The FINANCIAL -- Ukraine’s real estate market is currently defined by a severe shortage of quality commercial and residential property. Rising income and growing wealth, on the one hand, and a simultaneous difficulty in procuring development sites on the other, allow developers to keep prices artificially high and capitalise on the shortage of supply, says report produced by Galt and Taggart Securities (Ukraine).
According to the report, Ukrainian market also lacks true nationwide developers with the largest companies just starting to branch out of Kyiv and the Kyiv region and target the so-called ‘millionaire’ cities: Donetsk, Kharkiv, Dnipropetrovs’k, Odesa, Lviv, and towns with population of over 200,000 inhabitants.
XXI Century and TMM were the first Ukrainian developers to go public in 2005 and 2007, respectively. The placement of TMM showed that there is significant interest from foreign investors in the Ukrainian real estate sector, which gives us confidence that the planned secondary offering of the XXIC shares on the Warsaw exchange, planned for later this fall, will be successful as well.
Considerable long-term growth
Average vacancy rates for class A and B office space in Ukraine are below 5%. This explains higher rent rates (35-40% higher on average) in the office sector than throughout the rest of Central and Eastern Europe. Over 80% of existing warehousing facilities do not meet international standards. Average occupancy of Ukrainian retail space is 95% – 5% above the European average. The payback period in this sector is 4-5 years in Ukraine compared to
over 10 years in Europe.
Ukraine’s GDP growth reached 7% in 2006 compared to just 3% one year before
Out of 1,280 total Ukrainian hotels, only 3 have 5-star status (two in Kyiv and one in Donetsk) and about 30 have 4-star status. Just five hotels in Kyiv accommodate 90% of all foreign guests in Kyiv. Most hotels are refurbished Soviet-era buildings so more modern hotel complexes are needed. Stable and robust economic growth and declining interest rates on consumer loans should help keep retail RE in demand.
“These factors, in our view, will contribute to the considerable long-term growth of real estate development firms who position themselves to meet this surge in demand”, says Galt and Taggart Securities.
Housing prices increased 46% per sqm on average in 2006 but since the beginning of 2007 growth has slowed; low-end residential property is going through a period of price stagnation as potential buyers are both unwilling and unable to pay the current market prices. There are no such problems at the high-end of the market.
According to Galt and Taggart Securities Ukrainian market is heavily regulated by local authorities – a factor which tends to increase development time. Therefore, companies with an established reputation and solid track record have a distinct advantage over new market entrants and small developers.
Ukraine also faces a shortage of building brick as Ukrainian brick manufacturers struggle to meet demand. This demand translates into higher prices, which grew by an average of 27% in 2006. Other materials, such as mortar and steel rod, are also rising in price, which means higher costs for developers and, in turn, higher retail prices. The situation is not likely to change
in the nearest 7-8 years, when the market will approach saturation.
Worth the effort
The Ukrainian warehousing and logistics sectors mainly consist of refurbished Sovietera warehouses or of new warehouses built-to-suit, generally developed by companies to meet their own bespoke needs. The number of speculative warehouses built by developers to be leased or rented out and logistics complexes is low as investors prefer more profitable office and retail sectors.
“Until recently, most developers concentrated on facilities with total warehouse space of roughly 20,000 sqm as larger projects were deemed more risky (most developers in this sector, thus far, have been Ukrainian). As a result, demand for quality warehouse space far exceeds supply. Kyiv remains by far the most popular market in this sector with the highest yields in the country. However, the so-called ‘millionaire’ cities also provide attractive opportunities going forward.
The situation, however, is changing as a number of domestic and foreign investors have announced plans to build large modern logistics centres in Kyiv, Odesa, and several other large industrial regional centres”.
Kyiv still accounts for over 25% of all retail chains in Ukraine
Even though the payback period in the warehousing sector is longer (7-8 years) than in
the retail or office sectors (4-5 years), it is still significantly shorter than the payback
period in Europe (up to 15 years), which means the sector will continue to draw more
Kyiv: The total quality warehousing space in Kyiv at the beginning of 2007 was estimated at
150,000-160,000 sqm, while demand was estimated at close to 400,000 sqm. Demand is driven by a growing number of international companies on the Ukrainian market. In 2006, only two class A warehouses (9,700 sqm and 27,000 sqm) were built in Kyiv (population 2.7-3.0mn), or 0.013sqm per person. In Moscow (population 10mn), over 280,000 sqm of class A warehouse space was built over the same period, or 0.028 sqm per person. This means a great deal more warehouse space needs to be built before Kyiv catches up with Moscow and the market approaches saturation, which means there are still plenty of opportunities for willing investors.
The highest demand for warehousing facilities has traditionally been on the right bank of
the Dnieper River (close to the business district). However, high land prices and a scarcity of suitable land have forced developers to consider the left bank, which, while further from the business district, has suitable land lots at lower prices.
Odesa: Odesa has become the second most attractive area for developing logistics projects.
This is explained by the fact that Odesa is the largest Ukrainian seaport with a population of over 1.0mn. Rapid development of the retail sector and a severe shortage of quality warehousing facilities (total space of class A-D warehouses is estimated at 70,000-80,000 sqm at the end of 2006; class A and B facilities accounted for less than 10%). Another plus for Odesa is the availability of relatively good connections to Kyiv via the Odesa-Kyiv motorway. As a result, a number of companies have announced plans to build large modern logistics centres with a total declared space of close to 200,000 sqm in and around Odesa.
Other potentially attractive areas for developing logistics centres include Kharkiv, Donetsk, Dnipropetrovs’k (all with a population over 1.0mn), and Lviv (proximity to the western border and western-bound transportation routes). Quality warehousing facilities are scarce in these regions.
Keeping Euro 2012 in mind
According to the Ukrainian State Statistics Committee, there are 1,218 hotels in Ukraine of which only 3 (two in Kyiv and one in Donetsk) claim a 5-star classification. The number of 4-star hotels is 30-40.
The shortage of quality hotel space in Ukraine became obvious in 2005 when the number of tourists to Ukraine tripled over the spring and summer months compared to the same period in 2004 (the increase was, at least in part, caused by hosting the Eurovision song contest in Kyiv).
Most hotels in Ukraine are refurbished Soviet-era hotels. In Kyiv, just five hotels (three
4-star and two 5-star) serve over 90% of all foreign guests.
There are just three 5-star hotels in Ukraine
The lack of investment in this sector is explained by expensive internal bank loans and the long payback period (7-12 years) compared to housing, office and retail sectors. Until now, foreign investors were willing only to take existing hotels into management and not into the development of new ones.
The situation, however, will change in the near future as several Ukrainian developers have already announced plans to invest in the hotel sector (hotels are to be operated by international hotel chains). The Euro-2012 Cup will draw a significant number of tourists to the country, which means that cities that will host the football tournament’s matches (Kyiv, Donetsk, Dnipropetrovs’k and Lviv) will need to invest in the hotel sector, either to renovate the existing hotels or build new ones.
With Euro-2012 Football Cup coming to Ukraine in 2012, hotel development is becoming a particularly hot topic
Foreign tourism is not the only driving factor for the hotel business: increased business activity by Ukrainian businessmen has resulted, according to media reports, in greater profits for the Ukrainian hotel industry, which increased by 1/3. “Considering the above factors, we expect the hotel sector to draw significant interest from investors and developers, both domestic and foreign, in the near future”, says Galt and Taggart Securities.
No true nationwide developer
In 2004-06, the total investment in construction in Ukraine amounted to US$ 16,140 thousand. Kyiv and its region accounted for 31.4% of all investments, while the top five regions (excluding Kyiv) accounted for 31.2%. What is clear is that most development is focused on Kyiv rather tan the country as a whole.
When it came to housing, Kyiv and the Kyiv region amounted to over 30% of the 24,010.3 thousand sqm built in Ukraine over the same period, while Ukraine’s five extra-Kyiv regions (Donetsk, Dnipropetrovs’k, Kharkiv, Lviv, and Odesa) accounted for another 40.1%.
“Based on these figures, it is easy to conclude that the most attractive places for all sectors of real estate development would be in these six regions and especially in the city of Kyiv”, says report.