What property remains in the focus of investors in Ukraine and globally
14 December 2020

COVID-19 crisis has a specific impact on every segment of commercial real estate. Though, it is a question whether investors should expect the price collapse as a result. What property will remain in the focus of investors and how COVID-19 has influenced investments in property in Ukraine in the recent expert column. 

There is a common belief that a crisis is the best time for acquisition as usually asset prices decline significantly. Institutional investors consider real estate as a more justified option to save their capital compared to the stock market, which is more volatile as the company value can change suddenly in case of a dramatic decline in stock prices.

Compared to Asia and the USA, the European market feels better in terms of deals. 

Commercial property is more conservative and more stable compared to other sectors of the economy. The Coronavirus pandemic shocked the global business community. As a result, the volume of investments declined. Compared to Asia and the USA, the European market feels better in terms of deals.

According to Colliers International, the volume of investments in Central and Eastern Europe dropped by 32% and equaled to 50,1 billion euros. Within this market, only Germany and Denmark demonstrated growth more in terms of deal value, but not its number.

Investment in the office market dropped by 18%, retail – 4%, warehouses grew by 2%, apartments – by 13%. The latter is a result of several large institutional deals – Brackstone bought British operator of student houses for 5,3 billion euros, German Fund ADO acquired German operator of apartment Adler for 5 billion euros.

Discounts today are within 5% – 10%. If the recession does not last long, we expect that there will be a deal slowdown with a slight price decline, though. It is related to cross border deals due to travel restrictions.

The value of both listed and off-the-market property in Ukraine almost has not changed.

Still, it is complicated to forecast how the Ukrainian commercial real estate market will respond to the crisis in the future. Though, we do not expect a dramatic price decline, which we witnessed during the 2008 and 2014 crises, even in case of unfavorable conditions.

The real estate market responds slowly to new stresses. The market players need time to evaluate losses, level of decline, and prospects of recovery.

What do we see today? After six months of a lockdown in Ukraine, the value of both listed and off-the-market property almost have not changed. After careful analysis, investors, who are looking for property to purchase, understand that prices declined a little, level of income slightly dropped, payback period grew but not dramatically.

We see a completely different situation compared to 2008 and 2014. First of all, investment activity resulted from a large number of collateralized assets offered by banks. Thus, some real estate players significantly accumulated assets and even became leaders in specific real estate segments.

Since 2014 there has been a lack of bank loans for development projects. Those commercial projects, which are under construction or at the stage of the design, were developed with private equity. Operating projects, provided with loans by 2014 and which could not maintain and pay them back, were sold. That is why there is no reason to expect an asset sell-off.

COVID-19 crisis came to Ukraine during the period of growth. In 2019 new investors started to consider Ukraine as an investment destination. Some of them were ready to invest $ 100 million in projects. Today the majority of investors have put their decisions on pause. They keep monitoring the market.

Local investors remain more active. They prefer income-generating assets to bank deposits. Ukrainian investors are ready to consider projects of $5 – $20 million.

Foreign funds also analyze and keep looking at the projects. In case there are no global stresses in the future, we expect activity will restore during the upcoming year.

Kyiv office market has overcome the lockdown period with minimal losses.

One of the main challenges of landlords all over the world is the willingness of the tenants to make offices flexible. Though, despite the opinions that the office era comes to its end, the Kyiv office market has overcome the lockdown period with minimal losses. Still today, it remains the most stable sector for investments.

At the end of 2019, developers announced the delivery of a significant amount of the new office spaces by 2020. It is about 230 o00 m2. Most of them will be postponed to 2021 – 2022 y.y., though. The real volume of new supply by the end of the current year will be 105 000 m2, the same as the last year.

During 2010 – 2015, there was, on average, 120 000 m2 of new supply. At the same time, takeover outpaced this level and reached about 130 000 m2. The same level of takeup remained (on average, 140 000 m2) during the following years. During 2015 – 2018, the new supply decreased to 50 000 m2. Only in 2019 and 2020, it increased to 120 000 m2 per year. As a result, we witnessed a record low vacancy rate, which was 7%.

The office market met COVID-19 in good condition. Even though flexible and remote work indicated the year 2020, we believe that the office sector will recover fast. We expect the new supply will be delivered with small volumes with proportional take up while the economy will recover. High-quality projects will be on-demand for large and long-term tenants.

Almost all retailers opened their stores after lockdown.

Experienced, after the previous crises, the landlords and tenants were ready to find win-win solutions. Operators of shopping malls made everything to keep tenants and focused on clear communication with the tenants. Almost all retailers opened their stores after lockdown. Recently the entertainment segment started to operate. Shoppers have returned to shopping malls. Even though they visit retail centers less often, the growth of the average purchase amount makes a balance.

Investments in the retail sector. There is a high likelihood that there will not be any investment deals in the short run. After careful evaluation of risks, potential investors prefer deals with a considerable discount. Operators are not ready to make any discounts believing that the crisis is short-term, and soon they will see a pre-crisis level.

The logistics sector remains the most crisis-proof. 

E-commerce was a key driver for the sector’s growth before the quarantine. Lockdown accelerated this trend. The Ukrainian market is expecting growth in the rental rates for warehouses. Despite the almost zero vacancy rate, rental rates do not grow. The best projects ask $5/m2 while the construction costs are $500.m2. Thus the development of new projects still does not look very attractive. There are developments of new warehouses for personal needs or specific tenants. The logistics sector remains prospective. We do not know when to expect real growth.

The hospitality sector responded to the lockdown and COVID-19 crisis with the most significant losses.

In new conditions, it is the most complicated sector in terms of management and income-generating. Taking into account net operating income, capitalization rates, the real value of the projects hit a new low. Even though there are many requests to buy hotels, owners are not ready to sell them for a price lower than construction costs. The legalization of gambling in Ukraine will be a lifeline for hoteliers.

There is high uncertainty in forecasts given that nobody knows the further restrictions and steps of countries: strict lockdown or more liberal methods of fighting COVID-19. The development of the local economy depends on the actions undertaken by the government. In case there will be a lack of rigorous measures toward quarantine strengthening and, as a result, dramatic deterioration of the economy, we can expect a gradual recovery of the markets in 2021.