Upturn not expected soon.
For many, last year’s nosedive on the Ukrainian real estate market was a nasty and unexpected surprise. While few actually predicted the bubble was about to burst, some industry insiders say it was both logical and predictable.
“This is the fourth real estate crash I’ve experienced in my life. For sure, it’s the biggest and the most brutal, and I don’t believe I will see anything as bad as this in my lifetime again. But it’s not dissimilar to the ones before it,” said Guy Lambert a director at DTZ in Ukraine, an international real estate consultancy.
Having worked in the industry for 25 years and survived previous real estate plunges, Lambert suggested that the market will remain in its current flat state for the next six to nine months. This will be the time for individuals and businesses that have cash or access to loans in these credit crunch days to buy real estate, and for the industry players to make more realistic plans for the future.
But what is the guarantee that their future plans will be more cautious and grounded in reality than before?
“Every time there is a crash and we are in a mess like today, experts sit down and think: ‘What can we do to stop it from happening again?’ The problem is that people have very short memories. Within a year or two, everybody forgets all the sensible and good ideas, becomes greedy again and it all happens again. It’s a seven-nine year cycle,” Lambert said.
But before that happens, the market will offer real bargains for awhile, said Oleksiy Govorun, deputy director for marketing and strategic development at TMM, a Ukrainian developer. Compared to one year ago, dollar-denominated prices have dropped by 20 to 40 percent on the primary and secondary residential property market.
The primary market, in which Govorun specializes, is now at $800-900 to $1,200 per square meter for economy class apartments, $1,500-2,500 for middle class and $3,500-8,000 for premium class. DTZ’s Lambert said that commercial real estate prices have also about halved in the last year, and so did prime office space rents.
But there’s a catch.
You can only buy if you have the money, and money is now in very short supply. You have to have at least half of the property’s value in cash before applying for the few mortgages that are still available. And be ready to repay the hryvnia-denominated loans at around 30 percent annually.
“Even if your salary is $5,000 per month, these days it does not guarantee that you’ll be able to buy a property,” said Govorun.
He said there are three conditions you have to meet before taking a loan: Desire and ability to work for many years, an employer strong in its field and job security.
“Believe me, if you make a realistic self-assessment, you won’t have even a 75 percent guarantee on fulfillment of these conditions,” Govorun said. He added that it’s best to avoid loans at the moment, if you can. “If you strain yourself to make a purchase, it’s something evil … from the devil.”
Nevertheless, if you do have the money now, industry insiders say it’s best to spend it soon because the supply of properties will shrink in the next two or three years. “Nobody started new construction in Ukraine this year,” added Govorun.
Some developers who have enough financial muscle and see beyond the crisis are this year continuing with their plans to bring new supply to the market. The property arm of ISTIL Group, which publishes the Kyiv Post, continues to develop a 15,000 square meter business center in Kyiv’s Podil district. The Rialto center is expected to be completed next year.
“These days we see limited construction activity going on in all segments of the market,” said Martin Hormuth, general manager of ISTIL Real Estate. “It is very clear that this must lead to a small supply of new quality space in the short run. We, as a developer, and our partners share the common goal to provide European quality office space, at very affordable prices. We see a market for this.”
“By building speculatively now, we hope to capture the wave later, when it bounces back. By that time our business center will be complete and ready to welcome quality tenants,” Hormuth added.
Yet ISTIL’s new project is an exception. Last year, about 1.4 million square meters of new residential space came on to the Kyiv market. This year, optimists forecast half of this volume by year’s end. But 2011 and 2012 is expected to bring even fewer new residential properties to the market, said Govorun.
“We will be dividing the same properties that are already on the market,” he added.
With cash unavailable to developers, and demand extremely low, developers in Kyiv currently sell about 20-50 apartments and office spaces per month on the primary market, compared to 800-900 deals before the crisis.
About 70 percent of all construction in the capital remains frozen. Some leading developers have avoided bankruptcy narrowly. XXI Century stayed afloat after it managed to restructure a $175 million Eurobond. TMM announced two weeks ago that it succeeded to redeem in full its bond issue to the total amount of Hr 180.6 million. The company reduced its staff from 3,200 to 2,400 employees, and cut their salaries by a third.
“The construction business is not profitable now,” Govorun said.
This is a sharp contrast from just over a year ago.
Profit margins for developers ran up to 200 percent on some projects. Speculative deals in residential property fueled the demand and prices. Business was booming and rents rose by about 200 percent between 2002 and 2008.
Now, at least 15 percent of office spaces are vacant and a quarter of industrial and logistics premises.
“The problem of the last year or two is that developers designed huge buildings, hundreds of stories into the sky – so big that there would never be enough companies to occupy them. They were too big to attract any funding as well,” Lambert from DTZ said.
“There must be greater research done by developers if they want to make sure they build the right thing of the right size, in the right place and of the right design. You can still have a lot of money as a developer from such a project,” Lambert said.
But it might never be the same gigantic profits as before the crisis. Profit margins may be no more than 40 percent, a markup in line with the global trend, explained Govorun.
Prices will eventually rise. “Residential prices will eventually reach central European levels. In two-three years it will be $2,500 – 3,000 for middle class property in Kyiv,” Govorun said.
The key issue for both buyers and sellers is when the money will become available again. DTZ’s Lambert thinks it will also take two or three years for the return of ‘serious’ investment. “When the money becomes available again, it will go to other Western European countries before Ukraine. But so far, there are no signs of that,” he said.
