Office real estate of Kyiv: supply and demand tendencies

The beginning of 2009 is marked by continuation of rent rates fall and fall of square meter selling price in the market of commercial real estate. Prolonged world crisis allows assuming that even according to the most optimistic forecasts real estate will not start to get out of the price hole before next year. Socmart Company has carried out a research of  Kyiv business centers market, in this article extracts and partial results from the research are given.

General situation in the market. In Kyiv about 110 professional business centers function, their total area is more than 1 million sq. m. During the last half of the year Mikom Palace, Alliance Center, Capital Hall, Inkristar, BC in 172 Horkiy Street, Karat, Fahrenheit, Podol Kyiv, BC in 7 Mykhaylivska Street has been put into operation. On the total during the last year 14 business centers have been completed, the total area of which is 165,000 square meters. There are, according to DB of  declared office buildings of the capital, 52 business centers under construction in Kyiv, the most big among them are: Sky Towers, Premium, Continental, Forum Victoria Park, TOC in Industrialny provulok, World Trade Center, TOC in 57 Tolstoho Street. BC in 105 Saksahanskoho Street, Protasov, Solomiansky are in the last stages of construction. They plan to put into operation more than 20 business centers this year (the completion of construction some of them they have postponed from last year to this one) but it seems unlikely. Most of the constructions are either put on hold or slow building works are being carried. So, according to analysts of Socmart Company, at most 5-6 projects will be put into operation this year with total area of about 100,000 m2. However, if multi-purposed complex Continental has been completed in 2009 (where an office function is planned to be predominant, and that is being built in high gear) more than 200,000 m2 of office areas will come in the market. But for the time being putting into operation of the multi-purposed complex is planned in 2010.

Information about buying of BC Ilyinsky (former name – Lastochka) by German holding Schmidt Investors has become an important event of February. Interest to office real estate of Ukraine the company has shown exactly after the beginning of the crisis and price fall in the real estate market. The price of Ilyinsky Center selling is not publicized. The German holding plans to purchase several assets more in the form of real estate in Ukraine, investing more than 100 million, and the company is mainly interested in buying of business centers of “A” and “B” classes. Business Center Ilyinsky in Kyiv faces Bratska, Ilyinska and Borysohlibska streets in Podil district of Kyiv. The total area of the office building of “B” class makes more than 50,000 m2. According to Socmart data among the renters of the BC are: Europe development company, Foyail Asset Management, Khreshchatyk bank, Ukrsybbank, QBE insurance ompany, Relacom, etc. The new owners of Ilyinsky business center are not going to change the conception of the project cardinally but there is probability that rent rates for some renters will be reconsidered and a part of BC areas will be reconstructed. Besides, Schmidt Investors intend to engage new renters from among transnational companies which the holding cooperates in other countries with. «Ilyinsky» is the first purchase of Schmidt Investors holding in Ukraine.

Business Centers which have been put into operation in 2008 – at the beginning of 2009 (according to Socmart)

Demand tendencies. The research of business center market of Kyiv carried out by Socmart Company has discovered that the most frequent consumers of large office areas are:

- banks and financial centers (HSBC -  1100sq.м. in Leonardo, Nadra bank in Lvivska Brama, Dresdner Bank AG in BC in Instytutska street, Index bank in Kyiv Donbass, Alfa bank - 4296 sq.м. in Forum in Moskovsky prospekt, Pivdenkombank in Business Standard, etc.)

- insurance companies (QBE  - 713 sq.м. in Ilyinsky, Oranta in Euroasia, etc.)

- consulting and legal companies (for example «KPMG» in Barok, «Vasyl Kisil and partners» - 1231 sq.м., «Squire, Sanders & Dempsey» -1150 sq.м, «Colliers International» – 600 sq.м. in Leonardo, Renaissance Capital – 1600 sq.м. in Parus, PricewaterhouseCoopers - 3135 sq.м. in Euroasia, Ernst and Young in Khreshchatyk Plaza and BC in Mykhaylivska street.

- investment funds (Veles Capital in Panorama, Remoso in NEST)

-IT companies (Oracle - 708 sq.м. in Parus, 3 М -2178 in BC Fahrenheit)

- cosmetics and goods for beauty and health (Amway -1348 sq.м. in Euroasia, "Procter & Gamble Ukraine" in BC in Ihorivska street, L'Oreal - 880 sq.м in Horizon Park)

- also big representative offices of foreign pharmaceutical companies (for example GlaxoSmithKline - 1299 sq.м. in Fim Center, Bayer AG - 4000 sq.м. in BC Trio), automobile companies, companies which produce and supply household appliances, electronics, mobile phones, etc.

Some companies prefer to rent a business center  wholly (so called business villas) 7 Mykhaylivska street – Ernst and Young, BC in Turhenivska street – AVK, NTBC - ОТР Bank, ОC in 8/27 Shevchenko bulvar – VTB bank, etc.

Because of the world crisis lots of companies have had to revise their policies and reduce the stuff. The tendency to change an office for less and cheaper one lasts now as well. In the course of the information gathering it was discovered that in nearly all buildings there are vacant offices, often the volume of vacant areas amounts up 20-30%. For example, in one of the central business centers of the capital nearly half of the renters have quitted areas, although RRates have been reduced from 50 dollars per meter to 25 dollars per meter. There are significant vacant areas in other office centers of the capital. BC Dominant does not exist now – in the first floor there is a Chanel shop, the rest of the areas have been attached to Mandarin Plaza shopping mall.  Even more offices are going to get vacant soon. Business centers which have been completed in the last half of the year or are going to be put into operation in the nearest future have especially significant problems with occupancy rates most of them do not have signed agreements even for half of the areas.

Main tendencies of professional real estate market of Kyiv at the beginning of 2009:

- quantity increase of square meters of vacant areas in business centers

- reduction of rent rates both in dollars and in hryvnias. In some BC a monthly rent rate in dollars has reduced twice

- renters migration to smaller and cheaper offices

- refusal of renters to rent parts of their office areas or attempts to sublease them  (in some cases up to 80% of their own offices)

- termination of activity of foreign representations, closing of offices

- significant concessions of business center owners to lessees – rent holidays up to a half of a year, 50% discounts in first months of a rent, bonus free parking spaces, etc.

Generally we can say that the market of business centers of Kyiv gradually becomes “a market of a lessee” (in last three years it could be called “a market of a lesser” for certain). The negative influence of the world crisis will continue for a year at least and we expect further reduction of rent rates. However, after stabilization of the situation in the world economy the Ukrainian market of commercial real estate will continue its development because it has a big potential of growth. Let us remember 1997, when Kyiv rent rates for office real estate of “A” class were about 55 dollars per meter and 40 dollars per meter for “B” class. But after the crisis of 1998 monthly rent rate started to drop and in 2000 reached 20 dollars per meter of “B” class and 25 dollars per meter of “A” class. In summer of the past year, according to Socmart data, RR increased to 75 dollars per meter (“A” class) and 60 dollars per meter (“B” class). The influence of the financial crisis in the end of 2008 declined business in Kyiv sharply, demand for offices in business centers dropped that caused the falling of rent rates. But this process is temporary; in fact the market of real estate, as other markets, is cyclic. So, according to Socmart analysts, one can confidently forecast further development of the market of business centers of Kyiv after an improvement of the situation in Ukrainian economy market.

The author: socMart

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