Apartments for Rent in Odessa, Ukraine

Ukraine's commercial real estate development goes regional

Although new shopping malls and business centers are under construction in Kyiv and throughout Ukraine, the demand for high quality retail space, office facilities and warehouses will not be met in the near future.

What's more, regional cities collectively outperformed Kyiv in terms of market growth in 2005. This dynamism in Ukraine's commercial real estate sector has piqued the interest of quite a few international developers, who are now actively looking to break into the market.

After slowing down in 2005-2006, Kyiv's retail property sector is expected to rebound in 2007 with the delivery of a number of large schemes onto the market.

With some 300,000 square meters in the pipeline, the current stock of retail space could double to over 600,000 square meters in Kyiv within the next two years.

But given the increasing disposable incomes of households, 2007-2008 will not see market saturation, and further growth of the retail segment in the capital is expected, according to Halyna Maliborska, head of the retail property department at Colliers International Ukraine.

"This forecast is subject to risks that are inherent in the development of three major pipelines' schemes - MEGA, Esplanada and Olympic Plaza, which in total account for 70 percent of the planned stock for the next two to three years," she added.

If completed on time, these and other retail projects in Kyiv could help begin recalibrating the local market, driving down some of the highest rental and purchase rates per square meter in the former Soviet Union and perhaps improving the overall quality of construction and design of available retail space.

No less in demand is Class A and B office space, and with an increasing number of foreign companies looking to enter the Ukrainian market in various sectors of the economy, even regional centers like Kharkiv are seeing rental rates and the purchase price of office space rise rapidly.

According to statistics provided by the TEKT group, a Ukrainian company operating on the Ukrainian market since 1995, Kharkiv ranks third behind Kyiv and Yalta in terms of commercial real estate prices, with office space going for $800-2,500 per square meter in the city center.

TEKT is currently developing Class A office space in Kharkiv, where demand for office space changed considerably in 2004-2005. Currently, more than 60 percent of businesses are looking for Class B office space, although only 5 percent of available space in Kharkiv can be considered Class B. Class A options are currently not being offered on the market, said experts from the TEKT group.

In Kyiv, demand for Class A and B office space also greatly exceeds available supply. Currently, their combined share comprises less than one-third of available stock.

According to Colliers International's 2006 Real Estate review, rental rates in Kyiv shot up at the end of 2005 in response to the undersupply in the market, with a base rental rate of $40 per square meter for brand new Class A office space becoming a reality for the first time in the last several years.

As with retail space, the growing proportion of high-quality projects and new construction has resulted in palpable changes in the supply of office space. Nevertheless, with continued lags in the delivery of completed projects, a demand-heavy dynamic is expected to drive the office real estate market in the capital for the next several years.

Growing foreign interest

In addition to high rental rates, the average construction costs for office, retail and warehouse space in Kyiv - $900, $700, and $500 - are second only to Moscow - $1,350, $750, and $550, according to statistics provided by Savant International, a project and cost-management company operating in Ukraine since 2003.

In Kyiv, there has been a "steadily increasing demand for new retail spac...from international and national retailers, who are already working in Ukraine and searching for new expansion of currently represented brands, as well as international retailers who recently made a decision to enter the Ukrainian market, and national retailers bringing in more new brands," Colliers' Maliborska said.

David Whitehouse, the general director of Savant Ukraine, said that after a plateau period that began six months before, and ended about six months after Ukraine's presidential election, "from the inquiries we've been getting, we can see that investors are coming in much stronge...not just Western European, but also Lithuanian, Polish and other Eastern European investment as well." There's also Ukrainian money that's been shelved and is now returning to the country, he added.

Ukrainian Trade Guild, a commercial real estate construction, management and consulting company based in Kyiv, has forecast that the ownership of most existing large trade centers in Kyiv will likely change in 2006-2007.

Recent acquisitions by companies represented by Colliers International, such as the purchase of Pyramida Shopping Center on Kyiv's left bank by London-based investment company 1849 PLC, and Apollo Real Estate Advisors, a prominent U.S. real estate investor, is one primary example.

Moving out of Kyiv

Ukraine's first major retail centers went up in Kyiv only in 2001. However, shopping centers like Globus I, II and III, Metrograd, and the Kvadrat retail centers scattered throughout the city were built for quick returns.

According to Savant's Whitehouse, "They weren't built to last, and what you'll find in the next 10-15 years, as the number of Class A retail centers grows, is that the quality of tenants will be reduce...what we've found in cities is a tendency to spread outwards, and as more people see their incomes going up, they'll be likelier to drive out to shopping centers [located in residential areas]."

Moreover, a number of major retail schemes scheduled to open in regional centers in 2006 have shifted patterns of growth in commercial real estate nationwide.

According to Maliborska, "new shopping center stock in the regions of Ukraine during 2005-2006 is expected to total 150,000-200,000 square meters, as compared to 70,000 square meters for Kyiv."

Although, regional retail markets are still predominantly dominated by local developers, "national and foreign companies were watching this market closel...the main new players in regional retail development are expected to be Lex-holding, which is planning to open Karavan shopping centers in Kharkiv, Dnipropetrovsk and Zaporizhya, and, in the longer run, IKEA, with its concept of MEGA mall," Maliborska added.

Yulia Shylova, marketing director of UVK (Ukrainian Cargo Couriers), one of Ukraine's leading logistics operators, confirmed that apart from Kyiv, the highest demand for real estate is in the cities located at the crossroads of key transportation routes, such as Odessa, Lviv and Dnipropetrovsk.

For example, the company Alliance Service recently announced plans to build a new shopping mall in Lviv for a projected cost of $11 million, slated to open in 2007.

Savant International is also currently managing the development of two retail centers in Kharkiv, where there are also six Class B and two Class A office buildings under development.

A related problem is that Class A and B retail centers require Class A and B warehouses and logistics complexes to store goods going to market. These are also in painfully short supply.

UVK introduced a new 14,000-square-meter Class A warehouse in Obukhov, located 20 kilometers outside Kyiv, which is equipped with a high-quality pallet racking system, handling facilities, air conditioning, heating, video and fire security, and has plans to build another one in Brovary (also outside Kyiv), approximately 45,000 square meters in size.

"The demand for high-quality terminals is about 500,000 square meters, while [commercial] Class A warehouses make up 100,000 square meters, so the shortage of warehouses in Ukraine is obvious," Shylova said, adding that because warehouses are located on mainly agricultural land plots, the project approval process and registration may be difficult.

Savant's Whitehouse added that as the number of retail centers grows, so will the need for offsite warehouses and logistics facilities, but "even with the planned works this year and next, it [available facilities] will still be less than a third of the demand." Shylova estimated that new warehouses recently built and those being developed account for 250,000 square meters, still short of meeting demand.

Orysia Kulick, Kyiv Post Staff Writer
Jun 01 2006

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