Signposting Kyiv’s Commercial Real Estate Market

By Yulia Sobko, Financial Communications & Investor Relations Manager, The PBN Company, Kyiv

Foreigners visiting Kyiv over the past 15 years have often wondered how people are able to sell or rent office space given that one doesn’t see any FOR SALE signs on the streets. In the 1990s, people didn’t put up signs for fear of racketeers; then people feared tax inspectors checking up on their small businesses. A few years later, the rule of law was increasingly enforced and people were used to paying taxes but FOR SALE signs still did not appear - they were simply not necessary, as demand for high-quality real estate left supply light years behind.

In early 2008, supply of new office space lagged about 95,000 sq m behind demand (only a miniscule tenth of the existing 880,000 sq m was top quality ‘Class A’ offices).  Not surprisingly, rents went up by 16% (to $73 per sq m per month on average) in the first six months of the year. Only the strongest businesses could afford to have an office in Kyiv’s famous Parus Center, Leonardo Center, Horizon Towers or other prime business locations.

However, the market transformed quickly as the crisis hit. By December 2008 over half of Kyiv’s companies had tried to move to cheaper, smaller offices. Tenants became increasingly unreliable as they renegotiated contracts and sub-let to smaller companies. Within two months, most city landlords realized they were in an extremely precarious position, and started offering more reasonable deals. Over 30% of contracts were fixed in hryvnia in response to exchange rate volatility.

By March 2009, companies were renting even smaller offices (1.5-2.0 times smaller than the previous year), and office rents decreased by 20%. Vacancy rates doubled and tripled, scaring landlords all the more - in March, you could rent a square meter of Class A office space in downtown Kyiv for an average of $40-$50 per sq m per month!

Now as they face yet another round of cost-cutting, Ukrainian companies continue to wonder what will happen next, and where the market will be in the medium to long term. That will largely depend on the economic situation, the supply of new office space and the number of new entrants hunting for cheap real estate deals. Will the real estate sector that completely froze in Q4 2008 - zero deals were done - unfreeze?

Market experts DTZ expect a further decline in rental prices. They forecast prime market rents to drop even further to $25- $40 per sq m per month, and would be surprised if any new offices were built before 2011-2012. However, they think that approximately 80,000 sq m of new office space this year will come from converted former industrial and administrative buildings.

Today, one certainly sees a significant number of empty offices, shops and restaurants around Kyiv - but that alone doesn’t begin to describe the extent of the change that has taken place in just over 200 days.  There are signs everywhere - FOR SALE, FOR RENT, URGENT SALE, BUY CHEAP, OFFICE AT 30 HRYVNIA/SQ M.  So times may be tough for Kyiv’s commercial real estate sector, but the market has become more transparent and more affordable as a result, which just goes to show that even this cloud has a bit of silver lining.

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