UKRAINIAN REAL ESTATE AND ECONOMY

In spite of the prolonged redistribution of spheres of influence in the government and Verkhovna Rada the economy and business in Ukraine continue to develop, even if it is not so active as it would be in other political and socio-economic terms. Although the absence of systematic actions of politicians can not be noticed: in 2007 it showed up in the low level of GDP -7,3%, growth reduction of profits of population, and record inflation, making 16,6%. Increase of direct foreign investments during January-September, 2007 made $5238,8 million; retail commodity turnover according to annual report made up 318725,5 millions of hryvnyas (about $63 milliards), that is 28,8% more than in 2006.

Year of 2007 showed that the commercial real estate took firm positions among the most profitable and prestigious spheres of business and most active developing industries of the Ukrainian economy. Literally for a few last years to the real estate market pioneers in Ukraine, that began their activity in 1990 joined new Ukrainian companies, largest Russian and international development groups. Besides, years of 2006 and 2007 were marked by forming a set of projects and objects in the real estate sphere by the largest Ukrainian financially-industrial groups. So far serious requests on the development of development business in Kiev and regions have already been made by such large corporations as Interpipe», «System Capital Management», DCH and others. Market unsaturation, its large potential and so far comparatively high profitableness during a few subsequent years will form the promoted interest of large foreign and domestic companies to participate in the development of projects in Ukraine. Business consulting is developing actively in the sphere of commercial real estate. After continuous work in Ukraine of two companies - DTZ and Colliers International, in 2006 the offices opened Jones Lang LaSalle and Knight Frank, in 2007 - Cushman & Wakefield. At the beginning of 2008 about the establishment of its office in Kiev announced company CB Richard Ellis.

If 2-3 years earlier the experts had been rather careful in predicting demand and practically not any player had not been thinking about the volumes that could be absorbed today, then, at this moment, demand in every segment of commercial real estate in Kiev would have numbered thousands of square meters, and the deadlines of saturation would have been postponed till 2010-2011.

At the same time, speaking about plans, projects and basic participants of the real estate market estate in Ukraine, it is necessary to mark out the high level of isolation of information of many domestic and foreign development companies, and also retail-operators which try not to show their presence at the market (at least, to the appearance of the first oncrete results of work), or they give partial information the doesn’t allow to depict objective and whole picture of market development.

Kiev the real estate market in Kiev - the capital of Ukraine with its population in about 3 million people - develops very rapidly. Today for many foreign players Kiev is considered to be a strategic market with the certain level of development, standards, examples of transactions, essential demand on professional areas and the greatest in Ukraine buying attitude of population. At the same time, the capital sets for companies high enter barriers, among which there are relatively small number of indeed good opportunities for development, bureaucracy, corruption in all connected institutions, complications in searching for reliable partners and acquisitions of steading, being put for sale at the second market at hugely overpriced price.

In 2007, as well as in previous 4 years, the most rapid growth rates among the real estate segments were in habitation that on one hand was caused by high consumer demand and on the other hand - high interest of foreign and Ukrainian development companies in the implementation of the most profitable for today real estate segment. Annually to the market of Kiev hatches about 1 150 000 square meters of dwelling areas, that on 50-100 thousand square meters goes ahead the volumes set by the General plan of development of Kiev. In the last 2 years the segment of cottages develops very rapidly. Among the segments of the commercial real estate the most intensive rates of growth were shown by ware-house. Markets of commercial and hotel real estate didn’t outstrip the indexes of 2006 that can not satisfy permanently growing demand. The market of the office real estate in 2007 showed the slump of growth dynamics.

At the same time, in Kiev presently is announced and already being implemented the large number in all of the segments of commercial real estate (the basic mass will be introduced in 2009-2010). The activating factor of development of segments is activation of business, resulting in growing number of foreign companies in Ukraine, expansion of operating and appearance of new Ukrainian companies which need base for starting or further development of own activity.

Events Indisputably, the most spectacular event of countries importance that happened last year and that will influence directly on the development of construction branch and markets of commercial real estate is mutual claim of Ukraine and Poland for holding European Football Championship in 2012. The amounts of work and, accordingly financial resources for preparation for this event really impress. According to preliminary estimations, being in the Government program of preparation to Euro-2012, expenses will make more than $20 billions, 10% of which will be abstracted from the state budget, and other assets (except for the small mutual stake of local budgets) is planned due to the investors.

Among other objects which are needed to be established or brought up to European standards, are objects of sports infrastructure (stadiums, training bases), transport (roads, railway stations, air-ports) tourist (hotels) infrastructures and, at least, in five cities.

Talking about development of commercial real estate in preparation to Euro 2012 it is relevant to say that this period can become big time for some large foreign developers, that are conducting their activity in Ukraine for several years, but having only one, at least announced, request. For example, Hochtief or ENKA with the projects of development of stadiums in Dnepropetrovsk and Donetsk. Peculiar step on advancing the competitors and serious request on participating in realization of large objects of a transport and sporting infrastructure at preparation to Euro-2012 were made at the end of 2007 by an Austrian company Strabag that established multisectoral holding Strabag Ukraine with support of powerful partners: joint owner Strabag - Russian corporation «Base Element» and Ukrainian holding DCH. Among other significant events it is necessary to point out the activation of bringing in the equity of foreign investors through public and private placements of shares. Yes, if during 2005-2006 years there were made only two placements of the Ukrainian developers («XXI century » and VK Development), then in 2007 of such placements was 6: companies «Т.М.М.», «Karavan», «TKS», investment fund of Dragon- Ukrainian Property Development, Clubhouse Group Holdings (Ukrainian operator of new chain of 3 stars hotels «7 Days») and KDD Group (to the holding company of «Kiev-Donbass» group). According to experts, in 2007 Ukrainian developers attracted from foreign investors about $1-1,5 billions of share capital, without debt financing, although it was expected that flaw of resources will made $1 billions. For comparison; in 2006 through public transactions were attracted maximum $300-400 millions.

In 2008 it is expected 4-5 large primary placing of shares by developers, some existing public developers may conduct additional emissions. During one year in Ukrainian sector of real estate may be putted $1-2 billions of new share capital.

Investment transactions In 2007 at the market of the commercial real estate in Kiev were announced 5 investment transactions. 3 transactions are made in an office segment. Two transactions belong to Kazakh investment-industrial group «Eurasia», that entered Ukrainian market due to the purchase of completed object - «Iceberg», class A (developer - company «NEST», sum of transaction of made 104 million Euro, rate of capitalization - 9,5%) and project, being on the stage of realization - NTBC of the II class C (developer - ISA Prime Developments, a sum of transaction is $55 millions). The third transaction was «Podol Plaza» of class A (developer - Demir Group, a sum of transaction is $70 millions). A new owner of the center is the British fund London & Regional. At the end of 2007 the stake of capitalization in the office segment of class A was at the level of 9% (for comparison: in Moscow this index was 7,5%).

Besides «Podol Plaza» the London & Regional fund, that actively creates in Ukraine the list of objects of commercial real estate of various functional purposes, purchased one of the first professional shopping centres in Kiev, which is «The Globe» (the sum of transaction of was $200 millions) and specialized storage-refrigerator «Andakta» ($11 millions).

The beginning of 2008 was marked by completion of transaction in saling logistics complex East Gate Logistic of the OLD Invest Group company. New owner of the complex with a general area 40 00 squere meters become by an Austrian company Akron Group. The sum of transaction made a 35 million Euro.

Trends 1. Not only the market entry, but also realization of projects of some large foreign companies such as ECE, Multi Development, Seven Hills, Acteeum Group, Capital Partners and others. Consequence of such gradual implementation of European experience is gradual forming of compatible civilized market, where the keystone to success of companies is professionalism, experience and objects development practise, relevance and level of worked though conception, technical level of project implementation, possibility of involvement inexpensive loan capital, partnership relationships with large retail-operators, chain brands and etc.

2. Prolongation of active development of regional markets, which allow to conduct activity of Ukrainian and foreign developments companies and retail-operators in more comfortable conditions and terms, than in the capital, and also demonstrate large development potential of all of the segments of the real estate. Today foreign development companies, including international commercial operators (OBI, Auchan, Praktiker, Real), consider regions with population of 200 thousand people as interesting areas for placing theirs objects. In the first place the regional centres develops commercial real estate and connected to it logistics and then hotel segment for business and tourist audiences. Office real estate, according to experts, for the present time develops rather slowly as there is a low demand on it.

3. Substantial annual demand increase at considerable lag of suggestion of professional areas in all segments of commercial real estate. Consequently there is a t is a huge deficit of areas, stably low level of vacant state (1-3% depending on a location and quality of objects), and also permanent growth of leasing rates, that, according to experts will be the same in the following 2-3 years.

4. Gradual decline of level of capitalization that in 2007 made about 2% (indexes in Kiev). For the segments of the office and commercial real estate as of the end of 2007 there are typical such indexes as 8,5-9,5%, while at the end of 2006 the market of the office real estate demonstrated the rate at 10-11%, commercial real estate - 11-12%. On 2008 experts forecast the further gradual lowering of objects capitalization index.