Office Space

Economic News

22 Jul 2010
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After several years of growth, prices for Kiev's office space have soared, as demand from growing businesses outstrips supply by a considerable margin. High prices can bring high margins for investors. Investors should take note that risks are abundant, and many obstacles remain to creating a developed, transparent market.

Foreign interest in Ukrainian property shot up following the Orange Revolution almost 2 and a half years ago, when Ukraine was vaulted into the international spotlight. Development in Kiev has not been able to keep up with demand, particularly in the Class-A sector, and vacancy figures in the segment are miniscule.

Sergey Korol, head of the commercial department for Ukrainian developer NEST, told OBG, "The city's central business district is quite small compared to other capitals and land ownership and building codes can be pretty strict. Local and international companies are growing and demanding more floor space. A year ago, the average request was for 150-250sqm. Now, at least once a week we get requests for amounts several times larger than that. Demand just cannot be satisfied."

Though office space remains the most developed real estate sector in Kiev, stock is only around 600,000 sqm - well behind other Central and Eastern European capitals. Warsaw, for instance, has over 2.3m sqm of office space. There is some hope that industrial space within the capital can be re-zoned to address this need, as industries are moving outside the city, but such developments are slow, and fraught with political difficulty.

Additionally, Ukraine is burdened by a legal system that has fostered procedures for land acquisition and building permits that are of Byzantine complexity. Some industry insiders say this situation has gotten worse, as Orange enthusiasm wanes and significant legislative reforms to the sector have not been undertaken. Austrian firm GLD Invest, which develops warehouses and office complexes, told OBG that the market is riskier today than when the company first arrived, and issues of red-tape and corruption are worse than they were before.

But a rise in the number of institutional investors indicates the market is maturing. Ruslan Oleksenko, a managing partner of Kiev-based commercial real estate services firm DEOL Partners, told the local press that the wave of venture capitalists and speculators that initially entered the market post-Orange are giving way to foreign institutional players looking for professionally developed products.

Indeed, deals last year included the purchase of the Leonardo Business Centre and Univermag Ukraina retail facility by Ireland's Quinn Group. "The latest transitions and acquisitions show that foreigners are serious about this market," Korol said.

Another good sign for the industry is the increasing amount of capital and more favourable terms banks are extending to developers. "Three years ago finance was much more difficult [...] but we have gradually seen banks understand our business and its potential more and more," Korol said. With the increase of foreign participation in Ukrainian banking, this should be on the rise. Local banks are particularly drawn to the business centre concept as leases can generate cash for banks.

This compares favourably to other markets in the region, said Clemens Lehr, managing director in Ukraine for Austria's GLD Invest. "Accessing funds is easier in this market than in other markets, but significantly more expensive. The offset is that the margins on yields are much higher."

But as one developer wryly observed, "Because money is more accessible, bribes have had to be larger to get the job done, as well as the fees for 'problem solvers' in the market." According to industry insiders, securitisation is also much more difficult and requires the pledging of significant assets, leading to more risk for developers.

And risk comes from many sources. There is a dearth of experienced project managers and construction companies in the market. Likewise projects can be stalled right up until the end of a project, as a host of building certificates and permissions must be obtained, and performance boards satisfied.

This leads most foreign companies to look for local partners with local contacts to manage tax and office setup issues. The same applies to developers. According to Korol, "[foreign developers] have approached various Ukrainian companies. Most are not prepared to enter the market alone and are looking for Ukrainian companies for joint-ventures."

The upshot is that if a company comes into the market, well researched, and budgeted to accommodate potential hazards, it can succeed in the Ukrainian market. As Lehr told OBG, "delays should be expected and accounted for. This is done by organization and doing one's homework. But you can make money in this market."

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