Economic Update

Real Estate Remains Undersupplied

Ukraine | 7 Mar 2008

A local Ukrainian property developer, HCM Group, has announced plans to develop an office and residential complex in Kiev's Podil district, which will add much needed product to a real estate market that is severely undersupplied.

HCM Group, which has established itself as one of the leading property development companies in the country, announced that it will invest over $1bn on the construction of a multifunctional complex, in the industrial zone that lies between Novokostiantynivka and Frunze Streets in the Podil district of Kiev. Occupying a total of 1m sq metre of built-up space over 15ha of land, it will include financial and office centres, shopping and entertainment facilities, a hotel and housing. Construction is expected to begin in 2009-2010.

"Considering the scale and characteristics, the project is unique not only for Kiev, but for all Ukraine," reported HCM.

Valeriy Kirilko, managing partner of Concorde Development, a Kiev-based real estate provider, told local media that the "Kiev market is ready for such a project (...). Current demand in the city is so big that this project will not satisfy it completely."

According to a major real estate company, Kiev's commercial real estate market maintained rapid development in 2007, with an additional 240,000 sq metres of office space created and 250,000 more to be introduced in 2008, which is up from only 177,000 produced in 2006. However, Ukraine continues to operate at a vacancy rate of 2% and remains less mature than Central European markets.

"The demand for commercial properties will continue to exceed supply for at least another two-three years, so prices for real estate assets will keep at the present high level. In short, it will remain a landlords' and sellers' market throughout the forecast period. Hence we believe that the limited amount of investment grade assets makes the development of commercial properties, as opposed to their acquisition, more lucrative," Yuriy Nartov, managing director at Colliers International in Ukraine, told OBG.

However, international developers looking for opportunities in Kiev are experiencing barriers to entry. According to industry insiders, navigating the local bureaucracy can be extremely difficult and quality land plots are almost non-existent.

"Many of the potential international developers try to solve this problem by joint venturing with a local partner. However, it is not easy and I have not seen too many successful partnerships arrangements. Most often these attempted partnerships do not go beyond the first phase of negotiations because they cannot agree on the stake of each partner within the partnership. Typically, foreign companies demand 50% or more in order to have a controlling interest, but the local groups are not willing to give up their controlling stake," Nartov told OBG.

One company, Israel's Seven Hills, a subsidiary of the Scorpio Real Estate Group, has been able to overcome many of these challenges and has already begun the construction of a large residential complex and business centre in Podil and its biggest project will be a business park midway between Kiev and the Boryspil International airport.

Ari Schwartz, CEO of Seven Hills, told OBG that real estate development in Ukraine is a game of patience, "We have been in Ukraine for four years and there are no easy projects. You have to learn the environment and the clients. It is a very closed market in comparison to the West. You have to come, you have stay and you have take your time."

Chapter Summary