Scam or no scam, local developers say that rising cost of construction materials and unremitting demand for new apartments will continue pushing prices up on residential real estate market
Scams or no scams, local developers say that the rising cost of construction materials and unremitting demand for new apartments from potential homeowners will continue pushing prices up on Ukraine’s primary residential real estate market.
There has been some speculation on the market recently that apartment prices – if not the country’s entire real estate sector – would collapse in the wake of a real estate scandal that erupted in Kyiv earlier this month after years of steady growth. In the scandal, hundreds of prospective homeowners were bilked of an estimated $100 million by scam artists who sold them property that was never built or which had been sold to multiple buyers. The fradulent developers then fled the country.
But local developers and real estate experts are now generally dismissing speculation of a downturn, or outright collapse, of the Ukrainian real estate market as a result of the scandal. They also play down the possibility of other fraudulent schemes that may be brewing in the country’s real estate sector. Experts say that continued strong demand from prospective homeowners and rising construction costs, largely due to the surging prices for energy and raw materials, will continue fueling increases in new apartment prices. Few experts, however, are willing to say exactly how much prices will rise.
Costs now
According to Savant, a London-based project and cost management company specializing in Central and Eastern Europe and the CIS, current construction costs in Kyiv average $565 per square meter of residential living space. Their calculations include apartments with flooring, bathrooms, kitchens and other amenities.
That’s higher than Prague, where residential construction currently averages $476 per square meter, and Sofia, Bulgaria, where it averages $416 per square meter. Only Warsaw has slightly higher prices, as development companies there build residential property for $576 per square meter.
In Moscow, on the other hand, developers currently spend $714 per square meter to erect residential real estate.
Savant said that while Ukraine is geographically and politically close to Central and Eastern European countries such as Poland, the Czech Republic and Hungary, the characteristics of design and construction of projects place it very close to Russia and other countries in the CIS.
The company said that Kyiv and all major regional centers in Ukraine are undergoing a construction and property development boom, with the housing market being the most popular area of investment due to a high rate of return and the quick turnaround associated with the residential sector.
The situation on the Ukrainian real estate market in general, Savant said, is characterized by an emphasis on achieving high output at the expense of quality.
“Despite the high volumes of construction and property development, the Ukrainian market is a case of process rich and outcome poor,” Savant said in a recent market analytical statement provided to the Post.
“It is difficult to benchmark standards in construction, as there have been very few significant developments in recent years,” the statement continues.
“Only with the arrival of international property developers and construction companies will we see the quality of projects improving and the level of costs moving closer to CEE levels.”
Prices later
So, what’s in store for prices on the primary residential real estate market in Kyiv and Ukraine this year?
Generally speaking, higher prices will come, but some experts say it is still too early to predict by how much apartment prices will increase.
Natalia Khoreva, director of Kyiv Zhytlo-Invest, a construction and investment firm, told the Post Feb. 21 that it is still premature to forecast Kyiv’s residential real estate prices for 2006 for a number of reasons.
“The first reason is that producers of construction materials have not yet stated by how much prices for their products will change in connection with the increase in [natural] gas prices.”
Since Ukraine saw its principle gas suppliers, Russia and Turkmenistan, double their prices at the start of this year – to $95 per 1,000 cubic meters – both broadcast and print media have reported rising prices for raw materials used for construction like cement, and suggested that this may put new apartments in the country out of the price range of most Ukrainians.
The second reason, Khoreva said, is that demand for apartments is expected to increase on the primary market in connection with banks, which are making mortgages more accessible to a greater number of prospective homeowners. Lower lending rates for apartment purchases will start this spring.
Because information regarding these factors is still unavailable, Khoreva said that the Kyiv residential real estate market is expected to be stable only “for the next month or month and a half.”
Terry Pickard, the managing director for NAI Pickard, the exclusive agent in Ukraine for the international commercial real estate agency NAI Global, believes that the increase in energy costs and its effects on the cost of property prices in Ukraine has been exaggerated and said that there are other primary factors at work.
“With the underlying dynamism of the Ukrainian economy and the continuing growth of a new middle class, there is no reason to forecast that basic market demand will drop,” Pickard said.
Like Khoreva, Pickard said that another important factor driving demand on Ukraine’s residential market is the potential home-owning population’s increasingly easier and greater access to mortgage financing.
“As Western banks take over more of the Ukrainian banking sector, the probability is that mortgage banking terms will become increasingly similar to Western European norms,” Pickard said. “This is being supported by legislative improvements to the laws on mortgage lending.”
He also said that Ukrainian banks are likely to reduce interest rates on mortgage loans, as well as the size of the down payments that they will require of potential homeowners in order to extend loans to them.
“These factors will mean that the number of people being financially able to purchase [homes] will grow logarithmically. In other words, the number of people who can afford 20 percent down and pay the balance over, say, 15 years, is considerably greater than the number who can put 50 percent down and pay the balance over five years.”
Furthermore, Pickard said that demand for housing in Kyiv remains strong despite the cost of land for development more than doubling in the last two years, and apartment prices rising dramatically in some instances in the last several years.
“Apartment costs in some parts of central Kyiv have gone up 400 percent in three years, and this has not stopped people from buying,” he said.
“For example, an un-refurbished 90-square-meter apartment on Pushkinska Street cost $40,000 four years ago. Today it would cost you $250,000, and even at that price they get sold in a month.”
Well-connected means paydirt
Meanwhile Kyivmiskbud, the country’s largest residential real estate developer, has stated plainly that sale prices for apartments within its developments would go up by 10-12 percent this year, citing expected inflationary pressures.
Earlier this month, the Ukrainian Construction Association in Kyiv and the Construction Chamber, whose members account for 60 percent of the Ukrainian construction market, said that they would raise prices for the facilities that they own by 12-15 percent this year in connection with increasing prices for natural gas, which is driving up prices for construction materials and metal.
Kyivmiskbud President Volodymyr Polyachenko said in a statement published in the Russian-language newspaper Delo on Feb. 20 that it currently costs Kyivmiskbud an average of Hr 5,472 ($1,094) to build one square meter of living space in Kyiv. He said that 25-30 percent of its construction costs are spent building social and commercial infrastructures for its residential developments.
Polyachenko also said that there is a high level of interest from foreign investors to enter Kyiv’s residential real estate development market.
“We welcome those companies that arrive with their investments, register with us as taxpayers and create jobs [for Ukrainians],” he said.
Kyivmiskbud finished 2004 with a net profit of Hr 5.4 million ($1 million), or a profit margin of 7.3 percent on revenues of Hr 735 million ($147 million) – almost double its revenues in 2003.
Savant said in its analytical statement that from an investment perspective, Ukraine is currently more attractive to entrepreneurial developers than institutional investors:
“With returns being as high as 25-30 percent on development cost per annum, less attention has been paid to potential exit strategies by developers.”
Savant owner David Whitehouse told the Post that yields in Kyiv for residential real estate are generally between 15-20 percent, with some yields moving higher depending on the type of development, its location, and a number of other factors.
“I would expect that a contractor’s net post-tax profits would be in the region of 10 percent,” Whitehouse said.
“If they are financing and developing themselves,” he added, “I would expect the margin to move up to the 15 percent-plus mark.”
Savant said in its statement that under current business conditions in Ukraine there is little room for foreign investors in the Ukrainian real estate development market.
“The majority of construction in Kyiv and regional centers is undertaken by local construction companies, which have taken advantage of long-standing relationships with local authorities to buy land and permits at nominal prices, ostensibly to build social housing, but in reality to develop residential property for the middle- and upper-income sectors,” it said.“These firms have recently moved into construction of commercial facilities and have dominated the construction industry for the past 10 years without much competition from international firms.”
