Commercial and Residential Real Estate in Ukraine Current Status

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Commercial and Residential Real Estate in Ukraine Current Status Powered By Docstoc
					Market Overview, Ukraine
RED Ltd., July 2004

                             CURRENT STATUS AND DEVELOPMENT TRENDS


        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

Market Overview, Ukraine
RED Ltd., July 2004

       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             2005f
                                                                                            frcst          rcst
GDP, USD billion                                                 31.6 31.3 38.0 41.5 47.8 56.0             62.7
GDP in comparison to previous year, %                            -0.20 5.90 9.20 4.80 8.0 8.20             6.50
Industrial production, in comparison to previous year, %         4.0 12.4 14.2 7.0 15.8 12.20              7.40
Average level of unemployment, %                                 4.3 4.22 3.68 3.8 3.6 3.4                 3.2
Gross wages in production sector, in comparison to previous 16.3 29.2 35.2 20.9 21.0 31.4                  20.0
year, %
Average index of production prices, in comparison to previous 14.70 18.90 0.90 5.60 8.9 6.0                5.0
year, %
Average index of consumer prices, in comparison to previous 17.80 23.30 6.0 -0.50 8.0 8.7                  6.8
year, %
Index of consumer prices, in comparison to previous year, %      19.20 25.80 6.10 -0.60 8.2 9.2            7.0
Overall budget balance, % of GDP                                 -1.5 -0.7 -0.3 -0.74 2     -0.70          -0.18
Export, USD billion                                              16.3 19.2 21.1 23.6 28.0 30.8             33.88
Import, USD billion                                              15,2 17,9 20,5 21,5 26,0 29,8             33,1
Current pay balance, USD billion                                 0.9 1.2 1 .4 3.2 3.6 2.8                  2.4
Current pay balance, billion, % of GDP                           2.8 3.8 3.7 7.7 7.5 5.0                   3.8
International currency reserves of the National Bank of Ukraine, 1     1.5 3.1 4.4 6.6 9.2                 10.7
USD billion
Average exchange rate UAH/USD                                    4.13 5.44 5.37 5.33 5.33 5.35             5.42
Average exchange rate UAH/EUR                                    5.24 5.05 4.67 5.53 6.03 6.8              6.1
Sources: National Bank of Ukraine, Ministry of Statistics; (frcst) Raiffeisen Bank of Ukraine

Market Overview, Ukraine
RED Ltd., July 2004


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.

Market Overview, Ukraine
RED Ltd., July 2004
       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.


       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.

Market Overview, Ukraine
RED Ltd., July 2004

Largest investment transactions in the Kiev office real estate market, 2003-2004

                                                                            Cost, in USD,
    Property           Area, sqm       Grade         Buyer/Seller
                                               Legal entity non-resident/
Business Center          10 000          B+                                  15 000 000
                                               Legal entity non-resident

                                                                            Cost, in USD,
    Property           Area, sqm       Grade         Buyer/Seller
Business Centre
                                                Legal entity resident /
  Sportivnaya             9 000          B+                                  7 600 000
                                                   Legal entity *
  Square, #1

* 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.

Market Review

Market Overview, Ukraine
RED Ltd., July 2004
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

Market Overview, Ukraine
RED Ltd., July 2004

Historical overview

                          Start                End                     Phase
                          1996                 1997
                          1997                 1998
                          1998                 2000                    Decline
                          2000                 2001                   Reviving
                          2001                 2004

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.

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.

Market Overview, Ukraine
RED Ltd., July 2004

List of large office buildings launched in 2003

Name                                     Address                     Grade           Rentable areas, sqm
Forum Business City*                     Pimonenko st.13             B               10,000
Panorama                                 Bol. Zhitomirskaya st. 20   B               7,700**
Cubic Center                             Sholudenko st. 3            B               7,000
NTBC                                     Zhivlyanskaya st. 43        A               7,000
Podil Plaza (new building)               Skovorody st. 19            A               4,500
Mandarin Plaza                           Basseinaya st. 4            A               4,000
Business Center                          Bozhenko st. 87             B               4,000
Ukrainian Pharmaceutical                 Turgenevskaya st. 15B       B               4,000
Dominant Business Center           Basseinaya st. 6                 A                3,000
   * 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.

Market Overview, Ukraine
RED Ltd., July 2004

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
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

                               1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

                                              Supply of office space, in sqm

Market Overview, Ukraine
RED Ltd., July 2004

Office space distribution, by Grade
Grade A Grade B+ Grade B Grade C

Typical terms&conditions of leasehold agreements
                                               Normally, leasehold agreement is signed for 3 years.
                    Lease terms                As a rule, minimum lease term agreed to by Landlord
                                                                  will be 1 year

                    Agency fees                         Up to 11% of the annual base rent

             Leasehold prolongation                Exists, under condition of base rent revision

           Base rent calculation, units

                                                                    3 months
        Advance payment of base rent

                                                                     3 years
         Base rent revision, frequency

                                                               $2 – 6 /sqm/months
Operating expensed and management fees

                                                   At Tenant’s expense, though can be partially
                        Fit-out                              reimbursed by Landlord

                                                                   VAT of 20%
Tenant’s tax obligations, % of the base rent

         Main Office Buildings in Kiev

Market Overview, Ukraine
RED Ltd., July 2004

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

                     Market Overview, Ukraine
                     RED Ltd., July 2004
     Name                              Image                          Address          Grade    Overall   Base rent,     Parking    Number           Major
                                                                                                 Area       USD        (Number of   of floors       tenants
                                                                                                 Sqm        sqm/          spots)
Mikhailovskaya,                                                   Mikhailovskaya                                                                In the pipeline
#12                                                               street, 12
Institutskaya # 28                                                Institutskaya        В       2 788      32           70           4           Dresdener
                                                                  street, 28                                                                    Bank,

Bogdana                                                           Bogdana                      2 853      25           Более 40     5           Lufthansa,
Khmelnitskogo                                                     Khmelnitskogo                                                                 P&G, PASA,
#52                                                               street, 52                                                                    OKI, Konika,
                                                                                                                                                Air Baltic,
Aquamarine                                                        Zhilyanskaya         С+      2 800      16           есть         -           Burda Ukraine
                                                                  street, 29

Artyom Business                                                   Glybochitskaya       В+      10 000     20 -25       160          5           Mary Kay,
Center                                                            street, 4                                                                     Aventis,
                                                                                                                                                Renault, US
                                                                                                                                                Embassy, UK

Barok Center                                                      Mikhailovskaya       В       3 107      19-25        25           5           Altheimer
                                                                  street, 11                                                                    & Gray,
                                                                                                                                                KPMG, Bispro

Dominant Office                                                   Basseinaya street,   А       3 700      -            80           6           -
Center                                                            6

Europe Business                                                   Muzeiny              В       6 000      25-30        Limited      8           Merloni, Japan
Center                                                            pereulok, 4                                                                   Embassy,
                                                                                                                                                JVC, WINSEF

                 Market Overview, Ukraine
                 RED Ltd., July 2004
Forum Business                                                Pimonenka street,   В    19 000   18       300              3-5   Metro Cash
Park                                                          13                                                                &Carry,
                                                                                                                                Hertz Rent-a-
                                                                                                                                Car, Colgate-

Kempa Center                                                  Vasilkovskaya       В    12 000   От 15    50               4     Absolute
                                                              street, 1                                                         Holding,
                                                                                                                                Furnel, Sanitec
                                                                                                                                Florian Italia
                                                                                                                                Due, KANEX,
                                                                                                                                Krone Anlagen
                                                                                                                                Export GmbH,
                                                                                                                                Kodak, J.B.
                                                                                                                                Chemicals &
                                                                                                                                ls Ltd. Elite

Horizon Office                                                Shelkovichnaya      В+   16 000   30 -35   Limited          17    AmCham,
Towers                                                        street, 42-44                                                     BBC, Perrie,
                                                                                                                                Maersk, Cisco
Iternational                                                  Bol.                В    10 000   _        110              9     Shell, Sky
Office &                                                      Vasilkovskaya                                                     Travel,
Residential                                                   street, 9/2                                                       Mitshubishi

Khreshchyatik                                                 Khreshchyatik       В    7 535             28               4     Golden
Plaza                                                         street, 19 а                                                      Telecom,

Kiev-Donbass                                                  Pushkinskaya        В    7 000    19       40 (all prices   8     TAS -
                                                              street, 42/4                               are included)          Investbaek,
                                                                                                                                Index Bank,
                                                                                                                                Deloittte &

                  Market Overview, Ukraine
                  RED Ltd., July 2004
Kudryavsky                                                     Bekhterevsky         В   3 300    20         36          6   Initiative
spusk Office                                                   per., 4Е                                                     Media,
Center                                                                                                                      Hewlett-

Mandarin Plaza                                                 Basseinaya st., 4    А   4 000    30         Более 200   -   Not launched
                                                                                                                            into operation

Mechnikova                                                     Mechnikova st.,      В   4 500    25         _           4   _
Office Center                                                  14/1

Millenium                                                      Vladimirskaya        А   8 000    Более 30   55          9   TNK Ukraine
Business Center                                                st., 12                                                      Neftegaz,
                                                                                                                            nzie, SAP AG

NEST                                                           Uritskogo st., 45    С   14 235   18         90          9

New Technology                                                 Zhilyanskaya st.,    В   8 000    30         да          7   Raiffeisenbank
Business center                                                43                                                           Ukraine

OST-WEST                                                       Khvoiki st., 18/14   С   3 300    10-14      35          7   Rockwool,

                Market Overview, Ukraine
                RED Ltd., July 2004
Podil Plaza                                                  Spasskaya street   А   18 355   25-30    145          9         Miele, G-
                                                             30/ Skovorody                                                   Tech, Sony,
                                                             street, 19                                                      East-West,
                                                                                                                             Philip Morris,
                                                                                                                             JTI, Samsung,
                                                                                                                             Sky Travel

Renaissance                                                  Vorovskogo             13 113   25       120          5         -
                                                             street, 24
Silver Center                                                Lepse Boulevard,       6 000    18       Ample        8         Temde
                                                             4                                                               Ukraine,
Stand Office                                                 Vasilkovskaya      С   11 500   16       Ample        7         Renault
Center                                                       street, 14
Olymp                                                        Krasnoarmeyskay    В   13 000   25       340          10        _
Office&Retail                                                a street, 72

                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.

                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,
Market Overview, Ukraine
RED Ltd., July 2004
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 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.

Market Overview, Ukraine
RED Ltd., July 2004
Existing retail centers in Kiev
              Name                                           Location                     Areas, sqm
                                      Underground passage between Lva Tolstogo st. and
            Metrograd                               Bessarabskaya Sq.                          17,000
    Ukraine, reconstructed
      department store                                    Pobedy Square                        17,000
             Rhythm                                     Geroev Kosmosa st.                     14,000

             Kvadrat                                       Gnata Yury st.                      11,000

           Gorodok                                  Krasnykh Kazakov Prospect                  10,000
       Karavan, Phase 1                                    Lugovaya st.                        35,000

            Globus-1                         Maidan Nezalezhnosti Sq. – right-hand side         8,500
      Kvadrat Shulyavka                                    Dovzhenko st.                          890
      Kvadrat – Mir Knigi                                  Slavy Square                         4,270

             TsUM                                       B. Khmelnitskogo st.                    8,000
           Detsky Mir                                       Malyshko st.                        8,000
             Kvadrat                              “Druzhby Narodov” metro station               8,000
        Mandarin Plaza                                     Basseinaya st.                       7,500
            Globus-2                          Maidan Nezalezhnosti Sq. – eastern side           7,500
             Evroport                                    Lukashevicha st.                       6,000
             Kvadrat                               “Lukyanovskaya” metro station                5,300
         Retail Center
     at Lvovskaya Square                                 Lvovskaya Square                       5,000
            Alladin                                       Grishka st. 3a-5                     16,000
    Retail&Leisure Center                              Bol. Vasilkovskaya st.                  22,000
            TOTAL                                                                             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;

Market Overview, Ukraine
RED Ltd., July 2004
    • 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.

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
     • 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, all-
season 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.

Market Overview, Ukraine
RED Ltd., July 2004
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

Retail centers projected for delivery in 2004-2006
            Name                                                 Location                     Area, sqm
Magellan                              Akademika Glushkova Prospect                             17,000
Karavan, Phase 2                      Lugovaya street                                            7,000
Kureni                                “Obolon’” metro station                                  25,000
Promenada                             Baggovutovskaya street                                   30,000
GUM                                   Krasnoarmeiskaya street                                    8,500
Retail center                         Sportivnaya Square                                       29,000
Olympic Plaza                         Bolshaya Vasilkovskaya street                            30,000
Lybid’ Plaza                          Gorkogo (Antonovicha) street                             40,000
                                      Intersection of Stolichnoye shosse and Akademika
Retail center                                                                                  16,000
                                      Zabolotnogo street
                                      Between Dneprovskaya embankment street and “Osokorki”
Retail center                                                                                  30,000
                                      metro station
Retail center                         Perova Boulevard – former Avrora cinema                  20,000

Market Overview, Ukraine
RED Ltd., July 2004

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 6-
storey 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.

Market Overview, Ukraine
RED Ltd., July 2004

2003 base rents for retail sections in the retail centers

                                                                          Gross area,      Section area,
      Retail Center                            Location                                                      rate,
                                                                             sqm               sqm
Globus-1                     Maidan Nezalezhnosti Square – western part      8,500           50-250          80
Mandarin Plaza               Basseinaya street                               7,500           35-185          80
                             Between Lva Tolstogo street and
Metrograd                                                                   17,000            15-50          60
                             Bessarabskaya Square
Kvadrat                      Lobby of “Druzhby Narodov” metro station         8,000          20-100         30
Kvadrat                      Lobby of “Lukyanovskaya” metro station           5,300           20-80         30
Detsky Mir                   Malyshko street                                  8,000           25-75         30
Globus-2 (Levels 1-3)        Maidan Nezalezhnosti Square – western part       7,500          25-700         60
Kvadrat                      Gnata Yuri street                               11,000           20-80         25
Gorodok                      Krasnykh Kazakov street                         10,000           30-50        30-40
Karavan, Phase 1             Lugovaya street                                                 25-300          50
                                                                            of 8,000)

                                             Base rent for retail space in
                                        Single standing buildings and build-in
                                                shops ($/sqm/month)

                                                                            Max Base
                        80                                                  Rent $/month
                        60                                                  Average Base
                                                                            Rent $/month
                                                                            Min Base
                                                                            Rent $/month
                                1        2       3        4     5

     1                Downtown, central zones of Pechersky and Shevchenkovsky districts
     2                      Podol, Artyoma street, beginning of Gorkogo street,
                                      end of Bol. Vasilkovskaya street
     3                         Pobedy Prospect, Druzhby Narodov Prospect,
                          “Lukyanovskaya” metro station, Lesi Ukrainki Boulevard
     4                   “Levoberezhnaya” metro station, “Darnitsa” metro station,
                                          Leningradskaya Square
     5                            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.

Market Overview, Ukraine
RED Ltd., July 2004
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

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
Also, XXI Century group – the operator of Kvadrat projects – have announced on its plans to enter
the regional markets of Ukraine.


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.

Market Overview, Ukraine
RED Ltd., July 2004

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 dust-
and-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 owner-
occupier 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:

Market Overview, Ukraine
RED Ltd., July 2004
       -       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
       -       professional suppliers of logistic and transportation services. This group owns the
               majority of professional warehouse facilities and provides the majority of additional
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.

Market Overview, Ukraine
RED Ltd., July 2004

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
       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
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.

Market Overview, Ukraine
RED Ltd., July 2004

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 $8-
10 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.

In 2004, the demand for professional warehousing facilities with additional services (loading-
unloading, 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
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.


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
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

Market Overview, Ukraine
RED Ltd., July 2004
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.

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
Market Overview, Ukraine
RED Ltd., July 2004
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
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.

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

Market Overview, Ukraine
RED Ltd., July 2004
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
      - 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.

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                                                                   Size of apartment
                                                1-room                2-room               3-room                4-room
                                             up to 50 sqm         up to 100 sqm         up to 150 sqm         up to 250 sqm
                                         Low    Middle   High   Low    Middle   High   Low   Middle   High   Low   Middle   High

Close to the central area               $150    $220     $450   $200   $400 $1,200 $300      $670 $1,700 $360      $830 $1,800

Central districts                       $200    $380 $1,000 $250       $750 $2,500 $350 $1,500 $4,000 $750 $2,300 $6,000

Market Overview, Ukraine
RED Ltd., July 2004
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
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 20-
           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                                     $860                                $830                               $870
Darnitsky                                       $740                                $710                               $630
Desnyansky                                      $700                                $630                               $610
Dneprovsky                                      $730                                $710                               $700
Obolonsky                                       $790                                $760                               $750
Pechersky                                      $1,040                             $1,190                             $1,320
Lipki                                          $1,430                             $1,480                             $1,590
Peckersk                                       $1,100                             $1,150                             $1,320
Podolsky                                        $750                                $870                               $750
Svyatoshinsky                                   $700                                $670                               $600
Solomensky                                      $760                                $760                               $700
Shevchenkovsky                                  $970                              $1,010                             $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.