Orange adrenaline

The Ukrainian property market has been profoundly influenced by the \'Orange Revolution\' and by Viktor Jushchenko\'s team assuming the reins of power.  There is a serious shortage of office buildings, shopping centres, warehouses and housing in Kyiv and other cities, but their development is hitting a forest of barriers

The office market
The Kyiv office market is reminiscent of Warsaw\'s golden era in the 1990s, when demand outstripped supply and landlords signed long-term leasing contracts for enormous rents - at least by today\'s standards.
According to data supplied by DTZ, by end of 2005, Kyiv city accommodated in the order of 445,000 sqm, 93,000 sqm of which was delivered last year as mostly B-class buildings. This was not much when you take into consideration that in  throughout 2005 alone contracts were signed for the tenancy or purchase of around 99,000 sqm of space, far from satisfying demand. Analysts of DTZ\'s Kyiv office feel that companies are \'frustrated\' with the absence of offers which meet their quality expectations.
In accordance with information provided by DTZ, the way demand exceeded supply by end of 2005 is reflected in the vacancy rate, which was estimated at 2.6 pct. Tenancy contracts for class A buildings now stand at around USD 35 and  45 per sqm and, USD 25 and 35 in class B buildings. Specialists are predicting a rise in rents in the oncoming months.
The increasing demand for office space has led developers - mostly Ukrainian - to anticipate new investments (including the upgrading of older buildings in city centres and suburbs), but the dates on which they are expected to be delivered often change due to such things as the protracted issuing of building licences and organizing the necessary finance.
Most office buildings are in the city centre, particularly to the south and east of Khreshchatyk - Kyiv\'s main thoroughfare. The next biggest office location is Podil, with DTZ\'s specialists claiming that the importance of this part of Kyiv is bound to increase.
Companies that cannot afford expensive Kyiv office buildings have the alternative of so-called semi-professional offices (office space in municipal buildings) or residential space (adapted apartments on the ground floors of housing blocks). A number of analysts have estimated both kinds of space at 53 pct of total office resources, amounting to between 780,000 and 800,000 sqm (in modern, older and adapted buildings).

Shopping space
As the political situation stabilizes and the Ukrainian economy looks healthier, the growth of the shopping space market is gaining momentum. As in the case of office space, Kyiv, with its 2.6 million population as well as being the workplace of hundreds of thousands of commuters, is the major centre for shopping.
Shopping malls are also appearing in other Ukrainian cities, including Odessa, Kharkov, Donetsk, Dniepropretrovsk and Mikolayev. Kyiv at present has around 260,000 sqm of modern shopping space. In 2004 records were broken for new deliveries - a total of 147,000 sqm. Last year, however, was much less successful. Our data shows that only one centre came onto the market - the 8,000 sqm Arena. According to the Ukrainian Chamber of Commerce, 2006 should exhibit a further increase in activity with a total 60,000 sqm of retail space to be opened. This data does not include the most exciting project of 2006 - the Mega shopping and entertainment centre developed by Ikea near Kharkivska square. The construction of this project, totalling 130,000 sqm and housing 200 retail outlets, is to cost more than USD 300 mln. The principal tenants will be Ikea (28,000 sqm), Ramstore (12,000 sqm) and OBI (14,000 sqm) - all making their first appearance in Ukraine. A hotel will also be built as part of the same project. The investors expect 20 mln people to visit the Mega centre annually.
Mega is a real colossus in terms of size, although 2 other centres planned in Kyiv are not that much smaller: Lybid Plaza (60,000 sqm) and Troitskyi (formerly Olympic Plaza) (42,000 sqm), both of which DTZ\'s analysts expect to open in late 2007 at the very earliest as both schemes have been facing delivery difficulties.
Centrally situated Khreshchatyk, together with neighbouring streets, including Maydan Nezalezhnosti as well as Sofiyska Square, are the best and most prestigious shopping addresses in Kyiv. A number of retail centres exist in these locations, alongside franchised exclusive retailers. These centres include: Mandarin Plaza (7,500 sqm), the underground Metrograd (17,000 sqm), Globus (18,500 sqm) and several others. Developers have also expressed an interest in the larger residential districts, with Obolonsky, Tatarka, Poznyaka and Petrivka chief amongst these. Obolonsky, the population of which has the highest per capita earnings in the Ukrainian capital, is the home of  Metropolis (25,000 sqm), Karavan Megastore (33,000 sqm) and Alta-Centre (17,000 sqm).
By and large, the tenants of shopping centres are local retailers who are increasingly being forced to compete with western firms. Furshet, Megamarket, Velyka Kyshenya and Silpo are such Ukrainian chainstores. Major foreign operators include Billa of Austria (first outlet opened in 2000), Metro of Germany, the Dutch Spar chain, VP Market of Lithuania and Russiaís Pyaterchorka and Paterson. The next chains are waiting to make their entry to Ukraine, including Ikea, OBI, Praktiker and the Portuguese discount store giant Jeronimo Martins. Auchan, Carrefour and Tesco are believed by many to be the next most likely to appear.
Shopping centres are having no problems in leasing out their free space, indeed it is often let long before the projects open. Hardly surprising, then, that rents remain high, although specialists are talking of price stability in the near future. The major tenants of the largest spaces pay upwards of USD 9 dollars per sqm, with USD 80 per sqm being the rent for medium-size retailers. Those interested in smaller spaces at an attractive point in a good centre have to pay as much as USD 200 per sqm monthly.

Warehouses
A lack of available plots and the poor development of the local market are the two issues that come up most during discussions on warehouse properties. Agents such as Colliers International are convinced that international logistic operators and developers are effectively discouraged from doing business in the Ukraine. Nevertheless, since the beginning of 2005 DTZ have witnessed considerable increase in the interest of international companies to development opportunities on the Kyiv warehousing market, and the development process of several large-scale logistics complexes launched
The problem with plots is rooted in official policy: very little land has been earmarked for non-agricultural purposes outside the city, and even should a plot be found somewhere, the purchasing process is far from the standards of transparency that might be expected. The investor faces a long and painful road in acquiring the necessary building permits. A way out of such a situation could be the purchase of bankrupt industrial plants, but this is not always a profitable option. Another opportunity could come from a decision recently taken by Kyiv\'s authorities to earmark several plots on the east bank of the Dniepr River within a 35 km radius of the city, specifically for warehouse and logistics projects. The encountered barriers and pitfalls are reflected in the figures, with Ukraine possessing a mere 150,000 sqm of modern warehouse space to let. Analysts highlight that the quality of 80 pct of existing warehouse resources in the Kyiv agglomeration is rarely as high as category C. There is not a single building up to top European standards apart from those which companies have constructed for their own use -and this at a time when the demand for storage space is spiralling, the unoccupied space in the several existing premises being almost zero. DTZ conducted a survey of tenants, and found that only 20 percent were satisfied with the standard of existing buildings, while demand of about 400,000 sqm almost all from foreign companies does exist.
Rising demand has not been followed by a surge in supply, with only 2 projects being commissioned in 2005: the FIM Consulting company (22,000 sqm near Chayka airport) and the Orange company (9,700 sqm), while this year the construction of the Kyiv Ring Road Logistics Complex (88,000 sqm) by Europolis and HCM Group is to be completed. Both the right and left banks of the Dniepr River in Kyiv are being surveyed as a possible location for warehouse projects. The surrounding areas of Velyka Kiltseva, Akademika Palladina and Akademyka Zabolotnoho to the east of the city have been  mentioned, as well as the areas alongside the motorways to Zhytomyr, Odesa and Kovel. West Kyiv is a likely site too, having highways leading to Poland, Slovakia and Hungary.
The rent asked for top-class warehouse space is between USD 6 and 12 sqm/month, and USD 2 to 5 sqm/month in lower standard buildings.

Magda Konstantynowicz, Tomasz Cudowski with help from Andriy Khraban of Mnemosoft