According to industry insiders, Ukraine’s commercial real estate market will likely continue developing at its current pace.
Ukraine’s commercial real estate market is in the midst of a development upsurge, but the supply of available commercial space drastically lags behind demand, resulting in relentless upward pressure on real estate prices.
According to industry insiders, Ukraine’s commercial real estate market will likely continue developing at its current pace until around 2010, after which it will enter a so-called mature market phase.
Insiders say that the market’s upsurge has been driven by steady and strong economic growth, a rising middle class and thus more consumer spending, generally improving mortgage deals and shorter periods of return on investments.
According to market players, while local developers dominate on the Ukrainian commercial real estate market, foreign investors are very interested in entering the market thanks to a high level of return on investments.
Oksana Litvintseva, the head of the Landlord & Tenant Representation unit at DEOL Partners, a full-service real estate consulting and corporate brokerage company with foreign investment operating in Ukraine since 1992, said the payback period on investments in commercial real estate in Ukraine averages about seven years, while in European countries the average is about 12 years.
Litvintseva said that despite the “ambiguous” political and economic situation in the country, the Ukrainian commercial real estate market holds potential for long-term investments.
“All property is interesting to foreign investors, as yields across all spheres of property are more than double those in Western and Central Europe, with the perceived risks of operating in Ukraine decreasing,” added Terry Pickard, group chairman and a founder of NAI Pickard, the exclusive representative of the international commercial real estate agency group NAI Global in Ukraine and Moldova.
However, market insiders agree that Ukraine’s commercial real estate market is still far from saturated, with demand overwhelmingly exceeding supply.
“In the Ukrainian property market, across the country there is a shortage of every type of property – residential, office, retail, logistics, hotel,” said Pickard.
Concerning market saturation levels for professional office centers, by Serhiy Gach, an investment projects manager with ITT-Invest, a full-service investment company based in Kyiv, there are currently 1.6 square meters of office space per resident in Warsaw, Poland, and Prague, Czech Republic, 1.2 square meters of space per resident of Budapest, Hungary, but only 0.2 square meters of space per Kyivite, with Kyiv boasting the highest density of office space in Ukraine.
“The commercial real estate market in Ukraine is far from saturated, and there is no ‘bubble’ on the horizon. There is high demand and limited supply and hence, ever-increasing prices for land, buildings and rents,” Pickard said.
Despite the drastic lack of supply, the commercial real estate market has shown steady growth, with new large companies entering the sector with an interest in building logistics centers and industrial structures within rather short time periods. Many investors are interested in building huge commercial buildings, being certain that demand for commercial real estate will remain high for some time to come.
According to Gach, there are 122 large companies that deal in commercial real estate in Ukraine, with about half of them capitalized from foreign investment.
With respect to the latest trends on the Ukrainian commercial real estate market, insiders say that currently there is a tendency toward investments into the construction of increasingly larger-scale commercial buildings, often mixed-use structures combining office, retail, entertainment, parking and residential space under one roof.
Market experts say that commercial real estate development is increasingly taking place across Ukraine’s regions, in addition to the capital Kyiv.
According to Gach, another significant trend on the market is the movement of offices out of Kyiv and closer to warehouse space located outside the capital, although at the moment, demand for office space is still highest in the city center.
With respect to the quality of commercial real estate in Ukraine, market insiders say that while it has been improving, the market still has a long way to go to before it can provide space that conforms to Western commercial real estate standards.
“Warehouses located in reequipped buildings of former plants, factories or even farms can’t really be competitive on our swiftly developing market,” said Gach.
Among the obstacles hampering the growth of the market in Ukraine, analysts and insiders name the moratorium that has been placed on the sale of privately owned agricultural land and the current political crisis in the country.
“There is demand for land around the cities for retail and business parks, and residential and logistics space. However, much of this land is privately-owned agricultural land, so we have a development log jam,” said Pickard.
“In fact, our main problem is political instability in Ukraine,” added Gach, saying that the current standoff “has frozen the investment flow in this sector and in Ukraine in general for the nearest future.”
Gach said that the land-sale moratorium has had a braking affect on the development of commercial real estate space, resulting in higher development costs and longer terms for completing developments.
“And that is the thing that doesn’t attract investors,” he said.
Some market insiders say they do not expect the pace for commercial real estate development to pick up significantly within the next five years. In that period, office space is likely to remain the most attractive within the Ukrainian commercial real estate market for investors, with entertainment complexes and storage facilities commanding a significant chunk of investor interest, as the level of services such facilities provide continue to improve.
According to insiders, prices on the market will continue to increase over the period, but the rate of that increase will fall as the market moves closer to saturation. As the market enters its mature phase, prices will begin stabilizing and approaching European averages, the experts believe.
