The Ukrainian real estate market is continuing to gain attention from foreign investors as one of Eastern Europe's hottest investment destinations. Polish, Russian and Baltic construction companies are now prominent players on the market, especially in Kyiv. Developers from from France, Great Britain and Germany are now also targeting Ukraine. This year, the Russian-owned Mirax Group launched its first project in Kyiv and Seven Hills, owned by the international megadeveloper the Scorpio Real Estate Group, has set itself the ambitious goal of eventually becoming Ukraine's largest individual Western investor.
The attracting force of Ukraine’s real estate potential to international capital is obvious from a simple glance at the Kyiv skyline. More than one million square metres of residential real estate is now being erected annually in Kyiv, but twice as much space is needed to satisfy growing demand, mostly due to the influx of people to the booming capital from the provinces.
Less construction is expected this year due to Kyiv Mayor Leonid Chernovetskiy’s changes to the land acquisition procedures in what the city council said was part of an anti-corruption drive. Following the changes, which many real estate professionals say has only served to complicate already tortuous processes, many new projects have been turned down by local officials, raising concerns that the prices will continue to soar as demand grows and supply remains short.
Kyiv is still the most attractive location in Ukraine for foreign developers. International investors have only recently started looking seriously at other major cities, mostly in the eastern Ukraine as this heavily industrialised region is one of the most economically active in the country.
Some foreign investors are also betting on Ukraine not only as a short-term profit generator, but a long-term growth market. “Our group is already very active in Hungary, the Czech Republic, Latvia and Croatia so Ukraine was the obvious next choice. In fact, we have been here for three years, quietly watching the market, getting to know the movers and shakers and patiently waiting for real opportunities,” says Violetta Losyeva, Marketing Director at Seven Hills. “As a company we always take a long term perspective - we are not here to make a quick buck. We want to build exceptional developments that are good investments not just for us and our partners but for our clients as well and these take time and careful planning.”
Prices still climbing fast
Kyiv heads the country league table in terms of residential real estate prices, which have been increasing by an average of 50% annually since 2004 - one of the most dramatic rises seen in any major capital city in recent times. As a result, the average price per square metre of residential real estate in Kyiv has surpassed prices in Warsaw and the Baltic capitals.
The average price on the Kyiv primary real-estate market was USD 2,865 per square metre as at the end of 2006, with prices reaching USD 4,060 per square metre in the most prestigious Pecherskiy district, according to data from the Miskzhytlobud construction company.
Average prices for residential real estate demonstrated a 70% growth in 2006, with October-November alone experiencing a 16.5% hike. Developers said that the price hike would stay step with inflation, which is expected to be in the region of 7-11% during 2007-2008.
Regardless of future growth, however, stability could be a fundemental issue. “The housing market in Ukraine is currently a real property development paradox in that demand is still exceeding supply despite 15 years of very rapid expansion,” says Losyeva at Seven Hills. “The current boom in prices is really caused by two phenomena: the supply and demand situation and property speculation. The down side is that there is a great deal of empty property waiting for the market to peak and once the market peaks the majority will sell, leading to a glut of property in the market and prices falling further than real values.”
The residential market in Kyiv is being overheated by speculation, the experts say. Prices cannot continue growing much further as a declining number of deals on the market indicates and a large number of empty apartments are waiting to be resold by speculators. But until new apartment construction reaches a much higher level than today, demand will continue to push prices higher.
Many Kyiv residents buy apartments or land for investment purposes. People have got used to viewing real estate as a reliable investment - certainly better than banks that only offer 10-16% interest. “People are looking at real estate as an investment, just as in many other countries in Europe,” says Gerald Bowers, Director of Business Development at DEOL Partners, one of Ukraine’s largest real estate companies.
The inexorable rise in house prices is not limited to Kyiv. Real estate prices have not shown anything but continuous appreciation, except for in some run-down coal-mining towns around Donetsk where apartments are being given out for free so that centralised public utilities can continue to justify operation. Elsewhere, apartment prices rose by between 25% and 100% in 2006 in Ukraine's major regional centres. Clearly, the national trend resulting from Ukraine's economic success is having a discernable effect away from the capital.
The changing face of competition
So far, competition in the market took the form of construction companies battling it out for prime land plots which resulted in price hikes but produced little effect on the quality of product delivered. Today, however, a more worrying feature has emerged, where large Ukrainian developers artificially strangle supply to push up demand even further. Last year several local developers withdrew brand-new apartments from the market for two months before putting them back on sale at noticeably higher prices.
Other companies have been known to sell semi-finished properties, often without windows, doors, electrical or sanitary systems. ”Some companies invest minimal funds, don't hesitate to ask huge prices and make super-high profits. If the balance supply and demand doesn’t change and competition doesn't increase, the situation won't change and people will buy anyway,” says Mykola Tolmachev, general director of major Ukrainian developer TMM. “These companies should start working in a civilised manner, not necessarily offering fully furnished apartments, but at least properties with sanitary engineering and elementary wall dressing,” he says.
Local developers may also face the need to review their approach to quality with the emergence of foreign developers. Unlike local companies, which often first decide on a building’s outward appearance and only then squeeze apartments into the internal space, foreign constructors generally design the interior first - an approach that clearly goes a lot further towards meeting the customer’s needs.
“The issue of fitting out your home is another headache we have sought to overcome,” explains Losyeva at Seven Hills. “You cannot expect a young couple to raise the funds for their deposit, pay a mortgage, live and find a further USD 25-30,000 to equip their homes. It's just unrealistic. A new home should have new furniture, new appliances, in fact new everything so we have teamed up with two very large home and electronics centres and negotiated a massive discount for anybody buying a home from us.”
Bowers at DEOL Partners agrees. “The advantages that foreign developers bring to the market include higher standards of workmanship and providing properties that are 'complete' to a high standard,” he says. “Also, the whole process of how properties are presented and packaged to potential buyers along with support services is better. Foreign developers will also want to implement a high standard of health and safety in the construction process to protect workers and members of the public from hazards in the building industry,” Bowers concludes.
