LVIV PROPERTY MARKET BENEFITS FROM REGIONAL BOOM

LVIV: UKRAINE’S PROPERTY BOOMTOWN

Lviv real estate boom: the elegant capital city of West Ukraine is experiencing a construction spike as the local economy surges ahead on the back of growing international investor interest together with easy access to EU markets and strong regional tourism and IT sector expansion

LVIV: UKRAINE’S PROPERTY BOOMTOWN
Ancient Lviv has been emerging as a regional tourism hotspot for the past decade. Recent upswings in international investment and the local IT industry have further boosted the regional real estate market
Tim Louzonis
Monday, 06 March 2017 01:19

Despite being only Ukraine’s seventh largest city (with an estimated population of 728,000 in 2016), a valid case could be made for Lviv as the country’s second most important city after Kyiv. When it comes to real estate in Lviv, prices in many segments such as new homes and year-round rentals are second only to Kyiv. To some observers this phenomenon can be a bit head scratching. “Where is the money and demand coming from?” they may ask themselves. If we want understand any real estate market, then it helps to look at the interplay of various macroeconomic factors and cultural influences for that market.

 

Quantity and quality of new Lviv housing

My cousin in western Ukraine likes to tell me, “They’re building in Lviv like never before.” A quick look at the data from the State Statistics Administration for Lviv supports his statement.  Total commissioned residential real estate in Lviv in square meters for the first 9 months of 2016, 2015, and 2014 was at least double the amount of newly commissioned living space for the corresponding period during the boom year of 2008. While this data include figures for single-family homes as well as apartment complexes, and some renovations are included, the strong upward trend is quite clear.

What about the quality of this new housing in Lviv? In 2017, there are lots of offerings for the “economy” segment. Inevitably, some developers are cutting corners to serve price-sensitive buyers. Indeed, if you take a quick look online you’ll see non-renovated “core and shell” units in new complexes in Lviv that are being offered for as low as UAH 11,000 per square meter (about USD 400). In recent months, I have heard anecdotal accounts of buyers forced to replace the windows of their new apartments due to lack of quality.

However, there are also new market players who are changing the quality and variety of properties offered on the Lviv market. At present, TPF Ukraine is the only major residential real estate developer in Lviv owned and operated by Western investors. Their first project was Belgian Village, a complex of 9 “comfort class” buildings with 312 apartments on manicured grounds with a prime location about 300 meters from the new Forum Lviv shopping center and about a kilometer from the city’s downtown Opera House. The units are sold as turn-key properties with full renovations, something that is relatively rare in Ukraine. Seven of the nine buildings have already been commissioned and more than 95% of units have been sold. Current prices for remaining units range from UAH 25,000 up to UAH 32,000 per square meter (about USD 920-USD 1,175) depending on unit size, building and floor. TPF recently began sales on its newest project, a townhouse development in the suburban village of Pustomyty with 110 two-level buildings. Once again, they come fully equipped. The developer has two additional land plots for future real estate projects.

 

Real estate boom attracts diverse participation

Lviv’s real estate boom is attracting all manner of players to the market. The Lviv IT Cluster is a non-profit that brings together IT companies, universities, and local authorities for the development of the IT industry. It is one of many groups to become engaged in real estate development. This organization is a unique participant in Lviv’s real estate market. As a non-profit, it cannot and does not seek to make a big profit on its projects. Instead, it must reinvest proceeds back into the fund. However, it enjoys a special status by virtue of its close relationship with many of the key players in Lviv’s most dynamic and profitable business sector, along with strong support from local government.

The group’s first real estate project, “IT House”, is a 72-unit building located on land granted by the city. The project’s goal is to provide high quality and affordable housing to employees of Lviv’s IT industry. Non-renovated “core and shell” units are currently on sale at USD 555 per square meter, with commissioning planned for the first half of 2017. IT House is a pilot project for the Cluster and interested buyers can register for future IT House projects online – this helps the Cluster estimate interest in new developments, such as the next project, IT Village, with 20 premium cottages. Each project holds a separate tender for designers, architects, and building companies. With its focus on quality design and affordability, the IT Cluster is hoping to “disrupt” Lviv’s housing market to spur other developers to improve the overall quality of their offerings. Lviv’s IT Cluster has even received requests for IT Houses from other regional cities such as Ivano-Frankivsk.

 

Lviv tourism trade

If the 2012 UEFA European Championship was a catalyst for Lviv’s tourism industry, leading to the opening of several new hotels, restaurants, and a modern airport, then the devaluation of the hryvnia in recent years has been a windfall for Lviv’s tourist trade. The drop in value of the national currency has led to a surge in domestic tourists. Nearly five years after Euro 2012, new restaurants, cafes, and shops continue to sprout up like mushrooms after a rainstorm. As a result, commercial rents in Lviv’s historic core/Market Square area can be quite high and are highly sensitive to the volume of foot traffic they can command.

Yet despite opening a sparkling new airport almost five years ago, Europe’s major budget carriers have yet to begin flights to Lviv. For the present, Lviv’s vacation rentals market largely still caters to local tourists, often with lower budgets. As a result, the renovation level and service quality of Lviv vacation rentals have not been raised to meet the needs of tourists from EU countries, who have yet to arrive en masse. Lviv’s daily rentals market will rapidly develop in the future when budget flights to Lviv begin from EU destinations. 

In anticipation of future demand, Lviv’s hotel sector is looking to add significant quantities of new hotel rooms over the next three to four years. Numerous international chains are on record as looking to open Lviv hotels. According to hotel expert Ivan Loun, plans exist to add about 1,000 new hotel rooms in the 3- and 4-star hotel categories in Lviv. However, he sees many of these projects as 50/50 propositions under their current ownership structures. Indeed, while some of these owners are interested in attracting international operators, several may lack the resources or experience to meet the demands of operating under an international brand.

Many of these projects are still in their early stages of development and it is likely that several owners may look to attract equity investors or to sell their entire stakes. Lviv even has plans to attract business tourists for conferences by opening a 2,000-3,000 person convention center. To work on this project, the city has formed a Convention Bureau. It possible this project could be completed under a Public Private Partnership or similar structure, but so far, it is still in the early planning stages.

 

Lviv IT industry as key growth driver

According to recent reports, Ukraine’s IT industry employed about 100,000 people in 2016 – around 12% higher than the previous year. The size of Lviv’s IT industry is rapidly approaching that of the country’s number two regional IT market in Kharkiv, Ukraine’s second largest city with a 1.4 million population, making it rough twice the size of Lviv. This growing army of Lviv IT employees are all potential real estate consumers. There was a time when IT outsourcing to Ukraine was all about lower costs via labor arbitrage. While IT salaries in Ukraine are still lower than in the West, they are rising rapidly, especially when one takes into account actual “take-home pay”. Many Ukrainian IT workers are comfortably middle class, while local owners and directors of these companies can be affluent. Some estimate the total number of IT workers in Lviv to be as high as 20,000 or even 30,000 people. That is a lot of potential homebuyers and real estate investors for a regional market like Lviv.  

Some IT companies in Lviv are growing so fast that they can even be difficult tenants for commercial landlords, because these companies quickly outgrow their offices and move out for larger spaces. Landlords renting to IT companies should plan ahead and include several months of advance notification for early termination of leases. To keep up with demand for office space and to provide a foundation for the sustainable long-term growth of Lviv’s IT industry, the Lviv IT Cluster is spearheading an ambitious project dubbed “The Innovation District IT Park”. This project envisions commercial space for 10,000 IT workers, an “IT university” with innovation labs featuring participation from Lviv’s universities, which are important sources of human capital. There will also be a kindergarten, restaurants, and a 100-room hotel, all located on a prime location near Striyskiy Park and the city’s Tax Authority building. The IT Park will be investor-funded, and about 30% of available space has received commitments (Letters of Intent from IT companies that wish to have their own stand-alone buildings). Pending financing, construction of the IT Park could begin in late 2017. Assuming a 15-month construction period, stage 1 could be complete as early as late 2018/early 2019. In the meantime, fast-growing IT companies in Lviv will continue to need office space, and not all of them can wait for the opening of the IT Park.

 

Manufacturing and service sectors

Boasting a large population of well-educated students and recent graduates, together with lower salaries compared to neighboring Poland and Slovakia, Lviv should be fertile ground for Business Process Outsourcing (“BPO”). However, when compared with Lviv’s IT industry, the development of BPO in Lviv has been a mild disappointment. A beachhead has been established by Nestle with its Shared Services Center. This has been followed recently by Vimpelcom, with a few small call centers. But Lviv is a long way away from the progress of nearby Krakow, which has at least 20-25 large Shared Services Centers.

If you are a young person in Lviv with foreign language skills and not interested in working in the local IT industry, then you have relatively few attractive options available. Generally, entry-level jobs in the hospitality industry tend to be lower-wage and offer less room for professional development when compared with relocating to Kyiv to work at a multinational country office, for example. Wages in the BPO sector are not as high as those in IT, but are much better than most other currently available options in Lviv. BPO may not be as “sexy” as IT outsourcing, but with further development, it could become an important tool for Lviv to retain recent graduates, attract foreign investment, and stimulate demand for large commercial office spaces. 

Light manufacturing is often cited as another sector that could potentially flourish in Lviv and Lviv Oblast. It is not hard to see why - manufacturing wages in Lviv are currently lower than some coastal cities in China. With proximity to the EU 1-2 days by road, versus a month or more for container from China, logistics are especially favorable for things like apparel and footwear manufacturers. Today there are already a number of existing manufacturing projects in Lviv and Lviv Oblast, and in mid-2015, a subsidiary of major Dutch company CTP was selected to build Ryasne-2 industrial park that could house 20-30 companies and produce up to 3,000 jobs. However, today there is a growing shortage of land plots for factories within Lviv’s city limits. Many potential investors in new manufacturing projects (especially larger ones) will need to look to Lviv’s suburbs or move further out into other parts of Lviv Oblast.

Lviv’s proximity to the EU can also present challenges when it comes to finding employees for unskilled and low-skilled work. Neighboring Poland’s economy has cooled off in recent years, but remains attractive for Ukrainians, offering much higher wages. In recent years, Poland has issued several hundred thousand residency permits to Ukrainians, and about three-quarters of migrant workers in Poland are from western Ukraine, including Lviv. Over 70% of Ukrainian temporary workers, who participated in a recent survey by Polish staffing company OTTO, indicated that they are considering remaining in Poland permanently. This will act as a drain on human resources in Lviv itself, which will have a knock-on effect for the real estate market. 

 

The future of Lviv real estate

So what is the future of Lviv real estate? Where will future economic growth and demand come from? Where should investors be looking? Expect today’s prosperity in Lviv’s Old Town to continue to spread outward from the Market Square area. (Even if Schengen visa policy is liberalized, the hryvnia would have to strengthen substantially before domestic tourism to Lviv could be threatened.) Once major budget airlines open flights to Lviv, yields on vacation rental apartments downtown should increase, as should occupancy rates in hotels. Growth in IT services shows no sign of cooling off. This will continue to drive demand for office space, but demand could be much higher if Lviv succeeds in attracting more companies to open Shared Services Centers for business process outsourcing.

Real estate in Lviv, like elsewhere in Ukraine, is the preferred asset class for savings, and this phenomenon provides a “floor” for prices. But if Lviv wants to raise the “ceiling” on real estate, then it must meet the challenges of building a broadly diversified economy that is more than just IT and tourism, by wooing investors, stemming the outflow of labor, and attracting talented workers from other parts of Ukraine.

 

About the author: Tim Louzonis (This email address is being protected from spambots. You need JavaScript enabled to view it.) is a co-founder of AIM Realty Kiev, a real estate agency that specializes in real estate for foreign expats. Tim is a long-time expat with Ukrainian roots; he first came to Ukraine as an exchange student in 1993 and returned in 2008

 

For their contributions to this article special thanks to: Olga Syvak, Chief Investment Officer, Lviv City Council; Markian Malskyy, Head of the Western Ukrainian Branch/Partner at Arzinger; Stepan Veselovskyi, CEO, Lviv IT Cluster; Ivan Loun, Consultant, PKF Hotel Experts; and Lars Vestbjerg, GM of Sika Footwear and President of the Danish Business Association.

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