Kyiv’s residential real estate market can seem chaotic to foreign investors who are unfamiliar with it. However, as Games of Thrones character Petyr Baelish would say, “Chaos isn’t a pit. Chaos is a ladder.” Savvy investors know that the best opportunities lie in situations that aren’t easy. Whether you are an individual buyer, a property fund, or a foreign real estate developer considering entering the Ukrainian market, here are 10 things you should know before buying property in Kyiv. The list includes price and supply drivers, the availability of market information, investor risks, and other country-specific nuances.
1. The Ultimate Immovable Asset
Real estate is the most trusted asset for Ukrainians and functions as their “piggy bank”. Many Ukrainians do not trust the country’s banking system. Instead of depositing their savings into bank accounts, pension funds or other financial instruments, Ukrainians typically convert their earnings into hard currency (usually US dollars) and save this physical cash before buying real estate at the first opportunity. If a Ukrainian has a financial windfall, then they will also likely invest much of it into real estate. The preference for real estate purchases serves to push up and maintain the value of this asset class as a whole. As a result, a great deal of Ukraine’s capital at any given time is locked up in the country’s real estate market.
2. Minimal Mortgage Market
Mortgage financing is still not a practical option for most people in today’s Ukraine. As of mid-2017, mortgage rates in Ukraine are generally above 20% per year. Many Ukrainians remain reluctant to make long-term financial commitments. Inflation is also relatively high, meaning banks must offer high deposit rates to attract funds. These deposit rates in turn serve to push up mortgage rates. Mortgage rates also need to mitigate liquidity risks that arise from a lack of long-term funds on deposit. Most Ukrainian depositors keep their money in banks for short periods of between three and six months, while most mortgages typically have terms of 15 to 20 years. Mortgage rates are also high to account for currency risk. While the Ukrainian hryvnia exchange rate has been relatively stable in 2017, there was a steep currency devaluation from early 2014 until the end of 2015. Due to a combination of these factors, the Ukrainian mortgage market is minimal. Currently about two-thirds of Kyiv home buyers use their own funds for direct property purchases and just under a third use deferred financing from property developers. Meanwhile, only about 3% to 4% of Ukrainians use some form of credit financing.
3. No Market Regulation
In today’s Ukraine, there is currently no licensing for real estate brokers and the profession is not regulated by the state, so it pays to be careful. In developed markets, real estate professionals are required to pass exams in order to receive a state license before practicing their profession. Their professional behavior must match a code of ethics and they can face steep fines or lose their license for ethical violations. None of these regulations exists in Ukraine, so it is wise to use extreme caution when selecting a broker or real estate agency. Many real estate brokers are experienced and ethical professionals, but there are no guarantees so a careful approach is definitely justifiable.
4. Imperfect Information Environment
Property listings on Ukrainian web portals often contain inaccurate, contradictory, incomplete, or deliberately false and deceptive information. Online property information for existing homes in Ukraine is often a mess. There are many reasons for this: the modest levels of professionalism among some brokers and the reluctance of many Ukrainian owners to work exclusively with a single broker combine to create market chaos. Additionally, some brokers have bad intentions and deliberately create false listings just to get the contacts of potential tenants or buyers so they can offer them something else. A good broker will be able to quickly filter through this mess and avoid pitfalls but newcomers should avoid taking available information at face value.
5. State Statistics vs Reality
Official Ukrainian statistics do not generally reflect the actual prices paid for apartments sold on the secondary market. Most apartments on Ukraine’s secondary market are sold in exchange for physical cash, with payment made in US dollars. In order to save on taxes, the buyer and seller will often opt to sign a sales-purchase agreement with an official price specified in hryvnia that is well below that actual transaction value. This makes official statistics for secondary market sales useless for the purposes of serious market price analysis. Instead of official statistics, resourceful brokers in Ukraine compile information on recent sales transactions and are able to advise buyers and sellers on fair market value for properties.
6. No Substitute for Due Diligence
Due to a lack of quality property information and other investor risks, it is particularly important to do thorough due diligence when investing in Kyiv real estate. Due diligence for residential real estate can be divided into three parts: initial, legal, and technical. Firstly, you must find a competent broker who can advise you on the investment potential of the properties that you are considering. This broker should also have the resources to help you with legal and technical due diligence. Initial due diligence includes checking the official state register to confirm that the documents provided by the seller match the registered owners and whether there are any outstanding legal issues related to the property. If a buyer wishes to perform thorough legal due diligence, most agencies can get their own lawyers (or the buyer’s lawyer) to check all the legal documents related to the seller’s property. Lawyers will request additional documents from the seller. A good lawyer may need to adopt the grey methods of a private investigator in order to uncover court cases related to a property. These cases will often not be searchable in standard databases. Some buyers engage an additional inspector for a technical due diligence report to check the structural integrity of an apartment and the building itself before proceeding with any investments.
7. Housing in Short Supply
Kyiv has a structural housing shortage with an average living space per person equal to about 50% of the EU average. Kyiv is Ukraine’s wealthiest city and property values reflect this fact, making it the best market for real estate investment in the country. However, Kyiv also has a shortage of housing space. As recently as 2014, the average living space per person in Kyiv was only 22 square meters per person, while the EU average was more than 40 square meters per person. If we adjust these statistics by removing bankrupt or frozen construction projects and divide by Kyiv’s estimated unofficial population of 3.25 to 3.5 million, we get an even lower figure of under 20 square meters per person, without making allowances for daily rental apartments and apartments used as offices. While construction of new housing has continued at a good pace since 2014, the housing deficit in Kyiv remains. Moreover, much of the new housing in Kyiv is well outside the prime locations for premium rental apartments.
8. High Price of Low Communal Charges
Low property taxes and communal charges exacerbate housing shortages in Kyiv and contribute to a climate of underinvestment. The carrying costs for holding property in Ukraine are exceptionally low. Communal charges are relatively cheap and significant property taxes await implementation. There are property taxes in some cases, but they are minimal at this point. A federal law on property taxes passed a few years ago, but implementation fell short after municipal governments did nothing due to fears over a possible voter backlash. These low carrying costs enable owners of Kyiv rental apartments (especially in prime locations) to delay renovations to update their apartments. Instead, many of these owners will hold out without investing, hoping to find someone naive enough to pay an asking price that is way above the market rate. All of this exacerbates the already existing shortage of housing and keeps overall quality levels lower than they would otherwise be in a more competitive market.
9. Few Distressed Sales
Current sale prices in Kyiv are much lower than historic peaks but potential investors should not expect distressed sales. Many foreign investors arrive in Kyiv with unrealistic expectations of finding fire sale prices for real estate. Some go around muttering, “The prices for real estate in Kyiv are still too high,” as if repeating this mantra will magically decrease prices to the level they desire. In fact, Kyiv prices for real estate have plummeted since reaching stratospheric highs in 2007-2008 when prices of fixer-uppers in historical buildings reached USD 10,000 per square meter and higher. The first big drop began with the 2008 global financial crisis. Then came another significant fall from early 2014 through 2015 when the hryvnia currency depreciated 60% against the US dollar. In 2015 alone, sale prices were down 20-25% for apartments in older buildings in the center and down 20% for business-class complexes downtown. Today it is possible to find fixer-uppers in historical buildings in Kyiv at prices from USD 1,200 per square meter, or just over one-tenth of the price at the peak of the pre-credit crunch bubble market. Yet despite the huge price drops in Kyiv real estate, the number of distressed property sales has been relatively low. This should not come as a big surprise. Real estate is Ukraine’s most trusted asset class. Few people bought their properties via mortgage financing, while property taxes and communal charges are low. Kyiv in no way resembles the US credit crunch housing bubble that left millions of Americans with “upside down mortgages” where they owed the bank more than their house was worth. In Kyiv, people tend to own their property outright. This makes Ukrainian property owners less likely to seek a fast sale at a heavily discounted price.
10. Historical Properties Remain the Future
Fixer-upper apartments in historical buildings in the heart of downtown Kyiv currently offer the best potential investment returns. The premium rental market in Kyiv is dominated by expats who usually make the best tenants. They can often sign leases for two or more years, while affluent Ukrainian tenants will usually rent for shorter periods and can be less predictable, often taking on accommodation temporarily while their house or apartment is under renovation. Kyiv does not have any single expat neighborhood. Instead, many premium apartments cluster together in a narrow strip of Kyiv’s Old Town near the metro stations Zoloti Vorota, Universytet, and Lva Tolstoho, while thousands of expats also live all over the sprawling city and beyond Kyiv in the fast-expanding suburbs. Nevertheless, the most popular expat accommodation options remain in the downtown area close to embassies and the offices of multinational companies. There is an absolute deficit of expat-suitable two-bedroom apartments in this prime area due to the multiple reasons discussed above. Because of the low carrying costs for holding property, there are not a lot of attractive offers on the secondary market for such properties at any one time. In order to find the right investment opportunity, you have to spend a lot of time searching and engage a broker who is capable of sifting through lots of false information online and filtering out otherwise decent-looking properties that carry red flags. The good news is you can find prices for fixer-uppers in historical buildings in Kyiv’s center for as low as USD 1,200 per square meter for apartments with no lift that are offered by motivated sellers. When properly renovated, such apartments can deliver annual yields of 10-12% or more. This figure involves rental income alone and does not take into account the price appreciation of these properties, which could be substantial over the next five to seven years if the Ukrainian economy continues to grow.