Ukraine's Klondike

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Booming Real Estate

Although one of the youngest sectors of the Ukrainian economy, Ukraine's real estate market is also one of its most dynamic. At the same time, the majority of potential foreign investors don't realize that their returns on investments in this segment could reach an unprecedented 35% annually!

Fortunately, the sad legacy of the Soviet era when private businesses and landowners did not exist has become a thing of the past. With the advent of the contemporary period of Ukrainian history, spacious flats and attractive houses, comfortable offices and convenient commercial centres are swiftly replacing the cramped, studio-style hotel rooms; the massive, grey, State-run factories as well as old, inconvenient, awkward shops.

Contemporary Ukrainians have come to expect higher living standards and require more from their homes, commercial centres and hotels. In addition, the character of the political and economic life of Ukraine has changed, especially in the domain of international contacts. The introduction of foreign partners into the Ukrainian economy and the experience of other countries in Ukrainian real estate have had a direct impact on the volume and quality of this market. As a result, the first signs of successful investment projects had already appeared by 1992-94. Furthermore, today's market offers plenty of opportunities for new investors, while positive trends in the national economy promise low-risk investments.

Golden Opportunities

The last four years have seen confident growth in the pace of the development of the Ukrainian economy. The recent significant growth in the GDP and industrial output meant that 2004 was no exception. In 2004, income tax dwindled to a flat rate of 13%, while in 2005, the VAT is expected to be reduced from 20% to 17%. Ukraine's imminent joining of the World Trade Organisation (WTO), anticipated as early as in 2005, only reinforces her economic allure. This step presupposes the changing of Ukrainian legislation to meet the standards of the WTO and EU.

In 2004, the volume of foreign direct investments (FDI) in the Ukrainian economy totaled over USD 1.4 billion, surpassing the 2003 figure of USD 1.1 billion. Kyiv, the capital of Ukraine, is a remarkable focal point of international political life as well as the most economically developed city of the country, annually receiving about 35% of the overall FDI. This is why, despite the progress of recent years, new residential buildings, offices, commercial centres and first-class hotels are still needed here. Despite recent significant projects with foreign and Ukrainian investment, such as the Premiere Palace in Kyiv and the Donbas Palace in Donetsk, the potential of this market segment is far from exhausted. However, the experts only recommend hotel investment for corporate, rather than private, investors.

New Homesteads

As they say, 'my home is my castle', so it isn't surprising that lately the most active construction, particularly in Kyiv, has been in the housing sphere. It comprises a variety of flats, from modest studio flats to huge, luxurious flats outfitted almost on a par with Western standards. This development is driven by the growth of the middle class on the one hand and the annual influx of hundreds of thousands of people to Kyiv on the other hand. The new mortgage law as well as government loan programmes have stimulated the number of people wishing to buy housing. However, the experts recommend keeping a close eye on this market, since it could fall at any time.

In the opinion of the real estate expert Francois Demers, the most promising projects are new forms of housing. These include modern, hotel-like buildings containing 25-75 flats with kitchen and amenities ideal for students or visiting business people and residential complexes geared for a specific clientele, like the recently constructing Diplomat Hall on Zhylyanska Street. And he considers the most interesting projects for large-scale investment to be those that create new housing estates and residential complexes on 3-to-5-hectare plots. We're not talking about traditional multi-storey blocks of flats but rather cosy houses with plots of land and a developed infrastructure with shops, cafes, a church, a school etc. Kyiv's suburbs (Boyarka, Brovary, Irpin) provide ideal places for such residential complexes. "In the history of every city, "says Mr. Demers, 'it is always possible to observe migratory fluctuations, so if today people gravitate towards the centre, in ten years they will start to leave it. This will be especially true of Ukrainians, who are fond of land?. It would be reasonable to add that numerous representatives of the political and business elite are already moving to private houses in the Obolon, Borschagivka and Kharkivskiy districts, in the Koncha Zaspa village and so on.

In the housing sector big realtors work mainly with foreigners, and if not long ago the majority of foreigners coming to wok in Ukraine were single, nowadays most people bring their families with them. The demand for detached private houses is much higher that for apartments, and people don't want luxurious mansions made of marble but high-quality, comfortable houses with land and playgrounds for the children.

The Mother Lode

Business centres represent another interesting segment of the real estate market. Accordingly, 2005 may see the appearance of around 150,000 sq m of class A and B office space in Kyiv. The number of recent successful investment projects such as Lybid Plaza and Artem Business Centre still leave room for newcomers: even in Kyiv, a significant number of offices are still located in at least 10,000 converted flats. There is one more interesting trend: many companies would like to have their offices in districts far from the downtown area where the cost of land is significantly lower. The popularity of Podil Plaza confirms this preference. Another definite highlight of the coming years will be shopping centres, which experts say have the potential to grow by 250, 000-3000, 000 sq m. The Kyiv City Administration is planning construction of underground shopping centres similar to Kvadrat and Globus in every part of the city. New supermarkets will undoubtedly be in popular demand elsewhere in Ukraine, where this market is just developing.

Ukraine has vast investment potential, the Ukrainian legislation allows foreign citizens and Western companies to own non-agricultural land. Of course, the success of any given project depends upon proper management. This is why experts strongly recommend finding reliable Ukrainian partners who will help direct the course of operations. Real estate experts stress the importance of knowledge, trustworthy partners and being aware of the business fraud that, unfortunately, has occurred in Ukraine. But with all that said, both the extraordinarily high profit margin (25-35% annually) and the relatively low level of risk under the current conditions of a growing economy represent a real godsend for the modern businessman. It's time prospective investors woke up and took a closer look at Ukraine.

Panorama 1/2005