Kyiv’s residential housing market faces oversupply in certain areas, market insiders say.
Some developers risk being forced out of the market if demand doesn’t increase this year, an unlikely prospect given the difficulty of obtaining credit and the country’s still sluggish economic growth.
According to ARPA real estate Director Mikhail Artyukhov, oversupply is dragging down the market.
“We’re seeing a glut,” he said.
The mechanics
Residential construction is difficult to finance, as banks remain hesitant to lend. Moreover, individuals find it nearly impossible to get mortgages.
The banks have good reason to be afraid: According to data provided to the Kyiv Post by the National Bank of Ukraine, 33 percent of hryvnia mortgages are non-performing, while 86 percent of foreign currency mortgages are non-performing.
And yet, developers have found ways to finance new construction by relying on incoming residents.
“Over the past few years, construction of residential property in Ukraine has undergone a revival, the real estate market is quietly starting to restore itself,” said Nataliya Tikhovskaya, head of Ukrsotsbank’s factoring and promissory notes department. “But it’s worth noting that bank portfolios of mortgage finance continue to drop.”
Contracts to buy residential real estate under construction are executed through a range of financial instruments, according to Artyukhov and Alexander Borodkin, an attorney at Vasil Kisil and Partners law firm.
The first are special purpose bonds, when an investor and developer fund construction through a bond issue. This rare method is mostly used for low end development.
The second option is a construction financing fund, popular among the middle and higher ends of the market, in which buyers agree with the fund to invest money, and the fund then partners with a developer to build.
Forwarding contracts, popular in the mid-market, allow buyers to sign investment agreements that split the value of the apartment between a derivative contract and a separate contract with a developer for the production of the commodity on which the derivative is based — the apartment.
The third are co-ops, in which apartment-buyers band together to jointly own and finance construction.
Mortgages and direct purchases of property rights are still available in rare cases.
Borodkin said that many of these financial instruments were developed after a 2008 scandal that saw investors lose out in the Elita-Center property development fraud in Kyiv.
“The intention was to limit direct agreements between purchasers and developers, and to avoid situations in which a developer starts to sell apartments before he has the necessary permits in place.”
The glut
But amid these financial innovations to stoke demand, the Kyiv market faces a glut of supply. “Developers have sort of stopped, they aren’t very active at the moment,” Artyukhov said.
Borodkin said that many developers now prefer to build buildings with smaller living areas, due in part to people’s inability to pay for larger living spaces.
Anna Laevskaya, assistant commercial director at developer Intergal-Bud, blamed the glut on a burst in construction starting in the early 2010s, which has depressed prices.
“The amount of demand is not going away, it’s redistributing,” Laevskaya said. “If there’s not more demand, the amount of developers in the near future will go down because some companies will have to leave the market.”
