Despite the uncertainties typical for an election year in an emerging market, more and more foreign investors are seriously considering investing in Ukraine in 2019. Kyiv’s property market offers attractive returns, but simply copying and pasting a strategy that works well in a more developed real estate market is not necessarily a recipe for success. To succeed here, foreign buyers will need to shed their stereotypes about Ukraine along with any strong attachments to approaches they may have used in other countries. This article will discuss ten key differences that make Kyiv’s real estate market stand out from other European markets. By recognizing the specifics of the Kyiv market, property investors will be able to maximize their chances of success.
1. Higher Investment Returns
When compared with the low single-digit returns that are the norm in more mature and developed real estate markets, today it’s possible for property investors in Kyiv to achieve gross annual yields of 10-14% when buying investment-grade properties in the city center. Unlike the booming (and perhaps overheated) real estate markets of the US and parts of Western Europe, Kyiv is still currently emerging from a major “down cycle”. Most recently, the Kyiv real estate market suffered the impact of the post-Euromaidan Revolution financial crisis of 2014-15. Prior to that, it was still recovering from the 2008 Global Financial Crisis, which hit Ukraine particularly hard. So in addition to attractive current yields, there’s also much room to grow before prices return to levels seen prior to Euromaidan or the boom years of the mid-2000s.
2. Mortgage-Free Market
Many Western investors, especially Americans, cannot imagine a real estate market without credit, but that’s exactly what you’ll find in Ukraine in 2019. While technically you can find mortgages here, the interest rates on them are typically 20% or above and the terms of these loans make them impractical for most homebuyers. Nor will you find seller financing in Ukraine. You can find some developer financing, but it tends to be short-term and is not offered on investment-grade properties. To pave the way for the return of mortgages, the National Bank of Ukraine has used tight monetary policy to tame inflation (interest rates are currently among the highest in Europe). Some bankers in Ukraine believe that mortgage financing could gradually return to the market in late 2019 or early 2020 in the form of home equity loans for existing bank clients. Nevertheless, widespread availability of mortgages for the broader market and for foreign investors is likely to be much further away. For the short- to medium-term, investors should plan to pay “cash” and fund the entire amount of their property investment at the time of purchase.
3. Renovations Required
Whether you’re going to buy on Kyiv’s primary or secondary market, you should plan to buy with the expectation that you’ll need to renovate your investment property. Currently, apartments in old historic buildings downtown usually offer the best yields and potential for appreciation (just remember to do your due diligence). Such properties are “fixer uppers” and are often shunned by local buyers, hence their attractive purchase prices. Kyiv developers almost always commission new buildings with unrenovated shell and core apartments. Local buyers then often spend the next two to three years (or more) finishing renovation work in these new buildings, creating lots of noise for their neighbors. This makes such properties unattractive for rental tenants. With rare exceptions, newly renovated apartments in Kyiv usually aren’t investment-grade for a couple reasons: they either offer lower yields due to high sale prices, or the renovation style and quality are not suitable for rental clients. Even if you can overcome the language barrier and have some understanding of cultural differences, renovating an apartment in Ukraine can be a special challenge for foreign investors. Finding a reliable builder-contractor anywhere in the world can be difficult. Ukraine’s fragmented and inefficient building materials and service provider markets can create unwanted headaches and hassles for foreign buyers. Instead of taking on a challenging DIY renovation project yourself, investors should strongly consider finding a trusted provider for the renovation of their property.
4. High Rates of Home Ownership
The homeownership rate in Ukraine is over 90%, which is much higher than the EU average (about 69%) and the US (about 65%). Culturally, in Ukraine there is even a stigma against renting. Many locals will gladly exchange shorter commute times for longer journeys in order to own their home instead of renting. Unlike big cities in developed markets, professionally-managed high rise buildings with rental apartments are relatively rare in Kyiv. So if you’re a property investor who’s interested in long-term rentals, you should plan to target the niche market of foreign tenants who typically prefer to live downtown in housing with European-standard renovations, often in older historical buildings.
5. Supply Issues
The long hangover following the 2008 Global Financial Crisis left an oversupply of new housing in many developed markets that led to plummeting prices and foreclosures. By contrast, new housing construction continued even during Ukraine’s recent 2014-15 recession. Structural housing deficits remain and are particularly acute in the heart of downtown Kyiv, the area preferred by premium and upmarket rental clients. By some estimates, the average living space per capita in Ukraine is 23 square meters per person, or less than half the EU average of 50 square meters. In a recent interview, Ukraine’s Deputy Minister of Regional Development, Construction and Housing estimated that at current rates of construction, it would take 70 years to make up this deficit and reach the EU average living space. Meanwhile, there are thousands of obsolete Soviet-era buildings which need to be replaced. In Kyiv alone, there are over 3,000 Khrushchev-era buildings that need replacement (by conservative estimates this represents over 180,000 apartments). This supply deficit creates a pricing “floor” for the broader housing market, so investors shouldn’t come to Ukraine with the expectation of “fire sale” prices.
6. Landlord-Friendly Market
On paper, rental agreements in Ukraine are somewhat “tenant-friendly” and tenants do have some rights, especially when small children are involved. However, Ukraine is generally much more “landlord-friendly” than some US cities and many EU countries. For example, rent control does not exist in Ukraine. There are also no “anti-AirBnB” regulations restricting owners from offering their apartments as short-term rentals.
7. Low Carrying Costs
When compared with real estate carrying costs in more developed markets, the costs for property investors in Ukraine are quite low. Property taxes are insignificant. Tenants are expected to pay the full cost of utilities and communal charges, but these are also much lower than in the West. Since you probably will have renovated your investment property, your maintenance expenses will be low. Should you need to repair your apartment, the labor costs for such work are also generally moderate in Ukraine. As most investment properties in Ukraine are not financed due to the lack of local mortgages, debt service won’t be part of your carrying costs, either.
8. Lack of Transparency
Unlike many more developed markets, today’s Ukraine lacks a Multiple Listing Service (MLS) featuring detailed property info. Official sale price statistics are also useless since many sellers collude with buyers to create sale-purchase agreements that underreport the value of a sale in order to save on taxes. As a result of these common practices, the sale price information you’ll find on many online Ukrainian real estate portals is often inaccurate at best or intentionally false at worst. It’s also not unheard of for local Kyiv brokers to create an online listing using glitzy photos of an apartment in London or Barcelona just to get the contacts of a buyer lead. It is worth underlining that brokers aren’t required to obtain a license in Ukraine and aren’t subject to a code of ethics. Since buyers won’t find good price information online or in official statistics, they’ll need to find a trusted broker who can provide them with reliable information on recent transactions for the type of properties that they are targeting.
9. Lack of Exclusivity
While in the West it’s typical for sellers to sign exclusive agreements with sales agents to market and sell their properties, this practice is relatively rare in Ukraine. The lack of professionalism of many brokers is one reason that local sellers are reluctant to retain a broker on an exclusive basis to sell their property. But a bigger reason is often just an unenlightened mentality on behalf of many owner-sellers that can work against these sellers (a broker who is not being paid by the seller is not incentivized to get the best deal for the seller, which is something that a shrewd buyer’s broker can use to their client’s advantage). This lack of exclusivity also adds to the chaos of the pricing information that’s available online. Multiple brokers will advertise the same property for sale at different prices and it can be a hassle to determine the actual current offering price.
10. Foreign Buyers vs Local Buyers
Several countries have special rules for foreign real estate investors designed to restrict their investment activity in overheated markets. For example, Hong Kong has enacted an extra 15% on purchases by non-resident individuals and companies, along with extra taxes of up to 20% for these buyers if they sell after holding their property for less than three years. In Switzerland, only 20% of the housing stock in a community can be second homes. Meanwhile, Australia bars foreigners from buying on the secondary market unless they plan to live there full-time, and foreigners must apply for government permission to buy or build new homes. By contrast, Ukraine has relatively few special rules for foreign investors. The only outright restriction is that foreigners are prohibited from purchasing land that is designated for agricultural use. Ukraine does have anti-speculation taxes for all buyers who sell after holding their properties for less than three years, or those who sell more than one property in a calendar year. There is also an extra 18% in tax for foreign buyers if they sell their property after holding it for one year or less, and 5% if selling it within one to three years of purchase. But if you have held your property for three or more years and are only selling one property in a calendar year, then taxes are 1% of the sale price. There are legal strategies to minimize the impact of Ukraine’s anti-speculation taxes, but they only make sense for buyers who plan to purchase several properties.
Eyes Wide Open
Hopefully, this article has opened your eyes to some of the important differences between Kyiv’s real estate market and other more developed markets in Western countries. There certainly are historic opportunities to be found on today’s Kyiv market, but taking advantage of them requires an investment strategy that’s adapted to market realities instead built upon wishful thinking.