Having passed recession of 2009 Ukrainian economy is coming back on the way of recovery. Construction industry is not an exemption. Here growth rate accelerated and reached 11.1% YoY in 2011. For 2002-2008 sector volumes more than tripled demonstrating growth by 25.2% annually. Despite sufficient current growth rates market volume in monetary terms is still far below pre-crisis numbers, mainly due to devaluation of national currency by 48% that occurred in late 2008.
Around USD 8.7 bn or 17.7% of total inward FDI which came to Ukraine represents construction and real estate sector indicating fundamental interest in the sector by foreign investors.
Construction sector demonstrates huge potential for
growth, first of all due to low rates of existing stock
per capita (23.3 m2 per person) and dated residential
housing. Besides, a share of construction in GDP
structure of Ukraine equals only 3%, while world average
figure is about 13.4%.
Based on market requirements, the construction and real estate market can be basically classified into the following classes: residential, non-residential (retail, office, warehouse, hotels) market and the market of construction materials.
After deep downturn in 2009 residential construction market is showing signs of recovery. In 2011 there were completed about 82.7 thsd apartment units or 9.4 million m2 of housing stock, while the total area of stock reached 1,089 million m2 by the end of 2011.
The number of constructed apartment units rose from 2002 to 2008 with CAGR of 39%. According to Ministry of Justice size of market in monetary terms concerning apartments and houses purchase deals increased by 7.1% in 2011 reaching USD 19 bn. The number of deals rose by 10.6% to 491.7 thsd, while deals on mortgage equaled only 7% of total, which is quite a low rate in comparison with other countries of the region.
Residential construction is characterized by some geographical imbalances between metropolitan area of Kyiv, Kyiv region and other regions. In 2011 the share of Kyiv and Kyiv region amounted to 27.1%, with another 27.7% of residential construction performed in Odesa, Lviv, Ivano-Frankivs’k regions and the Crimea, while the part of heavy populated eastern regions is quite low.
Prices for residential housing in Kyiv gained impressive 43% annually for the period of 2002 and mid of 2008 when they reached historical maximum. As a result of decline in economy and reduction in demand as well as devaluation of Ukrainian currency a downward trend in house prices has been observed in the following periods stabilizing in 2011.
Average floor housing space per person in Ukraine remains low compared with other countries in the region demonstrating potential for growth and demand for residential housing.
Kyiv, Kharkiv, Dnipropetrovs’k, Donets’k, Odesa and L’viv are major Ukrainian cities, which have been attracting particular interest from retailers, developers and investors. Nevertheless major activities in commercial (non-residential) market just as in case with residential market are concentrated in Kyiv and Kyiv region.
In 2011 total existing modern retail stock in these six
cities exceeded 2.6 million m2, on average amounting
to 200 m2 per 1,000 inhabitants.
Modern retail stock in Kyiv has risen from 2006 to 2011 with a CAGR of 20.8%.
New supply was limited to two shopping centers (55 thsd m2) in 2011 and reached 478 thsd m2. It is expected that 185 thsd m2 will be added in 2012. In 2011 such brands as Christian Dior, Ermanno Scervino, GAP, New Yorker, Oysho and others were launched in Kyiv.
The retail property market throughout Ukraine remains largely underdeveloped in terms of its saturation and variety of formats in the existing properties (retail parks, fashion outlets).
In 2011 there was completed 170,865 m2 of quality office space. This was higher than new ones over the last three years (total office stock 1.3 million m2). During 2006-11 Kyiv office market experienced growth by 17.5% annually. In 2012 about 270 thsd m2 is expected to enter the market. This will be the largest completion volume on modern office market. Despite significant growth in recent years Kyiv’s modern office stock remains low. Office stock per capita is one of the lowest in Europe, indicating significant potential for further office sector development.
New supply of warehouse stock was comprised of 150 thsd m2 in 2011, which is about the same as in 2010. Total stock of modern warehousing and logistics in Greater Kyiv area reached 1.3 million m2 by the end of 2011.
The Kyiv hotel market comprises of 79 hotels (totaling 1,731), 47 of which are classified hotels (1-5 stars). The number of hotel rooms per 1,000 inhabitants in Kyiv stands at 2.7, which is far below the level of Warsaw – 6.3 or Bucharest – 6.
In 2012-2014 perspective, it is expected that several more high-end hotels under international operator management will be built in Kyiv. Those include: Fairmont (five-star, 259 rooms already operating), Hilton (five-star, 257 rooms), Swissotel (five-star, 513 rooms), and Holiday Inn (four-star, 210 rooms). Currently, there are a total of 19 three-star hotels in Kyiv and only few of them are managed by international operators.
Global financial turmoil of 2008-09 had direct influence on decrease in real GDP of Ukraine, personal wages, increase as well as decline in private consumption. Demand on commercial property has contracted as well, which reflected on vacancy rates.
Real wages growth and improved bank lending activity stimulated retail trade growth by 14.7% in 2011 compared to the same period of 2010. In 2011 the total retail market amounted to USD 84 bn. Currently demand for modern retail space in Kyiv shopping centers slightly exceeds supply. This is evidenced by a low vacancy rate of 2.1% in operating shopping centers. Many successful shopping centers have no vacant space, and there is a waiting list of potential tenants. The Kyiv retail market remains fundamentally undersupplied in comparison to other European capitals.
Primary market-wide vacancy on the Kyiv office market
reached 15.8% in late December 2011, increasing
from 12.7% at the end of 2010, but remaining
lower than 17.4% registered at the end of 2009. The
increase in vacancy at the end of 2011 was mainly
due to recently delivered projects, significant amount
of which was not as yet ready for practical occupation.
Low supply of new premises and increasing demand for warehouse premises pushed the vacancy rate from 17.9% to 15.7% in first half of 2011. As a result of retail turnover growth and retail/logistics operators’ expansion increase is expected in demand for warehouse premises.
In 2010 the number of foreign tourists to Ukraine increased by 2% compared to 2009. According to Ukrstat in 2010 the number of foreign guests comprised 21.2 m people. It is worth mentioning, that typically demand for top-end segment hotels is driven by foreign travelers. According to Boryspil Airport data passenger traffic reached 8.0 m people in 2011 increasing by 19.4% YoY (2010: 6.7 m). The growth of passenger traffic of the county’s main airport proves gradual business activity recovery in Ukraine, and Kyiv, in particular. As a result, increased demand for hotel rooms lead to increased occupancy in highend hotels, on average, up to 60%.
Prime yields on Kyiv commercial property remain the highest in the region.
Total value of M&A deals on commercial real estate in Kyiv comprised about USD 400 m in 2011, which is twice as much as the previous year.
After decline in 2008-2009 the market of building
materials shows signs of revival due to recovery
in construction sector as a whole and realization of
various infrastructure projects due to preparation for
European Football Championship, in particular.
In 2011 production of cement in Ukraine increased by 10.7% corresponding with growth in construction sector. If growth dynamics in production of cement continues the sector could reach pre-crisis level in 2-3 years.
According to research of Personal Analytical Unit
88% of the cement market of Ukraine is under control
of foreign groups: Eurocement, HeidelbergCement,
Lafarge, CRH, Buzzi Unicem – Dyckerhoff. In
order to improve competitiveness of its cement units,
the groups are heavily investing in modernization and
expansion of production (investments in the cement
sector equals EUR150-200 m annually).
Development of a new segment on the market is expected to take place. It will be small plants with capacity of 300 thsd tons of cement per year. They will reduce the price of cement products in remote areas through the establishment of a regional network of small facilities.
Construction in most cases is performed on debt
funds. That is why financial crisis of 2008 in banking
system had direct impact on construction sector
where a lot of companies shrunk and some were on
the brink of failure.
At the same time majority of purchases of residential housing were made using personal funds of buyers. After 2008 high interest rates and short maturities of up to 5 years were the basic reasons for the low level of housing loans.
Improving liquidity in Ukraine’s banking system
seems to have its positive impact on the real estate
market. Decreasing interest rates and increasing
loan-to-value ratios indicate some improvements in
terms of financing for borrowers. Besides, new types
of financing are emerging, such as financing leasing
of real estate, for example.
Kyivmiskbud, T.M.M., Poznyakyzhylbud, Consol, Stolitsa, K.A.N. Development, UDP, Osnova- Solsif are among major players on the market of residential and commercial construction of Ukraine, while Altkom, Azovinteks, Mostobud, Kyivmetrobud are active in industrial construction. Overviews of major players active on the market are presented below.
TMM is a vertically integrated real estate developer
and construction company of the full scope.
TMM has been operating on the Ukrainian market
of real estate construction since 1994 and is one of
the leading real estate developer and construction
companies in Ukraine.
The Company’s projects are presented in Kyiv and Kyiv region, Kharkiv, Zhytomyr and the Crimea. As of today the total area of 32 projects completed by TMM during 1994-2011 is over 600 thsd m2 Current portfolio of 34 projects valued at USD 415 m by CBRE as of end of 2010.
In 2007 TMM entered international equity market. As a result of the placement, TMM attracted USD 105 m and was assessed on USD 800 m by market at the placement date. Revenue for 2010 totaled USD 51 m.
Holding Company “Kyivmiskbud” was created based
on assets of state utility construction corporation Kievgorstroy
in 1994. Joint Stock Holding Company
“Kyivmiskbud”, through its subsidiaries, engages in
the businesses of housing, construction, real estate
selling, repair and facility management, communication
equipment organization, computer technology
services, medical services, and hotels.
In 2011 Kyivmiskbud as a customer and contractor in the operation completed 213 thsd m2 of residential housing or 2,799 units of apartments, which is about 15% of the total housing construction in Kyiv. Being a general contractor of reconstruction of The National Sports Complex “Olimpiyskiy”, which hosted the final of the European Football Championship Euro-2012, the Company finished the stadium in 2011 as well. The revenue of the Holding Company equaled around USD 250 m for the period.
Altcom is a financial industrial group, headquartered
in Donetsk and represented in 12 regions of
Ukraine as well as overseas. The group is interrelated
chain of enterprises, involved in works from
extraction, production and conversion of raw materials
to accomplished stages of prospecting, designing
and building industrial and civil objects and
also building of roads with different level of complexity.
Company is a general contractor of a number of objects being constructed in Ukraine for hosting EURO-2012. Among them international airports in Lviv (project cost is USD 293 m) and Donetsk (USD 285 m), stadium in Lviv with 34 thsd spectators’ seats (USD 288 m), highway Lviv-Krakovets (length of 84.4 km, USD 512 m) and other major highways in Ukraine. Altcom actively works on external markets: highways in Romania and a vehicle bridge in Turkmenistan. The Company has also successful experience in construction of residential complexes primarily in Donetsk. In 2010 Altcom put into operation 58 thsd m2 of dwellings. As of mid of 2011 Company’s backlog of business orders was assessed as USD 2 bn.
Local players prevail on construction market of Ukraine, while international companies dominate on the market of building materials, where 12 out of 15 operating cement plants in the country are under the control of international holdings.
The central executive body in the field of construction
is the Ministry of Regional Development, Construction
and Housing and Communal Services of
Ukraine (hereinafter referred to as the “MRD”).
Additionally state architectural and construction supervision and control is conducted by SAI and its local divisions.
There are several industry-specific laws in this field
in Ukraine, namely Laws of Ukraine “On architectural
activities”, “On foundations of the city-planning”, “On
regulation of city-planning activities”, “On the liability
for offences in the field of city-planning activities”.
Beyond this there is a big amount of substatutory legislative acts, including regulations of Cabinet of Ministers of Ukraine, MRD’s orders etc.
With regard to the specific character of the field one also needs to consider legislation of Ukraine in the field of real estate in general and land particularly.