As Ukraine enters 2018, the hopeful signs of nascent economic recovery that we first saw in early 2016 appear to be bearing fruit. Looking forward to the year ahead, there are reasons for further guarded optimism. Economic forecasts for Ukraine project accelerating GDP growth at 3% or more, while numerous indicators point to heightened international interest in the Ukrainian market. With these positive signs in mind, what can we expect from Kyiv’s housing market in 2018? This forecast reviews current trends for Kyiv housing, including pricing for rentals and sales. It also explores the likely political and economic risks for Ukraine over the coming twelve months.
Looking Back at 2017
To quote Quaithe from Game of Thrones, “to go forward, you must go back”. This applies equally to forecasting the future direction of the Kyiv residential real estate market. In late 2017, rental prices for apartments in Kyiv city center in the USD 1,000 to USD 3,000 per month price range began to creep back up since the supply of expat-suitable housing is very tight and many companies have begun to bring in expat employees and mid-level managers for the first time since the steep decline in 2014-2015. At the same time, demand remains relatively soft for premium rentals of USD 5,000 per month and higher. These top category properties are typically appealing to ambassadors and country directors. If the optimistic economic forecasts for Ukraine in 2018 prove accurate, we can expect to see a gradual return of big-budget country managers to Kyiv’s rental housing market over the course of the next year. When these senior managers do return to the market, they will find that Kyiv suffers from a woeful undersupply of high quality three- and four-bedroom apartments that will meet their requirements.
Expat Investors Return to the Market
Among foreign buyers in Kyiv, the second half of 2017 marked a decided shift in sentiment and activity. In both 2015 and 2016, interested buyers typically asked brokers: “Have we reached the bottom yet?” In late 2017, the key issue on everybody’s lips was different, with brokers facing the question: “How much longer will these buying opportunities last?” While sales of downtown apartments on Kyiv’s secondary market continue to be relatively soft when compared with 2016, foreign buyer interest and purchases sharply increased in 2017. This general trend is likely to continue to strengthen in 2018.
What kind of foreign investors were buying Kyiv apartments in 2017? While the sharp hryvnia devaluation of early 2015 attracted amateurish wannabe vulture investors seeking “fire sales” and quick profits, the foreign buyers currently entering the Kyiv market are typically clear-eyed veteran value-investors. Many have prior experience investing in Central and Eastern Europe and other emerging markets, and take a long-term view towards their investments. They are typically ready to do the hard work necessary to make a success of investing in an emerging market.
What about sales of new apartments on Kyiv’s primary market in 2018? For several reasons, and with few exceptions, Kyiv’s new apartment complexes offer few promising opportunities for foreign investors who are seeking to maximize their returns. Firstly, in all price segments, new apartment buildings in Kyiv come with completely unrenovated apartments, which depresses potential rental yields as few tenants want to live in a construction zone for three to five years. Secondly, few new complexes are located inside the tiny area for premium rental apartments preferred by Kyiv’s expats.
According to some accounts, Kyiv had more than 70,000 unsold new apartments by the late summer of 2017. This situation creates the impression of a housing bubble in Kyiv, but is this actually the case? The answer is no. The bulk of these unsold apartments represent budget housing and are located well outside the prime rental area of Kyiv, so they will not depress rents in the premium downtown area.
Why are there so many unsold apartments in Kyiv? One big reason is the utter lack of proper market research and planning by Kyiv’s oligopolistic developers prior to construction. This has led to generic, undifferentiated products built without any clear target market in mind. For example, IT is the one of the most dynamic sectors of Kyiv’s economy, but if you are a senior IT developer, who is currently building apartments with you in mind? The answer is nobody.
Elections and External Risks
By the end of 2017, the business headlines for Ukraine were decidedly more upbeat than the political headlines. With elections on the horizon, the coming year may see the country’s political and economic fortunes converge to a greater degree. At any rate, it is a general rule that enthusiasm among politicians for deep economic reforms generally decreases proportionally as they get closer to the next election cycle. Energy and pension reforms pushed by the IMF would hit pensioners the hardest and Ukrainian politicians have traditionally been reluctant to antagonize these voters, so it would not be surprising if reforms were to slow down in 2018 as politicians look towards 2019 elections.
Stalled economic and anti-corruption reforms could undermine EU, US and IMF backing, with IMF support in particular regarded as especially important for maintaining currency exchange rate stability in 2018. The mostly likely scenario is that Ukraine’s current economic growth will continue to accelerate in 2018 based on growing domestic demand, while Ukraine’s politicians will do just enough to retain continued US, EU and IMF support.
In terms of external risks to Ukraine’s economy in 2018, we cannot forget about Russia with its unpredictable political culture and interest in an unstable Ukraine. Putin and his supporters will continue their efforts in 2018 to hold Ukraine down and discourage foreign investment. Nevertheless, there are signs that these scare tactics are losing their power to intimidate investors. In 2017, far fewer potential foreign investors appeared concerned about the situation in the Donbas compared to prior years. Meanwhile, the global economy is again awash in liquidity. The current Bitcoin bubble reminds one of the 1999 Internet bubble and the 2008 housing bubble, but while today’s party will inevitably end at some point, it is uncertain whether this will happen in 2018.
Expect More Investors in 2018
To sum up, in 2018 we can expect an acceleration of the 2017 trends for Kyiv housing. This means increasing numbers of expats seeking rental housing, reducing the supply of available premium housing even further in downtown Kyiv. More and more foreign investors, property funds and big budget buyers will enter Kyiv’s housing market in 2018 in order to address this need.
If this were a holiday wish list instead of a forecast, then we would ask Santa to bring a foreign investor with an appetite for risk and a long-term view who would buy a derelict historical building in Kyiv’s downtown, redevelop it as premium residential housing, and start a new trend. We would also ask Santa to help a local developer to discover modern marketing or to bring an enlightened foreign developer to Ukraine’s market and offer homebuyers an innovative housing product based on market research, targeted to a specific market niche, and sold with turnkey renovations instead of unrenovated apartments. While we will probably have to wait far beyond the next twelve months to witness these breakthroughs, 2018 has the makings of being a good year for some specific segments of the Ukrainian capital city’s housing market.
With special thanks to Yaroslav Ploshko and Alexander Smirnov at CMS Group for their marketing insights for Kyiv real estate.