Following several years of sustained growth, Ukraine’s commercial real estate market continues to heat up, building on a recent trend that has seen more foreign institutional investors eyeing the sector, while growing demand, and a shortage of space, have been driving property prices through the roof.

Industry insiders say that the demand for commercial real estate in Ukraine is still far greater than the supply of office, retail and industrial space available on the market.

Meanwhile, an underdeveloped legislative base that gave rise to an over-bureaucratized system of building permits years ago continues to stymie the growth of the sector.

The result, according to insiders, is a growing backlog of foreign businesses that are looking to enter Ukraine but are unable to do so due to the deficit of suitable commercial space in the country, while enterprises already established here are literally left with no room for expansion.

A hot spot

“Ukraine finally appears to be a hot spot for investors in terms of commercial real estate,” said Ruslan Oleksenko, the managing partner of DEOL Partners, a Kyiv-based commercial real estate services firm.

“That, in turn, has created a sort of rush to the market. The sell side cannot put a price together as a result. This, together with other factors, has contributed to a sort of chaos in Ukraine’s commercial real estate sector,” he added.

Oleksenko said that while 2004 and 2005 saw more speculative venture capital entering Ukraine’s commercial real estate sector, a larger number of foreign institutional players began cropping up on the market last year, and they currently comprise the market’s main investor base.

“The next cycle [of investors] will bring a critical mass of professional developer products and a decreasing interest in venture real estate. The future is in the construction of business parks, and building plants from the ground up, but not reconstructing old premises,” he said.

According to Oleksenko, the foreign investors entering the market are typically companies that prefer buying completed real estate projects, with all of the construction permits already in place, since “They are not ready to get involved in difficult legislative processes.”

“Those who are closer to the permit-issuing structures have more opportunities to obtain and capitalize on construction permits, and that’s what some Ukrainian companies are good at,” Oleksenko added.

He said that of the three fastest developing sub-sectors of the Ukrainian commercial real estate – office, retail, and industrial space – it was difficult to say which would see the greatest expansion in the next several years, adding, however, that the office sector has shown the most growth to date.

“Investors that have come to the market have eyed Kyiv’s central business district. Sooner or later, there won’t be any land plots left, and that’s when developers will start looking at plots available for constructing business parks,” he said.

According to Oleksenko, real estate construction, leasing and sales companies continue to concentrate their efforts in Kyiv, where construction costs for building an office center, for example, are around the same as in the rest of the country, but lease and sale prices are higher, while the time it takes for a tenant or buyer to occupy the space made available is shorter.

“So, net income is always higher in Kyiv,” he said.

With respect to the retail end of the market, Oleksenko said that sector is hampered by unclear zoning regulations in Kyiv, with plots that can either be used to construct low-lying malls, or multi-storey housing.

“Apartment building will always be more profitable than a two-storey mall,” he said.

“People won’t see much quality retail space until there are more strategic regulations from the side of the city administration,” he added.

“Retailers have a greater interest in expanding to markets in other regions, and that’s why we can see and will see a lot of activity in this regard in the nearest future.”

As for industrial real estate, Oleksenko said it is the least profitable of the three fastest developing commercial real estate sub-sectors on the market.

“As a result, this segment will get more attention only when it gets too tight in the other sectors,” he said, adding that the industrial real estate sector may present development opportunities for foreign investors that specialize in that area.

Lack of quality space

According to Yuriy Nartov, the managing director of the Kyiv-based operations of Colliers International, a global real estate consultancy, the current situation on Ukraine’s commercial real estate market is repeating itself this year, and is characterized by a lack of quality space.

“And this relates to all the segments of commercial real estate,” Nartov said.

“Companies that plan to enter the market or improve their space face real difficulties, as there’s very little stock available to satisfy their requirements,” Nartov said.

“As a result, companies have to choose between staying [where they are], not being able to expand, or finding a solution, such as moving out of the city center.”

He said that while many real estate projects are currently in the pipeline, their completion still won’t be enough to satisfy demand.

“Also, completion takes much longer than expected for a number of projects,” Nartov said.

He added that among the biggest problems contributing to the protracted completion and low supply of commercial office space on the market is the process of procuring land plots, as well as recently introduced regulations that have made developing real estate even more complicated than before.

“There’s no lack of capital,” Nartov said. “A lot of Western players want to enter the market.”

Partnering up

However, while foreign companies may prefer leasing or buying ready-made commercial real estate in order to avoid bureaucratic permit-issuing complications, unlike DEOL Partners’ Oleksenko, Colliers’ Nartov said that such companies may actually be better off trying to develop real estate projects from scratch.

“That’s where a lot of companies consider possible partnership relations with some local players that have more access to land plots and possess some other strengths, such as the ability to solve administrative issues, obtaining permits, and so on,” Nartov said.

He said that real changes will begin to occur on Ukraine’s commercial real estate market in the next several years, as institutional investors have only begun to study and research the country’s real estate market.

“It’s not enough for serious players to have one or two projects. They want to have a portfolio of projects,” he said.

Arthur Ohanesyan, the managing director of Parker & Obolensky, a Kyiv-based real estate agency, agrees with Nartov that most foreign companies that want to start and complete real estate projects in Ukraine find partners among local companies to meet their goals.

“There are no other options,” Ohanesyan said.
“There are quite a number of examples of foreign companies that tried to do something on their own and failed,” he said, adding, “The state is taking all possible steps to defend the interests of national companies, hurting the interests of consumers.”

The source: Kyiv Post