Demand, credit slump likely to linger
Ukrainian residential property developers are facing difficult sailing as the world financial hurricane gathers strength. A glance at Kyiv’s skyline quickly reveals the tell-tale signs of trouble: Many construction cranes are idle.
In the wake of the world liquidity crisis, property developers have been hit. There are few buyers who can qualify for mortgages at current interest rates and loans from banks are scarce. As a result, developers are scrambling to raise financing for their construction projects, particularly residential.
Sergiy Maksimov, president of VAB Bank, said it’s very easy to explain why the cranes have stopped moving. The state of residential development in Ukraine is “very bad,” Maksimov said.
Seventy five percent of Ukrainians “cannot qualify for bank loans and, at the same time, developers cannot secure loans on favorable terms to continue construction,” Maksimov said.
The situation has devastated domestic developer XXI Century. Traded on the London Stock Exchange’s Alternative Investment Market, the Kyiv-based real estate development firm has lost more than 80 percent of its value since July 1. After briefly enjoying a 52-week high of $31.24 per share, XXI Century’s price has plummeted to $5.34 per share.
The slowdown and difficulty in obtaining financing has forced the once high-flying developer to scale back its operations and focus on projects that promise the best return in the short run. XXI Century has tried to sell some of its projects in the pipeline to raise cash, but thus far few buyers can be found.
The current slump ends seven years of dramatic growth, during which more than one million square meters of fresh residential space were constructed annually and yearly prices surged by double digits.
“While the company still believes in the Ukrainian residential market, particularly premium apartment developments, the company is in the process of re-prioritizing projects and accelerating them. Primarily [they are focused on] commercial and premium residential, [which] promise the highest return in the near term,’’ said Dmytro Vasylev, XXI Century’s director for corporate communications.
Similarly, the Mirax Group, a Russian developer, halted work on its $500 million project to build Ukraine’s tallest building. Due to the deepening international liquidity crisis, slow sales and soaring construction costs, the company placed a construction moratorium on the mixed-use Mirax Plaza project, according to the group’s press service. Construction could resume next spring if the world financial crisis passes, the company adds.
Industry experts expect that if the financial crisis continues into winter, downward pressure will be placed on residential property prices, particularly affecting mid- and economy-class housing. But with borrowing costs rising, the final purchase price might not decrease for many homebuyers, experts say.
“We see the prices coming down slowly now. But we expect a drop of nearly 20 percent in the secondary and mid-class housing markets by the end of the year. Some are even predicting a 25 percent correction,” says Terry Pickard, chairman of NAI Pickard.
Another factor pushing high-rise apartment prices down is the surging number of suburban cottage developments. Three years ago, there were a handful of registered suburban projects.
Today there are well over 100. Ukrainians increasingly see a free-standing home with a yard as better value. And despite the prospect of getting stuck in Kyiv’s notorious traffic congestion, they are flocking to the suburbs.
The horizon isn’t entirely black for the country’s real estate developers. The commercial real estate market continues to offer significant upsides, experts say.
The amount of office, retail and warehouse space in Kyiv is among the lowest per capita in Europe. As a consequence, rental rates for commercial real estate in Ukraine far exceed the European average. And with demand so much higher than supply, investors still see double-digit rates of return.
“Due to the intrinsic supply and demand disequilibrium in Ukraine’s office and retail space segments, commercial real estate will weather the world-wide liquidity storm relatively well compared to the residential market,” said Sergiy Sergiyenko of CB Richard Ellis, a global real estate management firm.
The residential market is expected to reach a new equilibrium by the beginning of next summer, industry experts predict.
In the meantime, developers are expected to sit tight and ride out the storm in the residential market, says VAB’s Maksimov.
Only time will tell when the cranes start moving over Ukraine’s construction sites again, he adds.
