In recent years, Lviv has emerged as Ukraine’s number two real estate market. With a stunning architectural ensemble, vibrant tourism industry and close proximity to the European Union, the city is poised to become a popular choice for international real estate investors seeking to add something Ukrainian to their property portfolios. However, in order to access the potentially attractive gains on offer here, investors will need to tailor their strategy to the specifics of the Lviv market, which is in many ways very different from its Kyiv counterpart. Mastering the Lviv property market requires plenty of patience and a nuanced understanding of what remains a highly challenging but hugely enticing investment opportunity.
Lviv Old Town
Kyiv’s historical Golden Gate neighborhood is home to scores of embassies and international organizations that together support a healthy demand for long-term premium rental apartments. Lviv’s Old Town is quite different. Unlike its Kyiv counterpart, Lviv Old Town is largely an entertainment and leisure district crammed with hotels, restaurants, cafes and small shops alongside relatively few offices and apartments. The Old Town is the geographical heart of the city and the first place most visitors will encounter as they explore Lviv. However, this does not necessarily make it a natural focus for real estate investment. Most of the money currently flowing into Lviv’s property market is coming from two key sources: the earnings of IT industry workers and remittances from Ukrainians working abroad. The bulk of these investment funds are going into new buildings far beyond Lviv’s Old Town, with the one notable exception being the gradual gentrification of commercial spaces for restaurants and cafes near Market Square.
This is no surprise. Lviv residents may praise their city’s architectural beauty and heritage when they are speaking to visitors, but comparatively few are actually “putting their money where their mouth is.” Instead, they overwhelmingly prefer new buildings while shying away from the kind of classic architecture that excites many potential international investors. This strong bias among well-off Ukrainians against living in older downtown buildings is something that Leopolitans share with Kyiv residents. As a result, many of the historical gems in Lviv’s UNESCO-recognized Old Town currently lie in a sorry and dilapidated state, complete with dark and crumbling stairways and uninviting entrances. Residents of these buildings are often a mix of penniless pensioners and local tourists staying in shabbily renovated short-term rental apartments and makeshift hostels, with some individual apartments rented out as small offices.
When business-minded foreign visitors first encounter Old Town Lviv’s faded architectural glory, many exclaim “But look at Krakow, look at Prague! This place is so undervalued and has so much potential!” Such initial enthusiasm is entirely understandable. However, hope is not a strategy, as the saying goes. Instead, any potential investors need to build a solid business case for investing in these romantic but often poorly maintained properties. Successful investment projects in the heart of Lviv Old Town are possible but remain far from simple. After all, if it were so easy and obvious, local investors would have seized on these opportunities long ago.
Obstacles Facing Investors
One key roadblock to renovating property in Lviv’s Old Town is weak demand for premium long-term rentals. Despite Lviv’s rising international profile, the rentals market is actually quite small in terms of both quantity of tenants and average rents, meaning far fewer investment opportunities when compared with Ukraine’s capital. Why is this? While Lviv does have a few expat managers, the city does not have any international schools or other conveniences that routinely feature in standard expat employment packages. This makes it difficult for expats with children to relocate to Lviv. As a result of this expat shortage, demand for large three- and four-bedroom rental apartments in the premium segment of the city is virtually non-existent, while even demand for premium one- and two-bedroom apartments is quite modest. Many of the European expat managers based in Lviv tend to commute back to their home countries several times per month and often elect to rent smaller apartments on a long-term basis or even stay in hotels for weeknights.
If you do opt to buy a little piece of Lviv history, you should expect to spend plenty of time on renovation works. Apartments in Lviv’s Old Town will typically require extensive capital investments in order to restore them to their former glory. In many if not most cases, this will include complete replacement of plumbing and electrical systems, upgrading electrical load capacity, and reinforcing structurally compromised walls, ceilings and floors. However, investors will struggle to justify such outlays if they plan to target long-term rental clients in current market conditions. It is true that over the medium to long-term, we can expect that demand for premium long-term rentals will rise as more foreign manufacturers set up operations in Lviv to take advantage of the EU-Ukraine Association Agreement and the city’s location on the doorstep of European Union markets. However, the exact timing of this coming expat wave remains uncertain and the subject of much speculation.
Targeting Tourism and the IT Industry
Following the 2014-15 financial crisis in Ukraine, prices for apartments in Lviv’s Old Town fell to the levels not seen since the early 2000s. They have remained close to these levels for the past two years or so. This means that available per square meter purchase prices are now quite low (sometimes less than USD 1000 per square meter for fixer-uppers), but these prices are not sufficiently low to offer attractive current yields for investors who are considering buying and renovating properties to offer as long-term rentals.
So what investment strategies should property investors deploy in Lviv? The city’s tourism and IT sectors are currently growing exponentially and therein lies the answer. Lviv’s hospitality sector is not keeping up with rising demand for quality accommodation. There is a sharp deficit of branded hotels, while professionally run serviced apartments barely exist at all. Instead, the vast majority of Lviv’s short-term rental apartments target budget travelers and often suffer from poor management and limited comfort.
There are a few strategies investors can consider employing in order to take advantage of these opportunities. For example, an individual buyer could purchase an apartment, renovate it to suit the tastes of upmarket foreign tourists, and then offer it as a short-term let. This strategy is arguably more difficult to execute than a long-term rental strategy since it has more “moving parts”. To maximize investor returns would require professional management, savvy marketing, and yield management that takes into account both seasonality and special events that justify peak pricing such as Lviv’s popular Easter and Christmas holidays along with flagship occasions like the city’s annual jazz festival. However, all of this could be difficult for an individual buyer to implement. In practical terms, they would probably be much better off teaming up with a professional management company or an investment fund specializing in short-term lets.
Finding professional partners might be the most realistic investment approach. Even taking into account a professional manager’s fee, gross annual yields of 10% or more are certainly possible. With demand and prices expected to rise in the coming years, this makes it an appealing long-term prospect. In this investment model, the challenge for an individual buyer is not making the numbers work, but instead finding a professional management company to operate their short-term rental property.
Economies of scale are also worth considering. For many international investors, the best way to implement a short-term rental strategy is to minimize expenses and maximize yield either by obtaining several apartments within close proximity to each other or, ideally, by acquiring a small building with several apartments and ground floor commercial space. While requiring greater initial outlays, this strategy would allow an investor to renovate a building’s common areas and engineering systems and offer a more premium product.
For investors who would prefer greater income stability, one possible hybrid strategy would be to sign a long-term rental contract with one of Lviv’s numerous IT companies to house visiting clients, and then provide basic additional services including laundry and cleaning. Each year Lviv IT companies rent out scores of apartments, but the quality of the properties on offer leaves significant room for improvement. The Lviv IT sector is global in outlook and focuses on international contracts, meaning a steady flow of business visitors throughout the year. Catering to this market may be a route to real estate investment success in today’s Lviv.
Finding the Right Niche
Local preference for new housing over old and attractive current prices provide international investors with a golden opportunity to invest in Lviv’s historical Old Town and acquire properties with strong potential for price appreciation. Maximizing current income while serving the short-term rental market will require good business execution and shrewd market positioning, but property investors can draw inspiration from well-proven strategies that have already worked in similar Central European cities like Prague or Krakow.
Special thanks to Aaron Fust and Leon Guerrero (Lion City daily rentals) for their contributions to this article.