Kyiv residential market review - with Phil Hudson

Big city appeal Residential real estate bubble shows no sign of bursting anytime soon     Ukraine's residential real estate market seems to exhibit non-stop price rises because the demand for real estate is always high, especially in big cities like Kyiv. However, banks in the country have recently tightened the conditions for receiving a mortgage and this has cut into opportunities for middle-class Kyivites to purchase flats. As a result of this and other inflationary pressures on the domestic economy some stagnation on the residential market has been seen lately. At the same time market insiders believe that the mort?gage market will not have undue influence on prices because demand for Kyiv residen?tial property remains extremely high.   Since the turn of the new millennium the Ukrainian mortgage industry has blossomed and many middle-class people who could not buy a home at once discovered the mortgage services of local banks. "Up to 2003, when the mortgage market began to develop seriously, people saved money and bought one-room flats, then they added money and bought larger flats. With the development of mort?gages people started to buy larger flats right from the outset," recollects Ihor Odnopozov, president of the Kyiv Real Estate Specialists' Union.   Banks suspend mortgage market Mortgages presented opportunities for a lot of people to own their own home despite high percentage rates and strict require?ments to receiving a loan. However, starting from April this year, 5% of Ukrainian banks dealing with mortgage lending stopped giving them officially and a further 15% did the same without making this information public. Other banks increased their interest rates, on average from 15.25% up to 18% and some banks, such as Privatbank and Unicred-itbank raised rates as high as 20% to 25% while shortening the terms of mortgages. These restrictions cut interest in this sort of borrowing very quickly. According to the real estate consulting company Socmart's web site, flat sales dropped two to three times at the end of April, compared with the begin?ning of spring. The basis of the problem lies in not in an overheated market, but in the manner in which the National Bank of Ukraine (NBU) allows banks to engage in mortgage lending. Banks are no longer allowed to cover their long-term lending with short-term borrowing oftheirown.AddressingthenewNBUIawhas thrown banks into a quandary. The mortgage market suffers accordingly, and the consumer thereby.   "Of course, it [changes in terms for mortgage receiving] reduces the number of people who want to take a mortgage, but this hasn't influenced prices yet. However, there is already stagnation on the secondary real estate market," confirms Mr. Odnopozov.   Reasons to be expensive Ever since Kyiv residential real estate prices began to balloon in the final years of the Kuchma regime predictions that the bubble would soon burst have been in circulation. However, these expectations have not yet borne fruit. In the first quarter of this year prices grew by 2% to 5% for most new resi?dential properties and by 5% to 11% on the secondary market. Mr. Odnopozov says that in recent years prices have grown by 20% on the primary market annually. At present one square metre in a new building costs on average about USD 2,500 to USD 3,000 in Kyiv, while in the central districts this figure can reach USD 8,000.   Despite the expensiveness of residential property and a tailing off in the volume of real estate purchases, the market is still witnessing huge demand for apartments. "Prices for flats, both in new buildings and in existing ones, depends entirely on the market. If there is demand, the price will grow or stay at the same level. If there is no demand it will go down. Now we have a significant unbalance between demand and supply with demand exceeding supply by many times over," states Heorhiy Tsagareishvili of property developers XXI Century. He adds that this imbalance is being artificially heightened by the practice of speculative purchases, which are currently thought to make up about 50% of all demand on the market for new buildings in Kyiv and 80% on the market of existing housing.   Demand still serves as a good tool for property owners and their policy of driving prices up. "Kyiv prices for real estate are higher than in many other capitals in eastern Europe due to the existing levels of demand. It is a seller's market and the price is defined by the owner, according to his desire," explains Mr. Odnopozov. Developers and investors are not always interested in increasing the number of construction projects. "A developer under?stands very well that if he builds too much, too fast then he is in danger of undermining his own competitive advantage and creating an environment where people won't be as eager to buy these flats as they are today," explains the president of the Union.   "We looked at the ability of Kyivites to pay for houses and compared that with the ability, for example, of Londoners to pay for property. You would expect to find that the difference between prices and ability to pay would be much higher in Kyiv than in London, but in rela marginally higher" Philip Hudson, Jones East 8   Construction cost blues However, there are objective reasons for price growth which are connected with the growing cost of construction materials, energy and bigger expenses incurred meeting construc?tion workers' growing salary demands. Another troublesome problem which slows down building is the land issue. "Kyiv needs to build more residential properties in order to stabilise prices. Over the next few years market growth will depend on establishing order in the field of receiving permission [for land plots and construction] and on devel?oping clear and transparent rules for the market. It is necessary to hold open auctions and tenders for projects, for more projects to be introduced into the market, and for erverything to be done to allow investors to buy ready plots complete with all the relevant documentation/' shares Mr. Tsagareishvili. He explains that these measures will succeed in shortening project schedules, as today it takes about a year and a half just to get all the rights for the land in order, which scares many foreign investors away from the residential real estate sector.   According to analysts at XXI Century the current shortage of residential space in Kyiv amounts to 16.7 million square metres, and that is if one does not take into account migra?tion into the city. As well as being subjected to an ongoing influx of economic migrants Kyiv is also littered with a large number of old apart?ment blocks and about 30% of these shabby buildings are thought to require demolition. "During 2007 the gap between demand and supply of dwelling areas was only growing. Last year demand grew more than by 60%/' states Mr. Tsagareishvili.   Cozy homes most in demand The greatest and steadiest levels of demand are still for low-end and middle-class apart?ments with a total area about 100 to 150 square metres in the central parts of the city, analysts from XXI Century confirm. Developers are following this trend and increasing their construction focus on this key segment. Mid-range flats accounted for 75% of all projects on the primary market to appear in the first quarter of 2008.   "On the market for new flats the mid-range is the most interesting for consumers and the high-end for developers because the price per square metre is higher there. Low-end projects are popular but are built much less often. The mid-range is affordable for people with middling incomes as well," comments Mr. Odnopozov.   Mr. Tsagareishvili mentions that the domina?tion of relatively modest flats in construction projects demonstrates the improvement of general building quality, though, on the other hand, demand for economy class housing remains unsatisfied. He predicts that the popu?larity as well as the price for most flats will not go down in the next five or seven years.   The bubble won't burst "Despite the widespread idea that the Kyiv residential real estate market is inaccessible to local citizens, in reality it is not so impossible for a middle income local to buy a new flat/' states Philip Hudson, the director of Jones East 8. His company conducted a study into the ability of Kyivites to pay for a new flat, offering a comparative study with people from other European cities. "We looked at the ability of Kyivites to pay for houses and compared that with the ability, for example, of Londoners to pay for property. You would expect to find that the difference between prices and ability to pay would be much higher in Kyiv than in London, but in relative terms it was only marginally higher. House prices in Kyiv and Moscow are more difficult for locals to afford but not to the extent that many people seem to believe. It is not as extreme as one may think," he shares. The figures the company calculated demonstrated that the residential real estate market is rather sustainable and is unlikely to suffer from a lack of demand in the foreseeable future.