15 December, 2011
Economic overview of the Ukraine
2011 was marked by the Ukraine’s preparation for the EURO 2011 Football Championship and, generally positive economic dynamics in the country.
Despite existing obstacles such as the after-effects of the financial crisis, high borrowing costs and imperfect legislation, the Ukraine has been undertaking a wide spectrum of preparation works for the EURO 2011. This includes construction of new stadiums, upgrade and extension of the airports in the host cities, improvement of the motorways of international importance, as well as enhancement and development of the hospitality sector in the country.
According to the State Statistics Committee of the Ukraine, real GDP increased by 6.6% year-on-year in the third quarter of 2011 compared to the economic growth of 5.3% and 3.8% in the first and second quarters of the year respectively, and 4.2% in 2010. Economic growth was mainly driven by growth in industrial production, particularly its export-oriented industries, as well as the retail sector and agriculture.
As stipulated in the 2011 State Budget of the Ukraine, an increase in real GDP is forecast for 2011 at 4.5%. Oxford Economics projects economic growth in the Ukraine at 4.8% year-on-year in 2011. According to the draft 2012 State Budget of the Ukraine, an increase in real GDP is forecast at 5%, while major economic think tanks project the economic growth for 2012 in the range of 4-5.9%.
Institutional reforms and the improvement of inefficient markets for goods and services are recognised as being priority tasks for the Ukraine to secure long-term economic development in the country.
Nick Cotton, Managing Director of DTZ Ukraine said: “Clearly there remains very much to be done in terms of administrative and economic reform in the Ukraine, however, as we now see growth rates achieving some of the highest levels in Europe, this will drive further FDI attraction to the country, which, together with domestic growth will increase both occupational, development and investment activity into commercial real estate.”
In brief - retail property market in the Ukraine
Compared to other property sectors, the retail sector proved to be the most resilient during the economic crisis in 2008/9. DTZ believes that the retail property market will show further growth in the medium term when global and domestic economic conditions improve.
New retail supply during 2011 was low in Kyiv and comprised of the second phase of ‘Dream Town’, the hypermarket Novus, as well as four relatively small neighbourhood retail centres: ‘inSilver’, ‘Kvadrat’, ‘Livoberezhnyi’ and ‘Victorio’ totalling 75,080 sq m (GLA).
Major retail schemes delivered in regional cities of the Ukraine in January - November 2011 included the retail centre ‘Passage’ located in the core city centre of Dnipropetrovsk, the second phase of retail and leisure centres ‘City Mall’ in Zaporizhzhya and ‘Donetsk City’ in Donetsk, the retail and leisure centre ‘Ukraine’ in Mariupol and the retail centre ‘Galaktyka’ in Kremenchuh. In addition, DIY-stores within the national chain ‘Epicentre’ were opened in Kirovohrad, Chernihiv, Mukachevo (Zakarpattya Oblast) and Kamyanets-Podilskyi (Khmelnytska Oblast). In addition, the wholesale centres in the format ‘METRO Baza’ were delivered by Metro Cash&Carry in Ternopil and Lutsk.
In December 2011, the 7,100 sq m (GLA) retail centre ‘Ave Plaza’ was delivered by the Austrian developer Uniqa Real Estate in the core city centre of Kharkiv. DTZ acts as an exclusive letting agent in ‘Ave Plaza’ and secured many leading retail brands in the property.
Over the past 36 months, new annual retail supply was low in the Ukraine, 2012/2013 are likely to see significant augmentation in new delivery in this sector.
Above other sectors, the opportunities within the retail property sector are a priority for most developers and investors active in the Ukraine, particularly in the cities that have a total population of over 750,000.
Kyiv has been attracting particular interest from major retailers, developers and investors in the Ukraine. As of December 2011, there were over 345,000 sq m (GLA) under construction in the Ukrainian capital with delivery scheduled between 2012 and 2013. These include the first phase of ‘Ocean Plaza’ developed by UDP and KAN Development, ‘Gulliver’ by Tri O, the extension ‘Domosfera’ by DeVision, ‘RayON’ by Arricano Development, ‘Marmalade’ by VKF ‘Mava’, ‘Silver Breeze’ by Svitland Limited, ‘Fashion Factory’ by Aladdin Group, and the retail and leisure centre known as ‘Aquapark’ by Vilna Ukrayina.
To be delivered during the first quarter of 2013, ‘Kiev E95 Fashion Outlet Centre’ deserves special attention, as it will become the first fashion outlet development in the Ukraine. In October 2011, DTZ was appointed as the local exclusive leasing agent and granted a construction permit. Kiev E95 will pioneer a niche sector in the Ukrainian retail market, unlike an ordinary shopping centre in design, marketing and especially operational management; it will deliver a unique consumer experience.
In regional cities of the Ukraine, the year 2012 may see delivery of ‘City Centre’ in Odessa, ‘Magellan’ and ‘French Boulevard’ in Kharkiv, ‘Yuzhnaya Galereya’ in Simferopol, ‘Auchan City Park’ in Donetsk and ‘Fabrika’ in Kherson.
Amongst the retail schemes in regional cities, which are expected to be opened in 2012, ‘Yuzhnaya Galereya’ (YUG) Shopping centre by Arricano Development in Simferopol will be exclusively leased by DTZ. It is receiving high interest from national and international retailers, due to its modern and professional concept, good location and high quality tenant mix. Completion of the 26,500 sq m 2nd phase of the project in the third quarter of the next year will strengthen the centre’s position by enabling it to become a major shopping destination not only for citizens and visitors of Simferopol, but also for the population of nearby cities and the Crimean peninsula as a whole.
Despite the remaining signs of the economic crisis and comparatively low incomes, the potential of the retail property market in the Ukraine undoubtedly remains high because of its immaturity in terms of quality and formats of existing retail schemes, large country size, high population density, perceived high brand awareness and propensity to spend.
Work on several sizeable retail projects in Kyiv and the regional cities of the Ukraine were recently recommenced, which, if delivered to current schedules, will lead to a considerable increase in retail stock in the country by the end of 2013. As a result, the Ukrainian market will offer more opportunities for expansion of retail chains, but localised retail rents will be subject to downward pressure, particularly in some poorly conceived first generation retail schemes in light of the strengthening competition within the sector.
Investments
The National Bank of Ukraine reported that net inflow of foreign direct investment (FDI) into the Ukraine amounted to around $4,520 million in January - August 2011, almost 49% higher than the figure registered during the same period in 2010. The most attractive sectors for foreign investment into the Ukraine are the financial sector, industrial production, real estate, retail sector, construction, transportation and communication.
In early 2011, DTZ acted on behalf of an EU investor in their acquisition of a high profile, retail led mixed use development scheme in the centre of Kiev. The deal represented the largest EU derived investment into real estate into the Ukraine since 2007.
Kyiv, Odessa, Dnipropetrovsk, Donetsk, Kharkiv and Lviv have been attracting particular interest from major retailers, developers and investors.
DTZ is presently retained in the development consultancy and pre-leasing of a number of retail schemes in cities including Kyiv, Lviv, Odessa, Kharkiv, Simferopol, Vinnytsa, Kirovohrad, there still remains a willingness from some banks to consider debt finance and, interest from a number of sources of equity providers to invest into well conceived schemes with reliable developers.
Nick cotton comments: “This year, DTZ has been active in the regions in both offices and retail. In offices, on behalf of Nestle, we have secured 3,616 sq m in the Dominant Plaza Business centre in Lviv to accommodate their Share Service Centre and on behalf of Uniqa Real Estate we have been retained on an exclusive basis to lease 3,017 sq m at Ave Plaza, Kharkiv. Whilst demand for offices in the region is evident, rents however remain extremely low making any returns from speculative delivery marginal. The retail market however is very different where, speculative delivery can be and, is being viably delivered driven by an availability of sector specific development finance and a sufficient depth of retailer demand.”
2011 in review and 2012 outlook
Following considerable investment in servicing our clients during 2011, DTZ is anticipating an exciting and productive year and is looking forward to seeing the projects we have worked on in 2011 - commencement of construction works or completion.
Given the need for long leads in certain periods of real estate transactions and, the ever increasing demands of clients towards the highest levels of professional service, DTZ has continued to invest in itsteam and the benefits of this are now been acknowledged by the market. In October 2011, DTZ secured first place from a list of ten nominated leading consultants in the Ukraine, to become overall winner of the coveted 'Advisors and Consultants' category in the Euromoney Real Estate Survey. DTZ came first in three of the five sub categories taking pole position in 'Valuation', 'Agency\Letting' and 'Research' to achieve first place in the 'Overall Best Advisors and Consultants' award.
A month later DTZ was included on the list of '8 Leading Ukrainian Property and Facility Management Companies', according to Building Business magazine’s rankings. DTZ secured ranking positions in the following categories: Property and Facility Management in Office Real Estate, Property and Facility Management in Retail Real Estate and Property and Facility Management in Logistics Real Estate.
Nick Cotton comments on 2012 real estate opportunities in the Ukraine: “Given ongoing uncertainty in the Euro zone, there will inevitably be a high degree of caution from businesses increasing exposure to the Ukraine which remains a high risk environment. Nevertheless, with returns from investment into the Ukraine outperforming those in more mature economies, and, demonstrable opportunities in both the Kiev office and, national retail market there remains opportunity for effective investment into the development of both office and retail property in the Ukraine. Whilst the opportunities for development of logistics space remain thin due to very low rent levels and, relatively high vacancy there remains a wide scope for effective acquisition of operating logistics complexes as high investment yields coupled with what are clearly unsustainably low rents offer very positive opportunity for medium to long term out performance.”