You're reading: Will office, retail see pot of gold at end of rainbow?

Commercial sector still waiting for its day in sunThe commercial real estate sector - both retail and office - was all-but-dead last year. But, just as with Ukraine, there's plenty of room for growth.


On the retail side, according to CBRE and JLL, two international real estate services companies, Kyiv is undersaturated in comparison to other European cities. But also, as with the rest of the nation, the potential profit and risks are higher.

Sergiy Sergiyenko, the managing partner of CBRE Ukraine, assessed the situation this way: “Stabilization of the situation in the east of the country is therefore fundamental to making Ukraine an attractive destination for investment, following the many positive policy changes of 2014.”

According to JLL, the overall office vacancy rate hit 23.2 percent, while CBRE reports a vacancy rate of 30 percent. Either way, it’s one of the highest rates in European cities and record levels in the Kyiv market.

Combined with the other economic and political factors, building owners simply had to cut rents. Tenants aren’t going bigger, for that matter, but shopping for better bargains. “Better location and a better building for less money will remain the main relocation motivation,” Sergiyenko wrote.

New office completions amounted to 57,000 square meters in 2014, half of what was commissioned in 2013.

New supply may hit its cyclical low in 2-3 years after the office space currently under construction (around 130,000 square meters) comes on the market. “With high likelihood, new large projects will not be considered for several years due to the high vacancy rate, weak demand and virtual absence of financing, “ Sergiyenko said.

The new supply of quality retail space amounted to 71,000 square meters as of the end of the year, the lowest indicator for the last three years. Along with that, the completion of several large shopping malls due in 2014 were moved to 2015.

Residential

Residential real estate market in Kyiv may be close to bottoming out in prices.

Residential house construction has stalled in Kyiv because of lack of financing as prices of existing homes have dropped. (Pavlo Podufalov)

It’s still crisis times in residential real estate, according to SV Development real estate consultancy, with the number of deals in February dipping to 267, record low.

“There were usually some 55,000 offers on the market before the crisis,” Serhiy Kostetsky, an industry expert with SV Development, told the Kyiv Post. “Now the number is close to 20,000. Offers present in the market are from those who really need money or are planning to move. Demand comes from those who need housing for themselves. The investment component is currently absent.”

Prices have decreased by 15 percent in dollar terms over the last year, given the sharp devaluation of Ukraine’s hryvnia. But people’s expectations still haven’t caught up with the market: They want to recover their investment when selling. But hoping for a housing price increase soon is naïve, director of Valion real estate agency Artur Pylypchuk said.

“The growth is not foreseen even in the nearest 3-4 years,” Kostetsky said.

Most deals are now closed in the economy segment for $50,000-$70,000 per apartment, while apartments worth more than $100,000 have experienced a major decline in demand.

“These flats are usually bought by people with decent and stable income, who accumulate up to half of property value in savings and borrow the rest from a bank,” Pylypchuk said. “At the moment there are very few people with stable income as such and taking a bank loan is at large impossible or available at an unbearable interest rate.”

Access to credit is a major challenge for developers too.

“Those few flats a month sold by each developer are not enough to cover the costs,” Kostetsky said. “At least 80 percent of developers have already slowed down their construction intensity and start postponing delivery dates.”

Banks are generally not lending for construction as it is too risky, Pylypchuk said.

Like almost every other sector, this one is waiting for a turnaround as well.