2014 has been the most difficult year for the Ukrainian real estate market over the past five years

The results of the real estate market in 2014 turned out to be worse than expected. Indeed, analysts registered a sharp decrease in transactions on the primary residential property market. The reasons for this include panic moods of potential buyers, a 40-80% increase in prices for housing and the cutback in mortgage loans. The situation in the commercial real estate segment is no better: the vacancy rate in retail trade and office centers is on the rise, while hotels registered the lowest occupancy rate over the past ten years. Next year the situation will not improve for developers and constructors.

Developers are unstoppable

In 2014 real estate developers commissioned 30% more residential real estate than last year, Deputy Minister for Regional Development, Construction and Public Utilities Dmytro Isayenko told Capital. “This was the result of the industry for nine months and I believe it will persist until the end of the year,” he said. In 2013 developers commissioned 8.2 mn sq m of residential property, excluding squatter development, according to the State Statistics Service.

However, demand is still lagging far behind supply. According to Arpa Real Estate, 11,900 apartments were sold in Kyiv over 11 months, including 7,300 apartments on the primary market and 4,600 on the secondary market, while in January-November 2013 a total of 29,300 apartments were sold (14,000 and 15,300 respectively). Statistics for the regions are not available, but as the data of realtors indicate that the situation in major cities of Ukraine does not differ much from that in the nation’s capital.

The decline in sales is due to several factors: absence of lending, the unstable political and economic situation in the country and rising prices for housing. Around 60% of developers tie their prices for real estate to the exchange rate, according to Honorary President of the Stolytsya Development Company Ihor Lysov. These players, as a rule, attract financing in currency mainly from large private investors or in banks. “Interest rates for loans in dollars and euro are lower than those for hryvnia loans,” explains Commercial Director of the Nest Development Company Kostyantyn Bravo. Their prices for apartments increased since the beginning of the year by 50-70%. The prices of companies that are not pegged to exchange rate fluctuations increased by 30-40%. In this way construction companies factor in the increased cost of fuel and imported materials.

Developers simply failed to timely react to the trend of a sharp decrease in sales. “The construction of apartment buildings being commissioned this year began three years ago: it takes a year to develop the project and two years to build it,” notes Bravo.

Difficult situation

A decrease in activity was also registered on the commercial real estate market. By the end of the year the vacancy rate of Kyiv office centers will reach 23%, while in the beginning of 2014 it was 18.3%, according to JLL Consulting Company. “New companies are practically not emerging onto the market, while those that are currently operating prefer not to move from the premises they occupy,” Managing Partner of CBRE Consulting Company Serhiy Serhiyenko stressed.

By the end of the year 9% of retail space in Kyiv will be vacant, while in the beginning of the year the majority of successful projects were occupied and the vacancy on the market was 1.7% on average, as Capital wrote earlier.

Many retailers suspended implementation of their development plans, while others pulled out of Ukraine altogether. For instance, this year the clothing chains Bosco Sport, Esprit, OVS, River Island, footwear Minelli and others closed their outlets.

The hotel segment is no exception in terms of overall negative trends. “I do not remember such a low indicator in the hotel business,” admits Executive Director of the Association of Star Hotels Dmytro Prohorov. He forecasts that the average occupancy rate of the capital’s three-star hotels will be 40-42% based on the results of the year and for four and five-star hotels – 32-35%. Earlier, these indicators were not less than 50%.

Tourists are practically not traveling to Ukraine, says Oleh Bolotov, Vice President for Hotel Business at VS Energy (Premier Palace, Oreanda, Kharkiv Palace Hotel, Praga Palace Hotel, etc.). “In some hotels tourists account for around 40% of the total number of tenants,” he says.

According to data of the Tourism Department of the Kyiv City State Administration, over nine months of the year around one million tourists visited Kyiv, which is 40% less compared to the same period in 2013.

The situation could have been worse, believes President of the Development Company Double W Volodymyr Horashchenko. “For example, during the crisis in 2008 the occupancy rates in hotels in Prague and Budapest were12-18%,” he says.

In the segment of warehouses the situation has practically not changed over the year: just like two years ago every third warehouse near Kyiv is vacant.

Considerable concessions

The current situation forced developers to make concessions for their clients. In order to preserve tenants a comprehensive approach must be developed: discounts, different marketing programs (prize draws, festivals, special entertainment for children, etc.), which will help attract visitors and increase the turnover of tenants. “Due to the high cost of investments in a new store and high risks tenants are very cautious about opening new outlets,” says Director of Leasing at Arricano Real Estate Yulia Shchaslyva.

Bolotov says the official rent prices have stabilized. “But already after the first call you can get a 10% discount and if you negotiate with the general manager – maybe as much as a 50% discount,” adds Dmytro Prokhorov. General Director of Ultra Group of Companies (Baldinini, Levi’s, Pierre Cardin, Lagerfeld and Guess) Andriy Makarov says the majority of shopping malls agreed to make concessions to the tenants and fixed the rates (the lease in many centers is set in hard currency) at a preferential rate of UAH 9-11/US $1. The owners of office centers did the same. “Developers agreed to fix the prices for apartments at a preferential rate. For instance, in the beginning of November, depending on the construction company, it ranged from UAH 11-12.5/US $1,” explains Deputy Director for Marketing at MiskZhytloBud Angelina Derevleva.

On the commercial real estate market developers postponed opening of several projects for 2015. For example, three shopping malls were opened in Kyiv this year: Atmosfera, Appetite and Prospect with a total space of 60,600 sq m. According to JLL, this is 46% less than last year, although in January the developers were promising to beat all records of commissioning shopping malls. However, opening of the largest Kyiv projects – shopping and entertainment centers Respublika, BlockBuster Mall and Lavina Mall, the total lease space of which amounts to 424,500 sq m – has been postponed until next year.

A total of 92,000 sq m of space in new office centers were commissioned in the capital in 2014, according to the surveys of UTG Consulting Company. This is 26% less compared with 2013. The decrease in new supply was due to the delay in commissioning of a large project – the Sky Towers office center with a total space of around 120,000 sq m. “It cannot be physically commissioned not only this year, but also next year,” assures Serhiyenko.

Foggy prospects

The demand for real estate next year will depend on exchange rate fluctuations and the end of combat actions in the east of Ukraine. Prokhorov believes that after stabilization of the situation in the country the number of guests in the capital’s hotels will begin to pick up not earlier than in six-twelve months. Until that time, the hotels will be forced to dump prices.

Also, the vacancy of shopping malls will increase, believes Managing Partner of UTG Vitaliy Boyko. Makarov predicts that in Q1 2015 around 18-20% of retail space may be vacant. “Some retailers may close their outlets in unsuccessful malls and open them in new centers,” admits Boyko. In order to become more interesting for the tenants, unpopular shopping malls will be forced to either reduce their lease rates or change their positioning on the market. “In some malls we will work exclusively for payment of utility services,” notes Makarov.

A similar trend will also be observed in the office real estate segment.

Deputy General Director of T.M.M. for Marketing and Strategy Oleksiy Hovorun believes next year many developers, mostly likely, will not undertake new projects. “Developers will try to complete their projects or, in the worst case scenario, freeze them for a certain period,” he assured. This can lead to decrease in new supply in a couple of years.