Commercial and Residential Real Estate in Ukraine Current Status

Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua COMMERCIAL AND RESIDENTIAL REAL ESTATE IN UKRAINE CURRENT STATUS AND DEVELOPMENT TRENDS ECONOMIC OVERVIEW The results of Ukrainian economic development in the first half of 2004 can not be underestimated. Last year the country faced the facilitated growth rate of macro-economic indicators. The amount of direct international investments in the Ukrainian economy has grown substantially, speaking for the increasing interest from the side of foreign investors. Besides, the Parliament of Ukraine have approved of a number of important legal statutes aimed at further liberalization of the economics. Unfortunately, the 2004 president pre-election campaign made a negative effect on the Parliament activity in 2003; and adoption of several legal statutes was blocked. According to preliminary calculations, the GDP in the year 2003 was equal to 8,0% exceeding the anticipated indicator. In January-September 2003, the GDP indicator increased on 7,8% in comparison to the same period of the year 2002. Based on the data of the State Statistics Committee of Ukraine, the growth of industrial production for 2003 was equal to 15,8% in comparison to 7% of the year 2002. The highest growth was observed in the following fields of economy: construction (23,3%), industry (17,7%), wholesale and retail trade (12,5%) and transportation (17,7%). The highest economical growth in 2003 stipulated for the higher inflation rate - 8,2%. To compare, in 2002 deflation in Ukraine was equal to 0,6%, when in the years 2000 and 2001 – inflation was equal to 6,1% and 25,8% respectively. In 2003 a number of reputable foreign rating agencies increased the rating of Ukraine. Fitch Ratings Agency have increased the rating of Ukraine for long term currency and hrivna loans to B+, and short term loans – to B. The prospective of long term rating indicators remain stable. Fitch analytics outline that the favourable economical processes in Ukraine together with its relatively low level of debt and favourable status of external liquidity continue to assist in increasing of its rates. Though they confront with political risks of presidential election campaign to finish in September 2004. In 2003, Moody’s rating agency also increased the rating of Ukraine. The improvement of macro-economical indicators and investment climate promote further attraction of investments to the country. In 2003, the amount of direct foreign investments in Ukraine increased seriously in comparison to the year 2002. For the year 2003 their amount exceeded $1 billion. The same indicator for the year 2002 was equal to $698 million. When the Ukraine became an independent country, the overall amount of direct foreign investments was equal to over $6,2 billion (appr. $130 per person). At the same time, the 2004 presidential campaign can decrease an inflow of investments: the larger investors can choose to wait for the results of presidential elections prior to undertaking the strategic decision. Despite of this probable development of events, independent analytics forecast increase of average annual growth rates of investments for the next coming years. In 2003, the following countries made the largest foreign investments in Ukraine: United States of America (16,4% of overall amount of investments), Cyprus (10,4%), United Kingdom (10,1%), the Netherlands (7,0%), Virginia Islands (6,0%), Germany (6,2%), Russian Federation (5,7%), Switzerland (5,0%) and Austria (4,0%). Since January 1, 2004, a number of legal statutes have been adopted, which improved an overall economical climate in the country. According to the law of Ukraine “On changes in the Law of Ukraine “On taxation of the income of enterprises”, the standard rate of income-tax was decreased from 30 to 25 percent. Besides, the new legislation on regulating the amount of income-tax from physical persons have annulled the progressive tax scale (up to 40%) and stipulated a common tax rate of 13% (but in 2007 it is planned to increase the tax to 15%). The law of Ukraine “On mortgage”, adopted in 2004, is a serious phase towards development of an effective mortgage system. It stipulates the mortgage concept, accepted on a worldwide basis. The new law should create a positive development of the mortgage system, widen a loan market, and create an attractive investment environment in the country. It is important to outline that additional legislative statutes should be adopted, for an effective operation of the new mortgage system. Based on the above improvements, the financing of real estate projects should become more simple thus leading towards significant market growth 1 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua FORECAST The improvements of 2003 should make a positive influence on the 2004 economics. At the same time, there are some indications on diversion of an overall attention from the economics towards the sphere of politics, due to the presidential election campaign. Thus, the further intensification of economic reforms can be expected in 2005, the earliest The external factors play their positive role in the above. Taking into consideration the fact that Ukraine is bordering with Poland, Slovakia and Hungary, the members of the European Union, the country’s attractiveness for foreign investors should grow. The Ukrainian membership in WTO, the Governmental aim for the end of 2004, should also play its positive role in further improvement of macro-economic indicators. Economic indicators 1999 2000 2001 2002 2003 2004 frcst GDP, USD billion 31.6 31.3 38.0 41.5 47.8 56.0 GDP in comparison to previous year, % -0.20 5.90 9.20 4.80 8.0 8.20 Industrial production, in comparison to previous year, % 4.0 12.4 14.2 7.0 15.8 12.20 Average level of unemployment, % 4.3 4.22 3.68 3.8 3.6 3.4 Gross wages in production sector, in comparison to previous 16.3 29.2 35.2 20.9 21.0 31.4 year, % Average index of production prices, in comparison to previous 14.70 18.90 0.90 5.60 8.9 6.0 year, % Average index of consumer prices, in comparison to previous 17.80 23.30 6.0 -0.50 8.0 8.7 year, % Index of consumer prices, in comparison to previous year, % 19.20 25.80 6.10 -0.60 8.2 9.2 Overall budget balance, % of GDP -1.5 -0.7 -0.3 -0.74 2 -0.70 Export, USD billion 16.3 19.2 21.1 23.6 28.0 30.8 Import, USD billion 15,2 17,9 20,5 21,5 26,0 29,8 Current pay balance, USD billion 0.9 1.2 1 .4 3.2 3.6 2.8 Current pay balance, billion, % of GDP 2.8 3.8 3.7 7.7 7.5 5.0 International currency reserves of the National Bank of Ukraine, 1 1.5 3.1 4.4 6.6 9.2 USD billion Average exchange rate UAH/USD 4.13 5.44 5.37 5.33 5.33 5.35 Average exchange rate UAH/EUR 5.24 5.05 4.67 5.53 6.03 6.8 Sources: National Bank of Ukraine, Ministry of Statistics; (frcst) Raiffeisen Bank of Ukraine 2005f rcst 62.7 6.50 7.40 3.2 20.0 5.0 6.8 7.0 -0.18 33.88 33,1 2.4 3.8 10.7 5.42 6.1 2 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua INVESTMENTS Review, Kiev In the course of 2003 and the first half of 2004 the investment activity in the Kiev real estate market was the highest since the time when Ukraine became an independent state. The stable political situation, improvements in economics, improvement of legislation, consistent development of the real estate market and increased interest of international companies to exploration of the new markets have created the conditions that are necessary for development of Ukraine, and particularly Kiev, as one of the attractive markets of the Eastern Europe for investments in the real estate market. The first investment transaction of 2003 became the proof of investors’ confidence to the real estate market in the country. Today, the Kiev real estate market (the capital of Ukraine – the second largest country in Europe), is very attractive due to its significant development potential. The economical growth of the country influenced the increase of the tenant’s demand; the demand is high and unsatisfied almost in all segments of commercial real estate, and residential market. The quality of the product is still a sharp question: there is a small supply of vacant space in the Kiev market of professional office real estate (office buildings with professional property management services), a number of projects in the retail sector is limited, and there is practical development of warehouse and logistics centers. The number of investors in the hotel segment is also limited. Thus, for the exception of one or two projects in the pipeline, there are no significant results for the time being. The other important factor making the foreign investors to pay their attention to the Kiev real estate market, is a high rate of returns of investments. The income on projects in the Kiev real estate market remains high in comparison to other markets of the Central Europe. Moreover, according to the forecast and the market conjuncture, this situation can remain for the next 2-5 years. The rate of return required by the investors in commercial properties can reach 15-25% depending on the type of the real estate property and its qualitative and quantitative features. At the same time, profitability of development and construction companies can be even higher. In the process of the Ukrainian business environment improvement, and the number of high quality projects will increase, the return of investments in the existing real estate properties will decrease, which is observed in Central Europe. As a result, the cost of property will increase; this will attract the investors who will pay a proper attention to this factor and will invest in commercial real estate. While analyzing the current market situation, one can outline the following reasons for growth of prices for commercial property: • High demand vs low supply • Real estate market is developing and expanding • The quality of on-market projects is increasing • Investment risks of the real estate market are decreasing gradually Taking into consideration the above factors, we can outline the clear indication of the fact that the foreign investors and developers of the Central European region are considering Ukraine as a prospective investment area. After the market boom in the Central Europe real estate market, many investors started paying attention to the Eastern Europe, and particularly Russia and Ukraine. Some of them expect and try to guess on how political and economical situations will develop. We estimate that the situation will become clear after the presidential elections in Ukraine, in autumn of 2004. Last year, large-scale Ukrainian production and investment groups started to pay more attention to investment in the real estate market. The real estate consultants have registered a large number of requirements on the current market situation from the above group of investors. Acknowledging the fact that real estate is not their major field of activity, these investors apply to professional investment consultants. The major reason for the interest to real estate market from local investors is a possibility to diversify their investment portfolio, and existence of high returns in the real estate market in comparison to other spheres of economics. Many of these local groups pay their attention to Kiev, where the commercial and residential real estate markets remains the most developed in comparison to other regions of Ukraine. Kiev, the capital of Ukraine, remains the market attracting the most part of foreign investments into the real estate. Kiev possesses the advantages of a rapid growth which is connected to a large number of financial funds, allocated by the municipal authorities for the city development programs. Thus, being a capital of the country and a city with the most developed infrastructure, Kiev attracts the largest part of direct foreign investments. According to the Kiev Municipal Administration, the overall amount of direct foreign investments in the city economics in 2003 reached $230 million, which is 40% higher than the similar indicator in the year 2002. 3 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua In 2003, as a result of a serious attention to the Kiev real estate market from an investor’s point of view, was a completion of the first investment transaction in the market. ARTYOM Business Centre, Grade B+ office building, overall area of 10,000 sqm, located in Kiev, Glybochitskaya street # 4, was sold to a group of private foreign investors in September 2003. The bespoke property has the best tenancy selection in the market. This issue became a key-factor in attracting the attention of the buyer. Kiev real estate consultants expect that within the next several years the Kiev real estate market will face some more investment sale transactions. But being a developing market, the Kiev real estate market has a negative influence from some factors. Firstly, the Kiev real estate market, and some other local markets of Ukraine, does not possess a sufficient number of high quality buildings, that can attract the professional investors into real estate properties. Besides, slightly negative perception of Ukraine based on negative overview of local events by foreign mass media, continues to affect the decisions of Western investors who then define the significant risk premiums. This leads to the increased expectation in respect of potential profitability of real estate properties. At the same time, the local owners of high profile commercial real estate fix the prices for their premises at the level with lower cap rates, thus leading to a substantial difference of the buyers’ and sellers’ expectations. REAL ESTATE MARKET, AND ITS MOST VALUABLE SEGMENTS Taking into consideration the fact that in the residential market being the most developed real estate market in Ukraine, currently there is a very tough competition among the local developers, the foreign developers pay there attention to the commercial real estate market, particularly – the market office and retail properties. The underdeveloped segments of the market are hotel and industrial real estate markets. Industrial and warehousing properties become more and more attractive for investments, which is driven by a significant lack of supply. The strategic location of Ukraine at the intersection of transportation inflows from Europe to Asia opens wide possibilities to those companies active in the sphere of logistics. The presence of an appropriate infrastructure and warehousing facilities will increase when the countries of Central Europe will enter the European Union in 2004, and the EU borders will come closer to Ukraine. Unfortunately, today, none of the large projects in this segment have been executed. The local developers are studying a possibility of building warehouses, but these plans exist only on paper. Kiev, being a capital of a European country, needs hotels built to high standards. Currently, there are no hotels in Kiev managed by international hotel operators. Though a majority of Kiev hotels offer the scope of service of a low profile, the unsatisfied demand of high profile hotel services leaded to high prices and rather high occupancy of hotels. Today, only Premier Palace, with its second phase being ready for entering into operation, complies with high standards of hotel services. Radisson SAS Hotel Kyiv to be launched into operation by end 2004, will become the first hotel with an international hotel management. Raiffeisenbank together with the European bank for Reconstruction and Development are among the major investors. One should pay attention to the fact that there are plans to open Marriot and Hilton hotels in Kiev. 4 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Largest investment transactions in the Kiev office real estate market, 2003-2004 Property ARTYOM Business Center Glybochitskaya,4 Area, sqm 10 000 Grade B+ Buyer/Seller Legal entity non-resident/ Legal entity non-resident Cost, in USD, Presumable 15 000 000 Property Business Centre Sportivnaya Square, #1 Area, sqm 9 000 Grade B+ Buyer/Seller Legal entity resident / Legal entity * Cost, in USD, Presumable 7 600 000 * The above building, for the moment of transaction, have not been launched into operation, The new investor should finalize the completion of the complex and launch it into operation, and then to sell it to minor users, by small blocks. OFFICE MARKET Market Review 5 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Year 2003 was defined by a significant growth of activity in the office market. During this period, the level of absorption of office premises grew together with significant increase in the overall supply of high profile office space. Due to the fact that in 2003 a large number of office buildings were launched into operation, the vacancy space ratio have increased. This vacancy rate growth can not be called a significant one on account of a significant absorption level for offices in 2003 and the first half of 2004. During the entire year, the overall office space supply grew up to 250,000 sqm, which is 35% higher than the indicator for the same period of the year 2002. In 2004, the overall supply will increase to 350,000 sqm. In experts’ opinion, during the previous year the office real estate segment experienced the transitional period. During this period the market reached its highest level of the phase of growth. We assume that if the vacancy rate continues to grow, in the years 2004-2005 the market can enter the phase of saturation that is defined by a continued growth of office space supply and growth of vacant space share. This preposition is borned by an increase of competition between the projects that were launched into operation during the last year. But it is essential to outline that during the last year a surplus supply was not prevail in the market and became obvious only at the end of 2003, when the market indicators started to show that the growth in demand exceeded the growth in supply, especially for Grade B office space. This trend can continue in the year 2004. At the same time, bearing in mind that the number of Grade A office buildings in the market was insignificant, the majority of them were almost fully occupied. Office Market Development Cycle 6 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Historical overview Start 1996 1997 1998 2000 2001 End 1997 1998 2000 2001 2004 Phase Growth Saturation Decline Reviving Growth In 2003, the American Chamber of Commerce in Ukraine together with the leading real estate consultants and developers proposed the Classification of Office Buildings. Bespoke classification became a positive step towards the development of Kiev real estate market. Today this classification is accepted by the majority of market players. Unfortunately, this classification is not an official document, but the fact of its existence and acceptance of such classification by the majority of market players can exert influence upon the Ukrainian market and make it more transparent, and make the market information – due to its unification – more simple and impartial. Supply In 2003 and 2004, the supply of office space became the highest for the past years. According to estimations of Colliers International, the supply of new offices during the past year amounted to 70,000 sqm. In 2004, additional 100,000 sqm are expected to be launched into operation. But only some business centers that emerged in the market were of high profile. The above included Dominant Business Center, Mandarin Plaza, NTBC, Olymp office&retail complex. The majority of office premises that entered the market was of low level (Grade C, the highest) and was located in redeveloped industrial facilities and administrative buildings. 7 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua List of large office buildings launched in 2003 Name Address Pimonenko st.13 Bol. Zhitomirskaya st. 20 Sholudenko st. 3 Zhivlyanskaya st. 43 Skovorody st. 19 Basseinaya st. 4 Bozhenko st. 87 Turgenevskaya st. 15B Grade B B B A A A B B Rentable areas, sqm 10,000 7,700** 7,000 7,000 4,500 4,000 4,000 4,000 3,000 Forum Business City* Panorama Cubic Center NTBC Podil Plaza (new building) Mandarin Plaza Business Center Ukrainian Pharmaceutical Center Basseinaya st. 6 A Dominant Business Center * with additional buildings (## 4,5,6,7) launched into operation ** 2,000 sqm are available for lease Despite of the fact that during the past six months a significant number of new premises were launched into operation, the indicator of market provision with office space falls significantly behind those of the capitals of Central European countries. We assume that in the mid 2004 the overall supply of professional office premises amounted to 350,000 sqm, which is insufficient for such a large city like Kiev. Moreover, the markets with similar features are subject to sharp alterations, especially when their demand and supply face significant fluctuation. In 2003, developers began to project and construct a large number of high profile buildings. Parus Business Center – a new project to be located at the intersection of Lesi Ukrainki st. and Mechnikova st. – is securing an important position among those projects. Parus is a Grade A office building of over 30,000 sqm. Completion of construction works at this business center is projected for the end 2005. Construction works at the other large scale multifunctional center should start at the land plot located across the street from the catholic cathedral, in between Gorkogo st. and Bol. Vasilkovskaya st. With this project the market will get 35,000 sqm of rentable office space, delivered in stages. The project will include a hotel and retail zone in addition to offices. OPTIMA Investment group have announced on the start of development of a new Grade A multifunctional office center Optima Plaza to be located at Lesi Ukrainki boulevard, 26. Overall area will amount to 31,500 sqm., rentable office area will amount to 12,000-23,000 sqm. 8 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua As before, the projects on office reconstruction form the majority of supply in comparison to a new construction. It is difficult to find vacant land plots of central location qualified for development, from a brownfield stage. More often, these types of new construction projects require significant expenses for acquisition of the land plot, project approval and construction of the building in accordance with market requirements. The quality of new projects continues to increase due to the market development; the developers gain experience owing to the realized projects. Many developers experienced in construction of office buildings prefer to cooperate with professional consultancies in the spheres of real estate market research and concept development. At the same time, despite of the above efforts, some projects still lack the qualitative level of profile because of drawbacks in concept development provided by those developers who neglect recommendations from professional advisors and save money on construction. Rather significant number of companies still leases offices on the ground floors of residential buildings and in old administrative buildings. This trend occurred in 1990ies because of the lack in supply of a qualitative office premises and the growth in number of new tenants. But when the market faces new office building supply, and the base rent becomes more moderate, these tenants will be the first ones to improve the quality of their offices. Supply of office space, in sqm 400000 350000 300000 250000 200000 150000 100000 50000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Supply of office space, in sqm 9 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Office space distribution, by Grade Grade A Grade B+ Grade B Grade C Typical terms&conditions of leasehold agreements Lease terms Normally, leasehold agreement is signed for 3 years. As a rule, minimum lease term agreed to by Landlord will be 1 year Up to 11% of the annual base rent Exists, under condition of base rent revision $/sqm/month 3 months 3 years $2 – 6 /sqm/months At Tenant’s expense, though can be partially reimbursed by Landlord VAT of 20% Agency fees Leasehold prolongation Base rent calculation, units Advance payment of base rent Base rent revision, frequency Operating expensed and management fees Fit-out Tenant’s tax obligations, % of the base rent Main Office Buildings in Kiev 10 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Main Office Buildings 1. Artyom Business Center 2. Barok Center 3. Horizon Office Tower 4. Dominant 5. Europe 6. Cubic Center 7. Kempa Center 8. Khreshchyatik Plaza 9. Kiev-Donbass 10. Mandarin Plaza 11. Merks 12. International Office&Hotel Center 13. Millenium 14. NTBC 15. Panorama 16. Podil Plaza 17. Silver Center 18. Ukrainian Pharmaceutical Center 19. Forum Business City ____ Central Business District 11 Name Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Image Address Grade Overall Area Sqm Base rent, USD sqm/ month 32 Parking (Number of spots) Number of floors Major tenants In the pipeline Mikhailovskaya, #12 Institutskaya # 28 Mikhailovskaya street, 12 Institutskaya street, 28 В 2 788 70 4 Dresdener Bank, Ukrainian Aluminum, Kinto Bogdana Khmelnitskogo #52 Bogdana Khmelnitskogo street, 52 2 853 25 Более 40 5 Aquamarine Zhilyanskaya street, 29 С+ 2 800 16 есть - Lufthansa, P&G, PASA, OKI, Konika, Air Baltic, SAS, McMilan, Halena Burda Ukraine Artyom Business Center Glybochitskaya street, 4 В+ 10 000 20 -25 160 5 Mary Kay, Aventis, Adidas, Yamanouchi, Renault, US Embassy, UK Embassy Barok Center Mikhailovskaya street, 11 В 3 107 19-25 25 5 Altheimer & Gray, KPMG, Bispro Dominant Office Center Basseinaya street, 6 А 3 700 - 80 6 - Europe Business Center Muzeiny pereulok, 4 В 6 000 25-30 Limited 8 Merloni, Japan Embassy, JVC, WINSEF 12 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Forum Business Park Pimonenka street, 13 В 19 000 18 300 3-5 Metro Cash &Carry, Motorola, Hertz Rent-aCar, ColgatePalmolive, Chemonics, Marsh. Kempa Center Vasilkovskaya street, 1 В 12 000 От 15 50 4 Absolute Holding, IVECO, Furnel, Sanitec kolo, Mannesmann Rexrooth, Florian Italia Due, KANEX, Krone Anlagen Export GmbH, Kodak, J.B. Chemicals & Pharmaceutica ls Ltd. Elite AmCham, BBC, Perrie, VISA, PepsiCo, Whirpool, Interpipe, Nokia, Maersk, Cisco Systems, D’Arcy, Ratiopharm, Unilever, Kimberley Clark. Shell, Sky Travel, Mitshubishi Horizon Office Towers Shelkovichnaya street, 42-44 В+ 16 000 30 -35 Limited 17 Iternational Office & Residential Center Bol. Vasilkovskaya street, 9/2 В 10 000 _ 110 9 Khreshchyatik Plaza Khreshchyatik street, 19 а В 7 535 28 4 Golden Telecom, Ernst&Young, Telenor, Lundbeck, Radio Freedom, Eldorado, Slavutich TAS Investbaek, Ukrgazbank, Ukrainian Audio Distribution, Index Bank, Deloittte & Touche Kiev-Donbass Pushkinskaya street, 42/4 В 7 000 19 40 (all prices are included) 8 13 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Kudryavsky spusk Office Center Bekhterevsky per., 4Е В 3 300 20 36 6 Initiative Media, HewlettPackard Mandarin Plaza Basseinaya st., 4 А 4 000 30 Более 200 - Not launched into operation Mechnikova Office Center Mechnikova st., 14/1 В 4 500 25 _ 4 _ Millenium Business Center Vladimirskaya st., 12 А 8 000 Более 30 55 9 TNK Ukraine Neftegaz, WBB, Panasonic, Baker&McKe nzie, SAP AG NEST Uritskogo st., 45 С 14 235 18 90 9 New Technology Business center Zhilyanskaya st., 43 В 8 000 30 да 7 Raiffeisenbank Ukraine OST-WEST Khvoiki st., 18/14 С 3 300 10-14 35 7 Rockwool, OST-West Express 14 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Podil Plaza Spasskaya street 30/ Skovorody street, 19 А 18 355 25-30 145 9 Miele, GTech, Sony, East-West, Philip Morris, JTI, Samsung, Intel, Beiersdorf, Sky Travel Renaissance Silver Center Vorovskogo street, 24 Lepse Boulevard, 4 13 113 6 000 25 18 120 Ample 5 8 Temde Ukraine, Diastart, Monsanto, ACNielsen, Wrigley Renault _ Stand Office Center Olymp Office&Retail Complex Vasilkovskaya street, 14 Krasnoarmeyskay a street, 72 С В 11 500 13 000 16 25 Ample 340 7 10 Currently, one faces the development of new Points of concentration (submarkets) of office space. Initially, the majority of office premises that formed the supply were of central city location. Today some other zones of Kiev, having a potential to grow, can have a claim for being called submarkets. Podol, the historical zone inside the Podolsky district of Kiev, can be called a sample of such submarket. Being built in 2000 at Podol, Podil Plaza became the first office building of high profile. Currently this district has several professional office centers in the pipeline and new projects are being developed there as well. Significant improvement of the city infrastructure has become one of the reasons for potential tenants to pay attention to this part of Kiev when looking for the space with specific requirements. Demand The demand for professional office space remains at a high level. The following graph outlines several factors that can influence the 2004 level of demand. RETAIL MARKET Market Overview In 2003 – first half of 2004, the retail market came to the stage when foreign companies can start considering it as a rather attractive investment grade product. The appearance of Metro Group and its largest department – Metro Cash&Carry International GmbH – in the Ukrainian market is assumed to become a symbolic event. Metro Group is the third largest in Europe and fifth largest trading group in the world, and its emerging in the Ukrainian market indicates favorable economic processes in the country, increase of purchasing power of population and stable political environment. In fact, the launch of its first outlet in Kiev on August 20, 2003, with gross area of 16,000 sqm, and the company’s plans to invest $100 million Euro in the economics of Ukraine should become a signal for foreign investors and retail operators to facilitate their investment and retail activity in the country. Also, a significant increase of retail centers in their number and areas in 2003-2004 is one specific feature of the retail market development. The last year gave an increase in retail areas of retail centers for over 100% and amounted to 210,000 sqm. Here, their quality is improving and is approaching the quality of western shopping malls. Development of concept, technical elements, 15 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua and potential tenant mix attracted significant attention in the process of design and construction of shopping malls. Acknowledging Kiev to be a political and economic center of the country, with 2,6 million of officially registered citizens, as well as the city with the highest population income in Ukraine, the majority of local retailers, in the first place, are trying to occupy this market. Also, the majority of foreign trade marks and large scale retailers entering the Ukrainian market are trying to locate their retail outlets in Kiev. Thus, the Kiev retail market is the most dynamic in development throughout Ukraine, and currently the supply of retail areas in Kiev per 1000 of citizens leaves behind other Ukrainian cities. Anyway, in 2003, a trend when more and more of both local and foreign retail operators started to pay attention to the large regional Ukrainian centers like Kharkiv, Dnepropetrovsk, Donetsk, Odessa, became more obvious. The basis for that is, firstly, a level of local welfare together with purchasing power of these cities have grew significantly for the past two years, and secondly, a competition between the retail chains is considerably lower than in Kiev. Demand Demand for retail space is divided into two segments: 1. Premises that are occupied by operators of single standing outlets or build-in shops. 2. Areas (sections) in retail centers. Segment of single standing outlets or build-in shops The demand for the above segment is formed by retailers who prefer to improve or widen their existing premises, relocate to central districts, or increase a number of their shops. Lack of supply of high profile retail space in the downtown makes the retailers to look for premises both in neighboring districts, and in suburbs. Today the major trend stands for relocation of retail shops that are competing in prices only, into decentralized districts. Mainly, this remains effective for large scale retail outlets. Those shops that are oriented towards non-financial competition (majority of branded boutiques), are trying to incorporate profitable and comfortable location in the central districts in their competitive features. Bearing in mind the fact that the main purchasing power is concentrated in the retail zone of the central location – the area of streets Yaroslavov Val, Kreschyatik, Saksaganskogo, Vladimirskaya, Basseinaya, Sagaidachnogo and Bol. Vasilkovskaya – the majority of top branded operators prefers to purchase or lease their shops in this specific zone. Retail space of 30 to 250 sqm of central location remains the most popular among buyers and tenants of the first retail segment. The premises of this segment when located in the suburbs or decentralized districts will be used for small food shops or drug stores. The retail shops when located in close proximity to metro station or along the high traffic streets are also very popular with buyers and tenants of the above retail segment. Large single standing or build-in premises of 1,000 up to 5,000 sqm area that fit for location of a large scale retail outlet remain of stable demand from retail operators. These premises are actively utilized by a fast developing large scale retailers including: Ukrainian supermarket chain Silpo (15 supermarkets and 2 wholesale terminals), Furshet (16 supermarkets), Megamarket (3 supermarkets), and Velika Kishenya (5 supermarkets). In 2003, a new local chain of supermarkets emerged in the market – Kraina (1 hypermarket). The foreign retailers of this segment include Austrian chain Billa (3 supermarkets in Kiev, 8 throughout Ukraine), and Holland chain SPAR. This group can also include the German Metro Cash&Carry that is interested in retail outlets of over 10,000 sqm area and that prefers to build its own outlets rather than buy or lease the space. One should specifically pay attention to hypermarkets of Karavan and Kraina retail chains. These hypermarkets are unique by their location inside the large shopping malls owned by the retail operators of the above chains. This location is profitable both for retail brands that lease small sections in these shopping malls, and for hypermarkets themselves, because of both groups having a possibility to attract a large number of potential customers, thus increasing an overall customer flow. 16 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Existing retail centers in Kiev Name Metrograd Ukraine, reconstructed department store Rhythm Kvadrat Gorodok Karavan, Phase 1 Globus-1 Kvadrat Shulyavka Kvadrat – Mir Knigi TsUM Detsky Mir Kvadrat Mandarin Plaza Globus-2 Evroport Kvadrat Retail Center at Lvovskaya Square Alladin Olymp Retail&Leisure Center TOTAL Location Underground passage between Lva Tolstogo st. and Bessarabskaya Sq. Pobedy Square Geroev Kosmosa st. Gnata Yury st. Krasnykh Kazakov Prospect Lugovaya st. Maidan Nezalezhnosti Sq. – right-hand side Dovzhenko st. Slavy Square B. Khmelnitskogo st. Malyshko st. “Druzhby Narodov” metro station Basseinaya st. Maidan Nezalezhnosti Sq. – eastern side Lukashevicha st. “Lukyanovskaya” metro station Lvovskaya Square Grishka st. 3a-5 Bol. Vasilkovskaya st. Areas, sqm 17,000 17,000 14,000 11,000 10,000 35,000 8,500 890 4,270 8,000 8,000 8,000 7,500 7,500 6,000 5,300 5,000 16,000 22,000 210,960 Segment of shopping malls Main users of the above segment of retail market can be divided into three groups: 1. Large and well-known foreign brands (for example, Timberland, Esprit, Tommy Hilfiger, Eugene Klein). This group prefers to lease the space in the high profile shopping malls managed at a highest professional standard. Globus-1 and Mandarin Plaza can serve as a sample of these shopping malls. One of specific features of this group of users is the lease term, which is the longest for their rented shops. 2. Foreign brands of less reputation, as well as rather developer local retailers (for example, Carlo Pazolini, VD ONE, Antoshka). This group leases the space in rather qualitative retail centers being second in quality to the shopping malls of 1st group. 3. Less reputable retailers who are not widely spread in the market. These retailers consider retail centers to be one of possibilities to enter the retail market and increase their reputation among the customers. Normally, these retailers lease the areas in retail centers divided into small format sections with standard fit-out, and very limited to any further tenant improvement works. Gorodok retail center can be a sample of that segment. The most popular centers of the above retail segment are located in the zones with the following typical features: • Highest pedestrian and car flow; 17 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua • Maximum concentration of residential housing; • Intersection of major thoroughfares and city transport routes. Proximity to metro station is also one of the major factors adding to retail center success. Despite of significant increase of cars owned by Kiev citizens, metro remains the main city transportation mean for the majority of population. As per experts’ estimation, the overall demand for retail space for the end 2003 amounted to 850,000-1,000,000 sqm including: single standing or build-in retail shops (first segment) – 600,000-700,000 sqm, and shopping malls (second segment) – 250,000-300,000 sqm. Facilitated development of shopping malls in Kiev plays its role in attraction of well-known foreign brands that consider this trend to speak for the maturity of the market. Moreover, many brands locate their shops in the West specifically in shopping malls. Thus, the existence of these centers in Ukraine, and particularly in Kiev, should be considered as crucial for attraction of foreign retailers. But here one should outline that today the majority of existing shopping malls do not satisfy the requirements of foreign retailers and fall significantly behind the Western shopping malls in their quality and existence of all essential infrastructure. Thus, some foreign retailers locate their shops in single standing or build-in premises despite of their historical preference to shopping malls. Supply The supply of retail space in the retail market is coming from three major sources: • Construction of a new project, initially designed to become a retail project; • Changes in the existing real estate profile of a property into a retail; • Qualitative change of retail property. Thus, the primary and secondary retail market segments are formed. The primary retail segment will bring two types of projects in the market: • Shops inside the multifunctional project (retail&office, retail&residential, etc.), for example boutiques located on the first level of retail-office-residential complex Sofievskaya Brama; • New large scale retail complexes or shopping malls (Billa, Globus, Mandarin Plaza). The market of secondary space will also offer retail areas of two types: • Premises in the residential housing, being the flats on ground floors redeveloped into retail space; • Commercial property (warehouses, industrial) redeveloped for large scale retail complexes or shopping malls (Megamarket, Karavan). In 2003, the market faced an increase in retail space supply resulting from increase of demand for retail areas. Increase in demand facilitated the occupancy of the majority of properties within a short time period. Besides, due to a high demand, the base rent did not decline for a long period of time. Thus, the majority of retail projects in the pipeline possessed or currently possess a high return that, in its turn, attracts developers and investors. For July 2004, the overall retail area of retail complexes in Kiev amounts to 210,000-250,000 sqm exclusive of supermarkets. Here, some 80,000 sqm were launched into operation in 2003, that significantly exceeded the supply of 2002 with 30,000 sqm of areas delivered to the market. In the same time, for the years 2004-2006, it is planned to deliver into operation some 270,000 sqm of, thus making an overall supply equal to 400,000-500,000 sqm. In the late 2003, the indicator if retail areas per 1000 of citizens in Kiev was 2 times lower than in Moscow or Prague, and 3,5 times lower that in Warsaw. In the current year the most important projects delivered to the retail market included Mandarin Plaza retail center located in Bessarabsky district, and Phase 1 of retail&leisure mall Karavan located at Obolon’, at Lugovaya street. Karavan should be described separately, for it is the first Ukrainian full-scale retail&leisure complex. Its overall area covers 42,000 sqm. It is comprised of a hypermarket, supermarkets of kidswear and household electronic appliances, over 100 shops and restaurants, bowling alley, allseason skating ring, billiard hall, kids’ playground and parking for 1350 sqm. In 2003, the Phase I of the complex was launched into operation. It covers 17,000 sqm and includes hypermarket and 40 shops. The remaining areas of Karavan will be launched into operation in 2004. 18 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Opened in April 2003, Mandarin Plaza is located on five levels and covers 12,500 sqm of gross area. The retail center is comprised of 60 shops, 2 coffee shops, kids’ café, café-bar, supermarket in the underground level, and underground parking for 450 cars. Retail net area equals to 7,500 sqm. Retail centers projected for delivery in 2004-2006 Name Magellan Karavan, Phase 2 Kureni Promenada GUM Retail center Olympic Plaza Lybid’ Plaza Retail center Retail center Retail center Location Akademika Glushkova Prospect Lugovaya street “Obolon’” metro station Baggovutovskaya street Krasnoarmeiskaya street Sportivnaya Square Bolshaya Vasilkovskaya street Gorkogo (Antonovicha) street Intersection of Stolichnoye shosse and Akademika Zabolotnogo street Between Dneprovskaya embankment street and “Osokorki” metro station Perova Boulevard – former Avrora cinema Area, sqm 17,000 7,000 25,000 30,000 8,500 29,000 30,000 40,000 16,000 30,000 20,000 19 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua New projects Olympic Plaza project being developed by HCM Property Management company should become one of the largest retail&leisure centers in Ukraine. This project should be launched into operation in 2005, and will be comprised of 100,000 sqm of gross area including 30,000 sqm of retail areas, and underground and multi-level surface parking for 1,200 cars. Overall amount of investments will come to about $90 million. Another large scale project with construction works launched in 2003, is the retail&office center with a residential quarter located at Sportivnaya Square. The center will be comprised of a 6storey building of retail&leisure comples with a gross area of 75,000 sqm, and 33-storey office&residential building of 45,000 sqm gross area, where 10 floors will be occupied with offices, and the remaining 23 floors – residential apartments. The most largest projects with ground to be broken in 2004 will include Lybid’-Plaza developed by a Hungarian Transelectro company. It is projected that Lybid’-Plaza will become the largest regional retail&leisure and office center located in close proximity to the downtown of Kiev. Its gross area will amount to 120,000 sqm, and will include 40,000 of retail areas. Overall amount of investments will come to $100 million. Prices and rental rates For the last year, the rental rates for shops in single standing buildings and build-in premises practically did not change. As in 2002, the highest rates were gained in the central districts and districts with close proximity to the downtown. The major factor to influence the amount of base rent is a location of a shop. Among other factors are: intensity of pedestrian flow passing the property, visual accessibility of the property, comfortable car access, parking and entrance, architecture, project design and level of fit-out works. 20 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua 2003 base rents for retail sections in the retail centers Retail Center Location Gross area, sqm Section area, sqm Average rate, $/month Globus-1 Mandarin Plaza Metrograd Kvadrat Kvadrat Detsky Mir Globus-2 (Levels 1-3) Kvadrat Gorodok Karavan, Phase 1 Maidan Nezalezhnosti Square – western part Basseinaya street Between Lva Tolstogo street and Bessarabskaya Square Lobby of “Druzhby Narodov” metro station Lobby of “Lukyanovskaya” metro station Malyshko street Maidan Nezalezhnosti Square – western part Gnata Yuri street Krasnykh Kazakov street Lugovaya street 8,500 7,500 17,000 8,000 5,300 8,000 7,500 11,000 10,000 10,000 (including hypermarket of 8,000) 50-250 35-185 15-50 20-100 20-80 25-75 25-700 20-80 30-50 25-300 80 80 60 30 30 30 60 25 30-40 50 Base rent for retail space in Single standing buildings and build-in shops ($/sqm/month) 120 100 80 60 40 20 0 1 2 3 4 5 Max Base Rent $/month Average Base Rent $/month Min Base Rent $/month 1 2 3 4 5 Downtown, central zones of Pechersky and Shevchenkovsky districts Podol, Artyoma street, beginning of Gorkogo street, end of Bol. Vasilkovskaya street Pobedy Prospect, Druzhby Narodov Prospect, “Lukyanovskaya” metro station, Lesi Ukrainki Boulevard “Levoberezhnaya” metro station, “Darnitsa” metro station, Leningradskaya Square Decentralized residential districts of Kiev In 2003, base rents in retail centers did not practically change in comparison to those of the year 2002, and remained at the level of $25 to $200 per sqm per month. Base rents in the retail centers depended on location and quality of the project, size of section, intensity of customer flow along the show-windows of the section, floor where section was located, size of show-window, and tenant’s retail concept. The highest base rents were observed in Mandarin Plaza and Globus-1 shopping malls that are very close in their quality to the western shopping malls. 21 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Some retail areas commanded rather stable base rents despite of location of the retail property, and some places of the above commanded a significant growth in 1sqm price. For example, the maximum base rent for prime central retail properties reached the rate of over $4,500 per sqm per month. Forecast We believe that in 2004 the Kiev real estate market will face a significant growth in supply of retail areas. At the same time, the overall demand for retail property in 2004 will also continue to grow; but the increase in demand will follow considerably behind the increase in supply. By late 2004, the base rents will probably remain at the 2003 level because of some amount of unsatisfied demand will remain for the above period. That is why a part of supply will be absorbed by an existing unsatisfied demand, and the remaining part – by a new demand. In general, in 2004, the situation in the retail real estate market will remain favorable. The continuing growth of purchasing power of citizens will allow for conservation of a positive growth dynamics of demand for retail property. It is essential to outline a significant improvement of situation with retail projects in the regional centers of Ukraine like Kharkiv, Dnepropetrovsk, Odessa, Donetsk. In 2003, the situation in retail market resembled the same of Kiev in 2001. Thus, the development of retail real estate market on a regional basis falls behind Kiev for 1,5-2 years. It can be confirmed by a fact that in 2004 Metro Cash&Carry is planning to open both its 2nd hypermarket in Kiev, and one hypermarket in each of the following cities: Kharkiv, Odessa, and Dnepropetrovsk. Also, XXI Century group – the operator of Kvadrat projects – have announced on its plans to enter the regional markets of Ukraine. INDUSTRIAL MARKET Market Overview Kiev warehouse and industrial market can be defined as a less developed real estate segment. Despite of significant demand of 2003, the new supply of professional warehousing facilities was practically absent. In 2003 and first half of 2004, being similar to 2002, one could observe the trend of increasing of demand for high profile warehousing facilities and decrease of demand for unprofessional (non-serviced) premises. At the same time, the supply of low profile warehouse and industrial facilities was the highest. This market situation allows to assume that 2004-2005 can become the breakpoint for industrial market. Under provision of continuous increase of demand for professional warehouse and industrial facilities, many investors and developers can not stand aside from this segment. The 2002 approval of the Kiev City Master Plan of Development until the year 2010 by Kiev Municipal Council will influence greatly on development of warehouse and industrial sector. According to this Plan, until 2010, industrial zones and ecologically harmful enterprises will be relocated outside residential districts. Simultaneously, transit cargo routes, highways and railways were planned to be relocated outside the city limits. Assuming the fact that the majority of warehouses are located inside industrial zones, the Master Plan, in fact, will limit the future utilization of warehouse real estate inside the city boundaries. Moreover, the majority of land plots available for construction of warehouses are also located inside the Kiev industrial zones. Relocation of cargo transportation routes outside the city boundaries will also limit possibilities to use warehouse and industrial real estate inside the city boundaries to a maximum productive extent. Thus, the Master Plan provides for unpromising construction of warehouse and logistic centers inside the city of Kiev, and makes prerequisites for their development in suburbs. 22 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Supply Today the warehouse and industrial market of Ukraine can be divided into three major categories. First category – high profile professional warehouse facilities and logistic centers. This category includes all the premises that are used both for storage of goods, cargo and products, and also possess a variety of qualitative features (all outlined below, or a majority of those): even and dustand-water-resistant floors with special covering, modern warehouse equipment and machinery, fire alarm system and automatic fire extinguishing system, security and video-monitoring, autonomous electrical and heating supply system, convenient transport access routes (highway and railway). Besides, together with services on storage of goods, these centers and facilities provide a variety of additional services. This is the most undersupplied category of warehouses. The overall area of high professional warehouse facilities and logistic centers covers 10% of the overall area of warehouse and industrial real estate of Kiev and suburbs. Second category – warehouses at redeveloped former storage facilities of factories and plants, located inside Kiev, and possessing only one or some of the above qualitative features. They cover almost 20% of the overall area of industrial real estate. Third category – low quality warehouses of the existing production zones and warehouses of the former Soviet era. They are not qualified to modern requirements and do not possess any qualitative features of warehouses of 1st and 2nd categories. Third category is the most supplied category of the entire warehouse and industrial segment of real estate market, and covers minimum 70% of the overall area of warehouse and industrial real estate. In 2003, the supply of warehouse and industrial facilities did not practically increase. Insignificant growth of the overall number of warehouse premises occurred because of construction of owneroccupier warehouse centers by logistic companies. For example, the company Ukrainian cargo couriers increased the sizes of its warehouses for 10,000 sqm, SAV-Service company - for 7,000 sqm, Interdean.Interconex – for 3,000 sqm. At the same time, the developers were not active in this segment, despite of the fact that the demand was 2-3 times over and above the supply. Following are the major reasons for supply to remain at its’ 2002 level: The majority of developers and investors have observed the warehouse and industrial market to be less attractive than office and retail real estate markets. Despite of the fact that investment risks and yields of warehouse segment can be easily compared to those of office and retail segments, developers and investors preferred to operate in office and retail real estate segments. This was connected to their more dynamic development in previous years. Lack of a large client-customer. Many foreign developers, prior to development of a real estate project, prefer to select a large client (customer) who will later acquire the built real estate property or will commit to a longterm leasehold agreement for the developed premises. Nevertheless, despite of the fact that there was no practical increase in supply, one should outline that this situation results both from a market conjuncture that developed in the years 2001-2002, and developers’ investment policy of 2002 and earlier. Construction of new warehousing facilities, together with processing the leasehold for land plot (or freehold for the above), can have a duration of 18-24 months. Thus, the emerge of new logistic and warehousing complexes resulting from a significant excess of demand versus supply in 2003 can be expected, the earliest, by end 2004 – mid 2005. With supply of professional warehousing facilities being at 2002 level, one should specifically outline the new projects on construction of warehouses that were commenced in 2003 and in 2004 will bring both Kiev and the Greater Area new warehousing and logistic centers. In late August 2003, Kuehne & Nagel commenced the construction of a new logistic center in Gostomel settlement (15 km from Kiev). This complex will be comprised of 1,200 sqm office space and 6,700 sqm of warehousing facilities. Complex was completed in May 2004. Bespoke complex is equipped with modern warehouse equipment and corresponds to all requirements of a modern logistic center. Major supply of warehousing facilities is coming from the following groups of suppliers: 23 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua plants and factories, including state-owned enterprises, with storage or production facilities on site being already redeveloped for warehouses. This group of suppliers includes mainly aged storage facilities without or with minimum number of additional services; professional suppliers of logistic and transportation services. This group owns the majority of professional warehouse facilities and provides the majority of additional services. Overall supply of warehousing facilities of the 1st and 2nd group of suppliers comes to 100,000 sqm. The majority of combined supply is represented by warehouses of a 3rd category. The majority of warehouses inside the city limits is located in the zones with railway connection, or location of the Soviet era plants and factories – Darnitsa, Svyatoshino, Kurenyovka, Rybalsky Island. But the location of warehouses inside the city limits (especially in the zones of close proximity to the downtown) cannot be considered to be of maximum effectiveness because of the high cost of land and limited expansion possibility due to a lack of land resources. The Kiev suburbs should be considered as an optimum location (10-30 km outside the city) that possesses, in practice, of all necessary infrastructure for construction and location of modern warehouses and logistic centers. This is the reason for many international logistic groups to located their centers outside the city boundaries, in nearest suburbs (for example, Kuehne & Nagel – in Gostomel, International Container Trasport GmbH – In Vishnyovy). A complex comprising of 136,000 sqm to be built 8 km outside Kiev, along the highway to Borispol, should become the largest regional professional logistic center. This logistic center is projected to be a part of a large project called Global Center, which is to include both logistic complex, and autotrade retail center, office building, retail&leisure complex, and a hotel. - 24 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Demand In the first half of 2004, the demand for warehouse and industrial facilities of high profile grew to a significant level. We estimate the overall amount of unsatisfied demand for a high profile warehouse real estate (of 1st and 2nd categories) to be around 100,000 sqm. Following are the major reasons for increase of demand for warehouse facilities: 1. European Community borders came close to the borders of Ukraine. In connection to the above, many western production companies relocate their production facilities to Ukraine or in close proximity to Ukrainian border. Firstly, they are attracted by a cheap manpower and rather low cost of land (exclusive of the land inside Kiev). New production needs new facilities, to store the products, and this results in growth of demand for such premises. 2. Improvement of business and investment environment in Ukraine together with increase in production by local and foreign producers, increase in import, decline of investment risks, increase of retail outlets number (including super- and hypermarkets). 3. Improvement and liberalization of the customs legislation. For example, in November 2003 the State Customs Authority issued an order on simplification of customs control procedures and custom clearance of goods. Besides, the Cabinet of Ministers of Ukraine is working on a regulation for the State Customs Authority to form the so-called “white list” of those entities being subject to external economical activity who are loyal to the appropriate Law, and thus will be treated with a simplified procedure of custom clearance and processing. Modern logistic centers offering an additional variety of services – customs, loading and unloading, reporting, transportation, packaging – become more demanded; some companies (especially those of western origin) apply for the services of professional logistic servicing companies, rather than acquisition of owner-occupied warehouses and creating of logistic departments with an extensive number of specialists. This trend leads to, on the one hand, increase in demand for professional serviced warehouses (originating from logistic companies), and, on the other hand, decrease in demand for low profile warehouses (originating from production companies or importers). The customers of warehousing real estate in Ukraine can be divided into the following groups: 1. Professional logistic companies and large production companies and importers. The professional logistic companies in Ukraine include Kuehne & Nagel, FM Logistics, Maersk Logistics, Interdean.Interconex, P&Q Nedlloyd. This group of users prefers to lease high profile warehousing facilities of 1,000 to 10,000 sqm, or acquire into ownership the areas over 3,000 sqm, located in close proximity to the city boundaries or right behind it. 2. Foreign companies and local production enterprises with complex network of distribution of goods. The above companies prefer to lease or purchase warehousing facilities of 2nd or 3rd category (see the Market Overview), with an area of 500 to 4,000 sqm. 3. Enterprises of small and middle business sector. These companies prefer to lease small warehouses of up to 1,000 sqm. As far as estimation of the future demand for warehouses is concerned, we believe that the most required location for the above would be the right-bank part of Kiev and suburbs, for the majority of cargo inflows is entering the city from Lviv, Byelorussia and Odessa directions, i.e. from the right-bank part of Kiev. Left-bank part of Kiev is attractive for locating warehousing facilities mainly in Borispol direction. This route is of special interest because of its proximity to the Borispol airport and is generated by those companies who cooperate with Russian enterprises. 25 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Prices Despite of the fact that during 2003 the demand remained at a rather high level, and the supply did not practically increase, the rental rates grew insignificantly in comparison to the year 2002. For July 2004, the average base rents at the warehouse market amounted to $3-7 per sqm per month. Here, the minimum base rent was equal to $2 per sqm per month, and maximum – to $810 per sqm per month. In additional to the above base rent the tenants should pay for operating expenses, i.e. $1-1,5 per sqm per month. The majority of leasehold agreements in the warehouse market are signed for the lease term of 2 years, with a minimum lease term being 1 year and maximum – 10 years. Thus, short term leasehold agreements are signed more often rather than long term leasehold agreements. Forecast In 2004, the demand for professional warehousing facilities with additional services (loadingunloading, custom services, monitoring) continues to grow in comparison to 2003. At the same time, the demand for low profile warehouses remained at the 2003 level. The major reasons for increase of demand include the continued growth of production and trade, and increase of investment attractiveness of Ukraine, that in their turn provide for increase of turnover for importers and foreign production companies. Further increase of demand for professional warehousing facilities will give a hint to emerging of additional warehousing premises. The growth will be provided mainly by an increase of supply of high profile warehousing facilities. In 2004, according to the modest forecast, some 20,000 sqm of professional warehousing facilities will be launched into operation, with the majority being now in process of design or construction. Most probably, the base rent for warehousing facilities will remain at its’ 2003 level, though an insignificant increase of it is also possible because of demand being significantly higher than supply. The saturation of office and retail real estate markets can provide for changes in developers’ accent towards development of warehouse real estate segment. But one should not expect an instant grown of supply of high profile warehousing facilities. This is tied to a fact that project development needs a certain time: search for land plots, processing of project documentation, obtaining of permissive documents and approvals from local authorities, and construction. Thus, we could forecast the significant increase in supply of high profile warehousing facilities to emerge not earlier than the year 2005. RESIDENTIAL MARKET Market Overview During 2003, the prices for residential properties at the primary and secondary markets were stable in their increase, 1,5-2% a month. In the first half 2004, the increase in prices slowed down, probably, because of the number of speculative investors have decreased. At the same time, the trend of price increase during the summer seasonal holidays remained similar to those of two previous years, though prior to 2001 the prices for residential properties in the summer had a trend to decline. The stable increase in prices for residential property does not result from one or two recent events of the Ukrainian market. Quite to the contrary, some correlated reasons have stimulated the long term increase in prices and, most probably, these prices will continue to grow in the second half of 2004. These reasons include: favorable and stable economical situation, steady rate of national currency, growth of welfare of the citizens along with constant improvements in mortgage mechanisms, and, as a result, steady and non-stop demand for residential property. Here, inexpensive studios and one-bedroom apartments are of the highest demand; the majority of those are purchased out in the primary market prior to launch of the residential houses into operation. As per information of the State Statistics Committee of Ukraine, for the year 2003, in Kiev 1,001.1 thousand of residential square meters were launched into operation that covers 15,6% of the 26 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua overall area of residential properties launched into operation in the entire Ukraine for the same period in time. Demand for premium residences increased with even more rate, than in 2002, which resulted from a significant increase in the number of citizens who could invest their capital in purchase of premium residential apartments, for their further re-sale or leasing out. Here, the existing rental rates for premium apartments allow for return of investments on purchase and further improvement of apartments for the period of some 5-6 years. According to the Kiev Master Plan of Development, for the period until the year 2010, it is projected to build, on average, 1.1 million of residential square meters per year; here, the supply of residential premises in 2010 is projected to increase to 22.2 sqm per 1 citizen. In 2002 and 2003, the projected construction plans were completed. But preservation of this supply for the next coming years is possible with steady demand; and the steady demand will be possible only with conservation of the economics growth rates and increase in welfare of population that were observed during the last two years. Should macroeconomic indicators worsen, the demand for residential property may go down, and with this connection construction and development companies will, mot probably, decrease their activity in the residential market and this might result in shortening of construction. Demand Increase in demand for residential properties that continued throughout 2001 and 2002, remained at the same rates in 2003. But if earlier the majority of citizens purchased the primary market apartments for own occupancy, in 2003 a trend of acquisition of residential apartments as an investment instrument became more striking. Here, the investment grade apartments included both expensive apartments in premium class houses, and inexpensive apartments in mass residential districts. Development of mortgage program was fully in favor of the above situation. Upon acquisition of the apartments by means of loans, the citizens start leasing these apartments out and can pay the credit out of rental income. Also, it happened often that after being obtained in the primary market, the apartment was sold in the secondary market after the residential house has been launched into operation. And the percentage of these apartments in the new residential quarters in Kiev increased, in comparison to previous years. In the premium class residential segment the citizens of the Eastern Ukrainian regions were second to Kiev citizens in their market activity. This segment continued to develop very dynamically, and amount of 2003 sales overcome the sale amount of previous years. While analyzing this segment one should pay serious attention to the fact that one of the major parameters that differs premium class residential property from a non-premium grade property is the location of the first. Pechersky district of Kiev, and Lipki of the most, remain the most expensive and prestige district of the city. The other districts which offer premium class residential apartments (with other premium grade features second to location, including automatic ventilation and water-purification systems, triple-glazed windows, air conditioning) are the area of Golden Gates, Lysenko street and Tryokhsvyatitelskaya street, and Tsarskoye Selo district. Pricewise, the price range of the premium market is significantly wider in comparison to those of the secondary market. Thus, premium class residential apartment can be purchased starting from $1,500 per sqm, and their maximum rate will come to $3,000 per sqm. (Some individual projects may offer the rate of $5,000 per square meter, but this case is exclusion and should be disregarded for the sake of this analysis). The middle class apartments varies from $1,000-$1,500 per sqm. These apartments include modern qualitative flats located in prestigious districts of the city. The cost of economy class apartments comes to $500-$1,000 per sqm. In the premium class residential market construction of cottages is considered to be one of the most fast growing niches. Till recently, the majority of customers of premium class residential properties acquired the apartments in the downtown of the city; and the major feature of a qualitative location of apartment was its proximity to the historical center. In the process of construction and acquisition of cottages, this feature has also been regarded as one of the prevailing ones. Thus, the most popular and, thus, the most expensive locations were Tsarskoye 27 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Selo, Botanic Garden area, Zverinetskaya street, Timiryazevskaya street and Michurina street. By 2001, these locations practically had no land plots left for construction of cottages. In this connection, many developers started to pay attention to the Kiev suburbs. Also, a new trend to increase of land plots allocated for cottage construction started to appear. If until recently cottages were located on a land plot of 0,12-0,15 hectare (these are the land plot areas for the above listed cottage locations inside the city), now the developers prefer to buy cottages with land plots from 0,40 hectar that can be bought mainly outside the city limits. Moreover, for the past 3 years, there was a transformation of preferences in respect of housing location towards ecologically clean areas and districts with low criminal environment – Kiev suburbs. Though, together with the land plot area, ecological purity, and low criminal environment, a special attention is paid to the existence of modern engineering and municipal infrastructure at the land plot location. Along with the above listed features, the land price also depends greatly from proximity to Kiev. In accordance with the above, in 2003, the majority of transaction were closed for cottages and land plots for cottage construction being located in Kiev suburbs. Most popular were land plots and houses located in Obukhov, Odessa and Zhitomir directions. Thoroughfare to Obukhov was initially the most popular location. Koncha-Zaspa located in this direction possesses the most developed engineering infrastructure in Kiev suburbs. Land plots located inside the cottage settlements, locations with developed road infrastructure and connected to all communications (electrical supply, water-supply, sewage, telecommunication) are sold at $7,500 per 100 sqm. At Koncha-Zaspa, land plots without appropriate engineering infrastructure are sold at $1,000-$8,000 per sqm. Prime construction cost of a cottage amounts to $350-400 per sqm (disregarding the cost of land). In some cases, the prime construction cost can amount to $800 per sqm. It should be outlined that in the premium class residential market residential complexes, in practice, do not compete with cottages. This is connected to the fact that the customers of both types of property are citizens with higher average income who can allow (and are allowing) for having both an apartment in a premium class residential quarter, and a cottage in Kiev or its suburbs. While choosing lease versus purchase in the premium class residential market, one could see that the majority of Ukrainian citizens prefer purchase versus lease. At the same time, foreign citizens prefer to lease apartments. This is connected to a fact that foreign citizens are not planning to reside in Ukraine for a long period of time, but prefer high standards of living. Here, foreign citizens remain very active mainly in the premium class residential market. Supply According to preliminary estimations of municipal authorities, in 2003, some 1 million residential square meters were constructed in Kiev that is similar to the areas launched into operation in 2002. The preservation of these sizes of construction occurred mainly because of two fundamental reasons: high demand for residential properties and increase in the number of market players (construction companies and developers) that were attracted by high returns of the above construction projects. Here, a high possibility of increasing in sizes of construction still remains. This is connected to a fact that implementation of development projects takes a long time, and currently a large number of projects are at the stage of design, approval or under implementation. Some portion will be finalized in 2004, but the majority will be completed at a later stage. Besides, a large number of projects are overcoming the stage of financial feasibility study, and their construction will be commenced no earlier than in 2005. Thus, in 2005-2007, the size of residential properties to be launched into operation will significantly overcome the sizes of construction of 2002 and 2003. In 2003, Kievgorstroy Holding Company was the most active company among construction companies and developers. Among those companies active in the premium class residential market one should outline HCM Property Management, Zhilye XXI Veka, Poznyakizhilstroy, and the State Agency Zhitlo-Invest. Townhouses appeared to become a new group of premium class residential property that might be required in the near future. Gonchary-Kozhemyaki project is one of the first projects on construction of townhouses in Kiev (the project includes construction of both townhouses and cottages), and is implemented by ZAO Trest Kievgorstroy-1 n.a. Zagorodny, near Andreevsky 28 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Spusk, at Vozdvizhenskaya street (Podol). Here, the price per 1 sqm of this townhouse amounts to some $1,300. In 2003, a development of mortgage program in Ukraine became of the reasons for a high demand for flats. The leading banking institutions that provide loans to the citizens for purchase of apartments include Praveks-Bank, UkrSotsBank, Arcada, PrivatBank and Aval’. Here, some construction companies have a close working relationship with banks (and vise versa). For example, Arcada Bank program provides for favorable loan conditions for primary residential market transaction for the houses being launched into operation by Kievgorstroy Holding Company. InterContinentBank implements a loan program for the buyers of premium class expensive apartments built by Granit construction company. Another example of bank-construction company cooperation - a joint project on providing loans to physical entities for purchasing apartments - is undertaken by the State Agency Zhitlo-Invest and UkrSotsBank JSCB. Aval’ Bank is actively working with Kievgorstroy Holding Company, State Agency Zhitlo-Invest, Poznyakizhilstroy and TMM companies under the loan programs. In 2003, the mortgage program allowed for purchasing of a significant number of apartments by means of loans. In 2003, the major provisions for obtaining a loan for purchase of apartment included: - banks give a loan of 65-80% of apartment cost (mortgaged property); - credit terms - 5-15 years, with possibility of pre-term paying off; - credit rate - 13-15% a year in hard currency and 20-25% a year in hrivna. Prices The 2001-2002 increase in prices for residential property remained valid in 2003, and the first half of 2004. Here, 2003 was featured by higher growth rates both in primary and secondary residential markets. It is typical that growth rates were almost similar for all administrative districts of Kiev, exclusive for the most expensive and most prestigious – Lipki being a part of Pechersky district. In Lipki, the growth of prices was significantly slower, but the level of prices remained in 2004 as high as it was in 2003 (significantly higher than in other districts). In comparison to recent years, the prices for premium class residential property including apartments and cottages have grown significantly. The price per 1 square meter of gross area of cottage, together with the land cost (for cottage construction) depends greatly from existence of engineering and road communications, and proximity to Kiev. In cottage settlements located in close proximity to Kiev, the cost of 1sqm of gross area of cottage comes to $800 and sometimes overcomes $1,000 per sqm. At the same time, while departing from Kiev, the price per 1 sqm of gross area of cottage will decrease to $150. It is important to note that earlier, in accordance with the Law of Ukraine “On added value taxes”, the transaction with newly built residential property to physical entities were not imposed by taxes. But according to the Law of Ukraine “On the State Budget of Ukraine for the Year 2004” that entered into force as of January 1st, 2004, this privilege for 2004 was revoked. Thus, these changes in legislation have already leaded to increase in primary residential market prices because of construction and development companies have to pay an additional sale tax (on residential property sale transactions). Upon implementation of this legislation provision, the increase in prices for residential property came to 5-15%. Monthly rental rates for apartments, 2003 Location 1-room up to 50 sqm Low Middle High Size of apartment 2-room up to 100 sqm Low Middle High 3-room up to 150 sqm Low Middle High 4-room up to 250 sqm Low Middle High Close to the central area Central districts $150 $200 $220 $450 $200 $400 $1,200 $300 $670 $1,700 $360 $830 $1,800 $380 $1,000 $250 $750 $2,500 $350 $1,500 $4,000 $750 $2,300 $6,000 29 Market Overview, Ukraine RED Ltd., July 2004 http://www.red.kiev.ua Forecast In the second half of 2004, while preservation of steady growth in economics and stability of the national currency, the trend to increase of prices for residential property in Kiev should remain steady. In 2005, the majority of experts await for stabilizing of prices for residential property in Kiev. Today the following trends appeared in the Kiev residential market:  Increase of requirements to comfort and infrastructure;  Gradual outflow of customers from secondary market to primary market (some 2025%);  Increase of amount of apartments in a secondary market that were recently built or are currently under construction, because of transfer of ownership (investment) rights according to investment agreements. In 2005, the above trends should remain as outlined that will also support conservation/increase of demand for residential property. In addition, as of January 1st 2004, three laws on mortgage entered into force: “On financial and credit mechanisms and property management in construction of residential housing and real estate transactions”, “On mortgage credits, transactions with consolidated loan debt and mortgage certificates” and “On mortgage”. In prospective, the entering into force of the above laws should lead to increase of number of banks that will work in this sphere. This will result in increase of mortgage credits to citizens and, respectively, to in crease of demand for residential property. Average sale prices, secondary market, 2003 * District 1-room, per 1 sqm 2-room, per 1 sqm 3-room, per 1 sqm Goloseevsky Darnitsky Desnyansky Dneprovsky Obolonsky Pechersky Lipki Peckersk Podolsky Svyatoshinsky Solomensky Shevchenkovsky $860 $740 $700 $730 $790 $1,040 $1,430 $1,100 $750 $700 $760 $970 $830 $710 $630 $710 $760 $1,190 $1,480 $1,150 $870 $670 $760 $1,010 $870 $630 $610 $700 $750 $1,320 $1,590 $1,320 $750 $600 $700 $1,060 * The price can vary greatly from a level of fit-out, furnishing and household appliances, location, neighborhood, floor level, and various additional services. 30