Responding to yesteryear's dearth of premium office space in Kyiv, several real estate companies have been actively pitching major office building developments over the last year or so. Most are already completed or are scheduled for completion by the first quarter of 1999.
In total, close to 50,000 square meters of new first class office space was scheduled to come on the market in the last quarter of 1998 and the first quarter of 1999. Major developments include the 16,000 square meter Horizon Tower, being leased by Jones Lang Wooton, Atlantik's already completed 9,500 square meter Artyom Center, and the 6,000-square-meter Liepzigska, handled by Colliers.
Now, just as all that first class office space is about to come onto the market, a curious thing has happened: the economy has lapsed into crisis.
The crisis is taking its toll on the very companies whom real estate developers hoped would occupy all that class A office space: Western companies and well-heeled domestic companies. Many Western companies are leaving town completely, while local companies and those Western companies that are staying around are suffering from shortages of cash.
All of which raises serious questions about whether real estate companies will be able to fill out their fancy new developments.
While some companies report that the demand for office space remains constant, others are already reporting that interest in both first- and second-class office space has dropped, effecting a corresponding drop in office rents.
'Lately we've been looking at office space and we've been looking at retail space, and I can tell you where the prices are heading on both: south,' said Peter O'Brien, a partner at Kyiv consulting firm PCG, which has done several real estate market surveys.
On the other hand, DTZ's Jason Sharman said his company had registered no decrease in inquiries for rent, and the number of inquiries to purchase space in local currency had actually increased. 'We had a successful August when we let 540 square meters to Golden Telecom and made other big deals,' Sharman said.
Natalia Usmanova, the administrative director at Colliers International, said the real estate market, being more inert than other markets, has not suffered yet from the consequences of the financial crisis.
Her colleague at Colliers, General Director Mark Mangum, added that the $45-per-meter price tag of first class office space at Colliers' major developments was cheap enough to not seriously affect companies trying to upgrade their office space. Furthermore, he believes the real estate slump is temporary. 'The market has slowed down, seeing where Ukraine is going, but in three months demand will be restored.'
Usmanova acknowledged, however, that Colliers' had lost one potential office client to the crisis, and seen some other clients put plans to move out of second-class offices on hold.
Tatyana Musiyuk, a property manager at L-Mary House in Kyiv, said inquiries have been down of late. 'We have found the space but tenants are putting off looking at it until later.'
Adding insult to injury, the government issued a decree at the beginning of September that temporarily forbids payment in advance to companies' off-shore accounts, a method of payment many real estate companies rely on.
Makram Abbout, a senior manager at Price Waterhouse Coopers, said the decree is a significant setback to the development of the office market in Ukraine.
'The investors want to be paid in advance and in foreign currency,' he says, adding that a year ago payment in advance was allowed for the term of one to two years. That term had been cut back to six to twelve months before the recent decree completely eliminated payments in advance. 'Investors are strongly discouraged,' Abbout said.
Steven Garine, a consultant at Jones Lang Wootton, said it will take time to sort out the consequences of the decree. 'We really think it is a temporary decree and we are still researching how to deal with it,' he said.
If there's one thing real estate companies have always been united on, it is that Ukraine's real estate market has to come around eventually. The crisis will simply put things back a while.
