House of the rising sum

The fiscal year is coming to a close meaning it is high time to make plans for the future and take advantage of the crisis to one's own benefit. Correspondents at Weekly.ua looked into how a multinational company can strike the best deal when signing a lease agreement for an apartment or office space

Office space

James McDowell, the owner of a small media subsidiary in Ukraine, plans to change offices. "We are currently reviewing our budget and plan to rationalize our expenses on leasing office space," he said. The owners of the business centers in which the offices are currently located refused to lower the rent from US $60/sq. m. to the desired US $40/sq. m. Within three weeks McDowell managed to find commercial space in a building in the downtown area for US $18/ sq. m.

Naturally, premises in residential buildings converted into office space are not competitive with professional office space as they do not offer comfortable work conditions (i.e. lighting, air conditioning, uninterrupted operation of office equipment, etc.) and the corresponding level of service (security, parking, etc.). Be that as it may, many businessmen these days have one main priority - surviving in the market. For this simple reason they prefer a more loyal pricing policy over status.

"In most cases the owners of business centers prefer striking a deal with lessees than losing them altogether," Volodymyr Danylenko, Manager of Office Leasing at the Ukrainian Commercial Guild consulting company, noted.

He says the sharp fall in demand has forced lessors to become more flexible. For example, the share of vacancies in professional business centers in Kyiv is currently 13-15%. Before the crisis hit this figure was no higher than 5%.

The rise in vacancies is typical all over Ukraine, though the number of vacant offices in Kyiv is higher than in other large cities.

According to data from the Kharkiv-based consulting company First Capital, the vacancy rate of office space in Kharkiv was at a low of 1.5-2.5% before the financial crisis hit. By the end of 2008, this figure had more than doubled to 3.5-5.5% and reached 6-9% in Q1 2009. According to industry analysts, vacancy rates in Donetsk and Dnipropetrovsk are currently around 10-12%.

This can be attributed to two factors. First, mainly multinationals and Ukrainian companies that had forecast steady growth on the market leased out large spaces in the nation's capital. This is the reason the number of lessees of provincial business centers was higher than in Kyiv.

Secondly, developers in the capital leased out office space hoping to later sell the business center as an operating business. In the regions, office buildings with just a foundation were put up for sale to attract investments and complete construction. This is why the decline in business activity due to the crisis was more tangible in the nation's capital than in provincial cities. Despite this, rent fell both in Kyiv and in the provinces - in dollar terms by 40-55%, in hryvnia by 20-30%. Today the average rent for office space in a business center in Kyiv is

US $15-35/sq. m., in Odesa -

US $17-22/sq. m., in Dnipropetrovsk - US $12-17/sq. m., in Donetsk - $15-18/sq. m., in Kharkiv - US $ 10-16 sq. m. and in Lviv - US $10-13/sq. m. 

Apartments

In the high-end segment many apartments were purchased for further resale at a higher price. Since the sale of an apartment on a declining market has become unprofitable, many homeowners decided to rent out their property. Meanwhile, a rather paradoxical situation evolved - namely, finding property that realistically corresponds to demand with a fairly high level of market supply has become rather difficult.

Natalia Pronina, Director of the Strategic Consulting Department of Knight Frank, said more than 80% of the apartments offered for rent are decorated in a classical style closer to the Slavic heart and soul with gilded ceilings and different curls or ringlets despite the fact Americans do not accept this style at all. Specialists say many potential lessees do not even look at apartments decorated in the classical style.

"Despite this, potential lessors continue to trim apartments according to their preferences, rather than those of potential buyers," says Pronina. Furthermore, pre-revolutionary buildings and those built during the Stalin era are also not high in demand. As a rule, lessees are not satisfied with the stairwells in such apartment buildings as they are simply not aesthetically pleasing. In addition to that, there are no elevators and "parking on the street", meaning "first come first serve".

Moreover, the excess supply led to a drop in rent by 30-35% in the luxury segment and 40-45% in the business class. Lyudmila Druzenko, General Director of the Real Druzi real estate agency network, said the rent for luxury apartments with 100 square meters is on average US $1,700 to $3,500 per month.  

Apartments with 120-150 sq. m. of space can be rented for US $2,500-4,000 a month. Leasing a 3-room apartment or more in a luxury condo go for US $3,000+ a month. Industry experts note the level of rent fluctuates depending on the parameters of the building and the residential area in which it is located. For example, a 3-room apartment in the residential complex at 20 B. Khmelnytskiy St. goes for US $5-7,000 a month and in the residential complex at 13 Staronavodnytska - US $4-5,000 a month. Among the most expensive units available for rent today are 3-room apartments with 220 sq. m. in the residential complex Sofiyivkska Brama (St. Sophia Gates) for an exorbitant US $15,000 a month. Rental rates of apartments in the business class in Kyiv are on average US $450-600 a month for a 1-room apartment, US $550-800 for a 2-room apartment and US $650-1,000 for a 3-room apartment.

The prices of luxury real estate have fallen all over the country, though each region has its nuances. Natalia Shkileva, First Vice President of the Kharkiv-based Ukrainian Realtors' Guild, says luxury property has fallen 30% in the dollar equivalent, while demand for rent up front has fallen drastically. A luxury condo in Kyiv is US $500 for a 1-room apartment, US $1,200 for a 2-room apartment and US $1,500-3,000 for a 3- and 4-room apartment respectively.

According to the president of the Titul Group Telman Abbasov, the rent for a luxury apartment in Odesa remains at the same level as last year: US $800/month - 1-room, US $1,200/month - 2-room and US $2,000 - 3-room. "This is a resort area and the proximity of the airport to the seaport plays a major role", he explained.

According to data of the Herz company, rent for apartments in Donetsk fell only in the dollar equivalent and remained at the previous level in hryvnia - UAH 12,000 a month for a 1-room apartment and

UAH 25,000 for a 3-room. The football teams Metallist and Shakhtar guarantee a stable demand for high-end real estate in the city.

Cottages

Suburban real estate (i.e. cottage country) is demonstrating the same trends inherent to the urban luxury property market with rent having fallen by 15-30% over a year.

In Koncha-Zaspa, one of the most popular residential areas in the Kyiv Region for foreigners and well-to-do Ukrainians, a cottage can be rented for an average of US $30,000 a month. Before the crisis hit the rent started from US $40,000 a month.

You can find cheaper cottages 5-12 kilometers outside of Kyiv in the direction of Zhytomyr for US $8-12,000 a month.

In the regions the supply of luxury cottages is limited and the demand is also quite low. For instance, in Donetsk you can rent a luxury cottage for US $5,000 a month, but so far there are no takers.      

In Kharkiv, where the supply is 7-8 times higher you can rent a cottage 300 square meters in area with a swimming pool, sauna and other amenities for a mere

US $2,000 a month. A word of wisdom to potential lessees

The financial crisis broke the market in favor of lessees. So, why not jump on such an opportunity to optimize your family budget? Naturally, not all lessors are prepared to come down in price, though they may offer certain privileges that were simply unfathomable prior to the economic recession.

Given this, a lease holiday service (or a rent-free period) was introduced on the commercial real estate market wherein a lessee undertakes renovations of a premises and the lessor pays for the finishing touches.

Yehven Razumniy, Manager of the Corporate Clients Department of Colliers International (Ukraine), said setting a currency corridor in a lease agreement to protect the company from currency risks that are inherent to Ukraine is a common practice.

Spreading out payments over the entire term of lease make the interest rate in the first year of the lease as low as possible and the rate gradually increases (a so-called step deal) to the set amount in a lease agreement, a option many find attractive. This allows a lessee to carry over a part of the financial burden of lease payments for an extended “post-crisis” period. "There is no standard universal scheme for negotiating the lease of office space. In every deal there are specific circumstances that must be taken into account when negotiating with a lessor," Razumniy noted. 

When renting a space, keep in mind that realistic deals can be made for 15% less than the set price. Industry experts advise that all nuances and agreements with a lessor be included in the contract.

"It is critical to include all the details in the lease agreement in advance. For example, when and under what circumstances the landlord visits the apartment, are you allowed to have a house pet, can you smoke in the apartment, in what currency will you pay the rent and on what date, etc.", Pronina noted.

The expert recalls one incident when the landlord/landlady told the potential lessee that if the rent is delayed for one day the next day he/she will change the locks on the door. Naturally, the deal did not come to fruition.

Realty experts advise signing an act of conveyance and acceptance when renting an apartment. Such an act is an integral part of a lease agreement. The condition of the apartment being rented and the furniture in it must be indicated in the agreement.  A properly drawn up act will protect the lessee from possible property damage claims.

Peace of mind

Experts are cautious in their forecasts of the growth of the market for leasing office space and apartments. On the one hand, the pace of declining rent has considerably slowed, demand is gradually on the rebound and business activity is on the rise. On the other hand, there is a high probability that the national currency will continue to devalue and macroeconomic indicators will worsen.

In the most optimistic scenario the leasing rates of office spaces will remain stable and the construction of new hotels will experience an insignificant decline, which will have little impact at the mid-market level.

The leasing rates for luxury residences will also remain stable with fluctuations of +/- 0.5% a month, though the volume of high-end offers will considerably fall by November. The lull on the market will come to an end within the next 6-12 months. However, in the worst case scenario the market may experience a second wave of the crisis, which will force lessors to come up with new ways of hitting their target audience of potential lessees.

COMMENTARY

Olha Perkovska

Manager of the Leasing Department of the Real Druzi real estate network

In order to avoid a myriad of unpleasant situations in the process of renting an apartment, a lessee should follow some simple rules. First of all, he should review the original documents regarding rights of ownership of an apartment offered on lease (i.e. agreements on purchase and granting of property, a deed of the right of ownership, etc.) and a document certifying the owner's identity (i.e. passport). Secondly, when signing a lease agreement the object of the agreement must be fixed, the rent should be set, the parties to the agreement shall be indicated, the terms and conditions of annulment of the agreement, the conditions of payment, rights, obligations, liabilities of the lessor and lessee, force-majeure circumstances and the requisites of both parties must be indicated. Also, the act of conveyance and acceptance appended to the agreement must include a technical description of the premises and the condition of its property. There should not be any additional verbal agreements with the lessor that are not reflected in the agreement. In the event of a dispute it will be impossible to prove otherwise.

Radomir Tsurkan,

Managing Partner at CB Richard Ellis in Ukraine

Given the current fierce competition, many owners of business centers are ready to make the finishing touches for a lessee or cover their expense. In addition to that, it is worth noting that due to the sharp drop in demand many spaces in business centers that are ready for business have been vacated. Naturally, this simplifies the task of a potential lessee finding office space. Another option is sub-leasing. In this case, the sub-lessee can find a space of the required size that is finished and furnished with equipment, though the latter depends on exclusively on the conditions of the sub-lease agreement.

Jane Swanson

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