The Ukrainian real estate sector has been through a turbulent 12 months but there are signs that the worst of the shocks are now over. 2015 has been an extremely difficult year for the Ukrainian economy in general, but as the New Year period approaches, it seems that the worst-case scenario predictions of many have failed to materialize. Following the collapse in value of the hryvnia in February, the national currency has stabilized. Meanwhile, the government has succeeded in reaching an agreement with most of Ukraine’s international creditors and thus avoided a widely predicted default that would have potentially plunged the economy into far greater long-term turmoil. These small gains have allowed businesses in the country – including those in the real estate sector – to begin looking to the future with guarded confidence and creating strategies for renewed growth in a more stable environment.
Kyiv office real estate market
Since the beginning of the year, seven new business centres entered the Kyiv office real estate market, introducing 103,900 square meters of total leasable area onto the market. Six of these office centres fall into the ‘B’ Class of office space, while one ranks as ‘A’ Class. All new entrants are located on Kyiv’s Right Bank, with two located inside the city’s central business district.
According to date from property experts JLL, in 2015 a total of 38% of all Kyiv office space was rented by companies engaged in production. Another 33% was taken up by IT companies. Approximately 40% of office space tenants were companies active in the fast-moving consumer goods (FMCG) segment.
Rental rates in Kyiv business centres followed the fluctuations of the hryvnia-dollar exchange rate throughout the year. Rates decreased during the devaluation period in the first quarter and then remained at these new levels for the subsequent months. At the end of Q3, the highest basic annual rental rate was USD 350 per square meter.
Real estate company DTZ noted increasing demand for office real estate in Kyiv and Lviv in 2015, with many tenants seeking new options in the changing economic environment. “This demand is the result of an understanding that rental rates have reached their lowest point and now is the best time to secure the most favorable terms or to find new office spaces. This trend is likely to continue until the end of the year,” comments DTZ Ukraine Managing Director Nick Cotton.
This office space jockeying has affected vacancy rates. JLL analysts estimated the office real estate vacancy rate in Kyiv at the end of Q3 as 39.4% on ‘A’ Class business centres, and 23.3% in the ‘B’ Class segment.
Commercial real estate
The majority of large-scale projects in the Kyiv commercial real estate sector are still in progress. Several major shopping malls (Respublika, Retroville, Lavina Mall and Blockbuster Mall) was postponed plans to open in 2015, and are now scheduled to open their doors in 2016. Since the beginning of the current year, only one major shopping mall in Kyiv, Doma Center, opened for business, with an area of 8,000 square meters. More complexes are also in the pipeline. By the end of 2015, the ‘New Way’ shopping and entertainment complex is expected to be commissioned, with a planned total floor area of 25,000 square meters.
The current year saw construction begin at ‘Ocean Mall’, located close to the existing ‘Ocean Plaza’ shopping and entertainment complex. This project is being undertaken by MegaLine company, which is also behind complexes such as Lavina Mall and Blockbuster Mall.
The relatively small amount of new retail spaces entering the Kyiv market in 2015 meant rents and vacancy rates were able to remain largely unchanged. According to JLL, the average vacancy rate in the Ukrainian capital is currently around 25%-30%.
“Crises are a time of great opportunity,” comments Lilia Rezvaya, Managing Director of Kyiv’s downtown Gulliver complex. ‘We decided to use this period to completely renovate the ground floor of the Gulliver complex and opened the new season with a new anchor tenant – Silpo supermarket – and a new format.”
Despite the challenging economic climate, there does not appear to be any shortage of Ukrainian customers. According to Gulliver officials, the average number of daily visitors to the complex was up 41% in 2015 compared to the previous year. They attribute this rise to an increase in the number of tenants as well as a series of promotions and events designed to attract more customers.
Kyiv residential real estate
The Kyiv residential real estate market spent much of 2015 coming to terms with currency fluctuations, with most developers forced to adapt to the declining purchasing power of Ukrainian buyers while attempting to maintain business plans established at the old exchange rate. In the primary market of new properties, the fall in value of the hryvnia led to a rise in Ukrainian currency prices. In the secondary market, where pricing has long been entirely in USD, the Ukrainian currency devaluation led to a sharp drop in prices.
2015 was in many ways a transitional year for the residential real estate market. For the first time since independence, the number of transactions in the primary market may have surpassed the volume in the traditionally dynamic and active secondary market. This landmark is in part the result of a policy of massive discounts on the part of developers. In the second and third quarters of 2015, developers introduced promotional prices and discounts that in some cases went as low as 40% of cost.
Regional Ukrainian real estate markets
Commercial real estate activity in Ukraine’s regions during 2015 was even more moderate than in the capital itself. By the end of Q3, only two new shopping and entertainment complexes had opened for business in the country’s regions – the Forum Lviv mall in Lviv and Hollywood mall in Chernihiv. By the end of the year, a third complex is expected to open – Odesa’s Gagarin Plaza.
“The opening of Forum Lviv by multi Development has shown that a well-designed and implemented project can be successfully realized in Ukraine’s regions,” comments Nick Cotton. He argues that the opening of Forum Lviv has important positive implications that go beyond the regional level. “This is a rare example of an international developer successfully cooperating with local partners. Although the project developed under exceptionally difficult circumstances, it boasted 94% occupancy upon completion. This success sets new standards for the entire country.”
Lviv logistics appeal
The past year has witnessed considerable progress in the logistics real estate market. Dutch company CTP won an investment tender for the development of the ‘Ryasna-2’ industrial park in Lviv, which is set to become a logistical base for 20-30 enterprises. Japan’s Fujikura has already expressed its readiness to establish a presence at the site.
Fedor Arbuzov, Head of Industrial and Logistics Property Department at DTZ Ukraine, says that 2015 saw rental rates in the segment break all records for dumping as owners fought for shares in a shrinking and cash-strapped market. This price competition has managed to keep most facilities busy, with a vacancy rate in the warehouse and logistics real estate market in the regions of Ukraine of about 10%.
Residential real estate markets in Ukraine’s regions have largely been quiet in 2015, with the only significant movement to be found in Lviv and Odesa. The key drivers pushing demand in the regional real estate market have included the large number of displaced persons from the conflict zone in east Ukraine. Many wealthier Donbas residents have entered the real estate markets in other Ukrainian regions, with both Odesa and Lviv proving popular options.
Expectations for 2016
In the coming year, the commercial real estate market in Kyiv will be one of the focuses for growth, with four new shopping centres expected to open for business. This will substantially increase the number of new options available to retailers, driving up vacancy levels in existing complexes accordingly. It will also have a downward impact on rental prices as owners find themselves forced to compete for finite custom and seek to offer the most attractive terms possible.
The office real estate market will likely witness the arrival of double the amount of new space in 2016 compared to 2015, which will have a significant knock-on effect on occupancy and vacancy levels. At the same time, anticipated improvements in the general business environment are expected to lead to upwards adjustments of rental rates by the end of the coming year.
About the author: Natalia Eva is a marketing and PR specialist at UREClub