You're reading: Business Sense: Common sense finally is starting to prevail in real estate market

In a recent issue of the Kyiv Post, the lead article extrapolated on the decline and fall of the Ukrainian property industry. In my humble opinion, it was probably the best thing that could possibly have happened. Common sense and reality have finally arrived on the Ukrainian property markets.

Before the crash, material costs and in some cases labor rates reached levels higher than in London. Apartment prices reached levels twice the price of Warsaw, Budapest and Manhattan. Land prices became higher than in New York. All of this happened in a country where the per capita gross domestic product is on par with Albania and El Salvador.

It was, indeed, a massive bubble just waiting to burst and those who could not see it coming had their heads in the sand.

To those who think that they have lost a fortune on the value of their homes… you haven’t, it was only a paper value and before you even think of handing the keys back to the bank, I strongly suggest that you go and talk to them. The last thing they want on their books is hundreds of reclaimed apartments.

Property markets the world over are cyclical. They tend to go up and down in 20 year patterns and, once in a while, they go from boom to bust. While the doom and gloom merchants are talking of it taking up to five years to recover, they obviously have not been studying their history, nor do they recognize the unique set of perspectives that apply to this part of the world.

First of all, from our worldwide experience based on 40 years of closely monitoring global property markets, I can confidently say that the property market in Ukraine has bottomed out and prices of sensible and well-conceived projects will not fall any further. We said this in 1968 in London when we bought “phase 2” of the Canary Wharf project. The pundits said we were mad. Yet we made a profit of 98 percent on our investment.

Why will prices not go any lower? The market has reached the tipping point. It is now in the interests of those with money to start snapping up the bargains. This happens after every market fall. When it does, prices automatically rise. But it is going to take some time before they reach the dizzy heights of early 2009.

There is going to be a sea change in the market. Customers are going to become far more discerning and risk averse. Buyers will no longer be prepared to buy a concrete cave in the hope that they can turn it into a home. They are going to want European standards and so they should.

The whole system will change. Gone will be the days when developers were able to finance their projects purely out of cash flow. And this means a different type of developer will prosper, one with considerable financial resources and one who will plan projects and cash flows based on industry norms, as opposed to a blind belief in market conditions and a more-than-shaky banking system.

We, for example, planned all our calculations for our Park Avenue residential complex (currently under development in the Holosiyivsky district of Kyiv) on the worst-case scenario of a much weaker hryvnia, higher construction costs and a slower sales rate. In reality, the cost of construction today is appreciably lower than we projected. The hryvnia is getting stronger. Our sales averages are well above expectations. So Park Avenue is on track to be completed this year. And our margins are very close to what we projected.

Prices will start to increase once a little sense returns to the market and banks realize that they cannot sit on their resources forever. No market system or business can prosper without bank financing. There will need to be some changes in Ukraine’s central bank policy. Also, it still remains a mystery why interest rates in the primary markets are at 0.5 to 3 percent, while in Ukraine they are over 20 percent.

The economy is simply not going to re-start with rates at this level. Who in their right mind is going to take a mortgage at that level of repayment? It will change simply because the public will demand it, as the need for new homes is the same today as it was before the crash.

Will property values ever get back to the former levels? Not for a while. Prices in early 2009 were totally artificial, based on often reckless bank lending to a totally inexperienced market. Borrowing money is easier than paying it back. Let’s hope Ukrainian consumers have learned from this experience.

Who burst the bubble? It was a double act of Mr. Greed and Mr. Inexperience.

With luck it will be a long time before they step onto the Ukrainian stage again, if ever.

Ari Schwartz is managing director of Seven Hills in Ukraine, a part of Scorpio Real Estate. Scorpio is a property division of the Benny Stienmetz Group, one of the largest international property developers in the CIS region with over 2.3 million square meters of residential and commercial property under development. He can be reached at [email protected]