparable capital cities in Central and Eastern Europe. Kiev has only 1,200 modern standard rooms to offer today but even that classification is exaggerated compared with international standards. Only two high-class projects were delivered in 2007: the 4-star Riviera with 80 rooms and the 5-star Hyatt Regency Kiev with 234 beds. But investors are looking with much optimism to the future. Following UEFA’s decision to grant Ukraine joint responsibility to organize the 2012 European football championships, Sparkassen Immobilien AG of Austria announced it would construct 5 hotels in key Ukrainian cities by 2010 at a cost of EUR 500 mln.

Homes only for Ukrainians

The residential sector is also largely unsaturated. Investment is now picking up a head of steam, with local experts claiming that 7.1 pct more homes have appeared annually on the Ukrainian market since 2000. The average living space per head amounts to 22 sqm, with the figure being even 2 sqm less in the Lvov region in the west of the country, while the figure for western European is 40 sqm. Between 1.2 and 1.5 mln sqm of living space is currently being built annually in Kiev, and between 150,000 and 400,000 sqm in the largest cities. But it is with the amount of lower quality homes that there is a real problem. Apartment prices are also high, which would seem to justify fears of the speculative character of the market. With an eye to such risk, the most important developers incline towards high-quality homes in attractive locations, which generate much greater profit.

Warehousing awakes

The warehouse property market and logistics centres only really got going as late as 2005, since when it has been making great efforts to make up for lost time. DTZ estimates that modern warehouse space in the Kiev region amounts to around 2.7 mln sqm, Budapest has 0.9 mln sqm and in Moscow there is 2.5 mln sqm. The development of the Eastgate Logistic complex by GLD Invest of Austria was one of the largest investments of 2007. The available warehouse space is 40,000 sqm, with the project having an additional 4,500 sqm of office space. The complex, which was built on an 8-ha site was 70 to 80 pct financed by the Austrian Erste Bank. Also developed by western consortiums were Logistic Complex near Kiev by WND, which has an area of 250,000 sqm, and Delin Development Logistic Centre with an area of 186,000 sqm by Delin Development. The monthly rent in the best facilities is between USD 8 and 11 per sqm.

Politics can do little harm

Some western investors are put off by Ukraine’s political instability; but even so, the country is growing and attracting an increasing number of foreign investors, with the Germans, French, Spanish and Israelis being the most active. According to the State Statistics Committee, more than USD 5.24 mln entered the country in the first nine months of 2007, exceeding by more than 70 pct the 2006 figure for the equivalent period.

Wadim Nieposedov is convinced that: “Private investors have no end of difficulties on the Ukrainian market. They have to come to terms with local conditions, rates and prices. Ukrainian firms account for 90 pct of developers today, and it is they who dictate the prices. Many problems arise even at the first stage of the project: excessive red tape, inappropriate and inconsistent legislation and poor organization. One characteristic feature of the market is the impossibility of financing projects through credit. And all this is compounded by the lack of land. But luckily politics is not posing a real obstacle to the economy.”  n