Ukraine’s economic recovery has continued to gain momentum throughout 2018, with progress on many fronts that has laid the groundwork for long-term growth alongside integration into the global economy. However, the spike in tensions with Russia following the late November naval attack on Ukrainian vessels in the Black Sea added significant clouds of uncertainty to an otherwise improving outlook. This has generated additional anxiety among investors who were already becoming increasingly skittish about Ukraine due to the presidential and parliamentary elections scheduled to take place in spring and autumn 2019. What will this mean for the Kyiv property market over the coming year? In order to establish realistic expectations for the next twelve months, it is important to assess the progress of the property market during the course of 2018, while also considering the state of the wider Ukrainian economy and the likely repercussions of potential political and geopolitical developments.
Kyiv Real Estate: Tale of Two Cities
In 2018, the Kyiv real estate narrative remained a tale of two cities. On one hand, there is the premium rental market catering largely to expats who often live in Tsarist and Stalinist buildings in a small downtown area that represents the city’s historical center. Then there is the broader market that overwhelmingly serves the local population that tends to live in a mix of later period Soviet-era buildings and new buildings spread across a large area that is roughly the size of Berlin. The market dynamics (prices, supply and demand) and investment potential for these two segments remain quite distinct, with the best returns on investment available by serving the expat market in the city center. This is something that investors who are considering Kyiv property in 2019 should bear in mind.
In 2018, the Kyiv real estate market developed along lines already laid out during the previous year. The supply of Kyiv rental apartments in the upmarket price range of USD 1,000 to USD 3,000 per month remains tight. Meanwhile, more and more expats are moving to the Ukrainian capital. This is forcing rental rates to rise slightly as newcomers maintain price pressure on limited supplies of suitable accommodation. Meanwhile, demand for premium rentals of USD 5,000 per month and higher has experienced a notably less pronounced increase.
While demand for premium rentals is not nearly as strong as in the upmarket segment, the renovation quality of offers in the premium segment remains highly unsatisfactory for many expats, especially those with families. This is a significant opportunity for property investors, who can currently take advantage of lower sale prices and renovation costs for larger fix-upper apartments. With many investment projects on hold pending the outcome of Ukraine’s elections in 2019, we could see a pickup in demand for premium housing for expats after this uncertainty is gone towards the end of the coming year.
Following on from a sharp rise in foreign buyer interest in Kyiv property in 2017, interest remained high in 2018. However, there was only a gradual increase in the number of transactions on the secondary market. As 2018 draws to a close, it seems clear that many potential property purchasers are choosing to wait and see. This could mean waiting until after the New Year, or it could lead to longer delays as investors hold off until they know the outcome of Ukraine’s 2019 elections.
So far, prices for investment-grade flats on Kyiv’s secondary market remain stable and have been at current levels for the past two years. While sale prices for properties on Kyiv’s secondary market and rental prices for upmarket and premium rental housing are both usually priced in USD, large movements in the hryvnia/dollar exchange rate can still affect prices. This is likely to remain a factor over the coming year, but there is presently little sign of major shifts. After strengthening during the course of the year against the US dollar, as of late December 2018 Ukraine’s currency exchange rate was about UAH 28 to one US dollar, which is more or less where it began the year.
As in the previous few years, in 2018 mortgage financing remained a non-viable option for Ukraine’s homebuyers, with lending rates of over 20% per year. Earlier in 2018, some international banks had been hopeful that mortgage rates could fall to a more reasonable 9%-14% in 2019. These banks are now less optimistic that Ukraine will be able to bring down inflation and lower its refinancing in order to make such mortgages possible. As of late December 2018, Ukraine is maintaining one of the tightest monetary policies in Europe with a benchmark rate of 18%. Banks expect mortgage rates to be around 15-20% in 2019, which will not be enough to lift prices in Kyiv’s broader housing market. On a more positive note, there is some optimism that escrow management companies will begin providing buyers with services by mid-2019. This should help mitigate counterparty risk and make Ukraine’s property market more attractive to international investors.
Economic Recovery Continues
According to the World Bank, Ukraine’s economic growth rate was 3.5% in the first half of 2018, which is significantly higher than the 2.5% registered during the first half of the previous year. This growth then decelerated in the third quarter of 2018. Analysts are now predicting a final growth figure for 2018 of between 2.7% and 3.2%, with growth expected to continue at a slightly lower rate in 2019 due to election uncertainties, delays in key reforms, and a peak in repayments of Ukraine’s sizable public debt obligations. However, much like economist Paul Samuelson’s quip that “the stock market has predicted nine of the last five recessions,” economists have often been wrong before when it comes to Ukraine forecasts.
There are certainly reasons for guarded optimism. In 2018, Ukraine took several positive steps to increase its economic integration with the global economy (especially the EU) and to open up key areas of its economy to foreign investment. One particularly promising example is the energy sector, where Ukraine has begun making strides towards energy independence from Russia. The past twelve months saw the development of new solar and wind power projects, including those with funding from foreign private equity investors and international financial institutions such as the EBRD. New support schemes for renewables could come into force already next year, which would drive competition and investment in the industry.
Ukraine also boasts the third largest proven natural gas reserves in Europe and there are signs that this will become a bigger factor in the country’s energy strategy moving forward. Ukraine’s oil and gas industry has an improved outlook for investment growth in the coming years following fiscal relief, liberalization of the regulatory framework, and the recent launch of electronic auctions for the sale of exploration and production licences, as well as efforts to improve the transparency of geological information.
New regulations are also improving Ukraine’s energy efficiency and reducing waste. In 2018, a law on the energy performance of buildings came into force in Ukraine, which requires energy certification of certain types of buildings and provides a platform for the broader use of energy performance contracts and energy-saving technologies. A new electricity market is about to take shape based on the European liberalized and decentralized model, with improvements in market entry and competition as well as cross-border electricity trade.
Airlines, Agriculture and IT
For Ukrainians, 2018 was a year of broadening travel horizons. Both of Kyiv’s international airports recorded passenger growth of over 25%, while in Lviv this growth was nearly 50%. The boom in air travel is due to a number of factors including the removal of visa barriers for EU visits, the market entry of new low cost carriers like Ryanair, and significant route expansions by existing operators. Ukraine is also welcoming more arrivals. In 2019, Kyiv is predicting a record number of international visitors.
Ukraine’s thriving IT sector continues to serve as one of the key engines of the domestic economy with annual growth in excess of 20%. This is driving demand for office space in Kyiv and in other major outsourcing hubs. Traditional sectors of the Ukrainian economy such as agriculture are also performing strongly. In 2018, Ukraine recorded a record grain harvest in excess of 70 million tons. As modernization brings higher yields to the Ukrainian agricultural sector, getting Ukraine’s farming exports to market will require sizable investments to remove logistical bottlenecks in the country’s transport network. A billion-dollar deal with General Electric signed in early 2018 to provide Ukraine with new locomotives and to modernize existing rolling stock was a positive step in this direction.
When looking at Ukraine’s medium and long-term economic growth prospects, it is helpful to bear in mind that the country is still in the early stages of its post-Maidan economic recovery and transition away from deep integration with Russian markets. There remains much work to do, especially in the area of value-added exports. The challenge here is to integrate Ukraine more fully into global value chains, a process that is already underway in a number of sectors of the economy. Currently, the share of Ukraine’s exports integrated into global supply chains is quite low at about 6% versus a figure of 27% for neighboring Poland. This illustrates how much room Ukraine has to grow.
Election Year Uncertainty
By late 2018, many foreign investors had begun shelving investment plans in Ukraine until after the country’s election cycle is complete in late 2019. This means a delay of virtually an entire year. The outcome of Ukraine’s presidential election should be clear by late April, while parliamentary elections are set to take place at the end of October. This was a predictable pause as seen during any election year. Russia’s seizure of three Ukrainian naval vessels in the Black Sea in November 2018 was also far from surprising for many observers, given Russia’s ongoing efforts to sabotage Ukraine’s economic recovery and derail the country’s Euro-Atlantic integration. This new tension with Russia led Ukraine to declare martial law for a 30-day period in 10 strategic border regions. This precautionary measure did not lead to significant changes on the ground, but it further dampened investor enthusiasm for Ukraine.
International institutional support for Ukraine is likely to remain strong in 2019. Despite the international community’s limp response to Russian aggression in the Black Sea, we can expect increased multilateral lending and technical assistance for Ukraine in the year ahead from the IMF, EBRD and EU. Indeed, on December 18 the IMF improved a new USD 3.9 billion program for Ukraine, which will allow it to receive additional foreign aid. This support will be crucial as Ukraine faces a spike in long-term foreign debt payments. The need to maintain IMF financing will probably limit the maneuvering of presidential candidate Yulia Tymoshenko in particular. If her presidential bid proves successful, Tymoshenko will need to balance her populist promises to potential voters with the need to support key reforms that are a condition of continued IMF lending.
Price Drop Unlikely
Many investors considering Ukraine are hitting the pause button until after the 2019 elections. If you are thinking of buying investment property in Kyiv, should you also wait on the sidelines? It can be difficult to cut through the noise of the 24/7 news cycle and see past the bad optics of the current tensions in the Black Sea. However, if you are a buyer who plans to hold your property for the medium to long-term term and want to benefit from gross current yields that can be 14% and higher, waiting could just mean you will have more competition for good deals when the elections are over. Given that sale prices for investment-grade properties have been at current levels for about two years and Ukraine’s economic recovery is well underway, it is doubtful that these prices will decrease in 2019. In fact, it is far more likely that we will start to see price increases after Ukraine’s election season finally ends. Buying property in prime Kyiv locations at historically low prices with strong appreciation potential and achieving high current yields by renovating these properties to let as premium rentals is hardly a radical investment strategy. Nevertheless, in light of the current news cycle, it might appear contrarian to many, leading to hesitation. This means that for most of 2019, we can expect herd thinking about Ukraine to create an appealing buying period for properties in Kyiv’s historical buildings in prime locations downtown.
Special thanks to Robert Kossmann of Raiffeisen Bank Aval and Svitlana Teush, Head of Real Estate, Construction and Renewable Energy practices at Redcliffe Partners, for their contributions to this article