Office real estate of Ukraine: tendencies and future prospects

Office real estate equally with trade real estate is one of the most dynamically developing sector of Ukrainian commercial real estate market. Business activity growth of national businessmen and arrival of foreign investors to Ukraine caused the demand for qualitative office quarters, supply of which is not enough for today. Such disbalance caused high rent rates, profitability of investments in office projects and as a result -aspiration of developers to earn money by new objects supply in such situation.

For today office real estate market is the most developed in big Ukrainian cities and especially in Kiev, taking into account that high concentration of business activity in regional centers and especially in the capital has strong influence on these processes.

It’s very hard to determine an exact number of existing office-objects. It’s caused by such reasons:

  • Free treatise of office building classifiers
  • Existing mixed-use projects
  • Availability of office buildings which are used by one lessee-owner, etc

In general, for today in Ukraine the number of office-buildings is approximately between 120-180 objects, at the same time the number of office centers in Kiev is between 60 and 100 objects. The area of classified Kiev’s objects is estimated at 600 - 750 ths. sq.meters. In Kiev the square of unprofessional or unclassified office-objects amounts approximately from one to few million square meters.

B-class office buildings account the biggest part in sector of Kiev’s professional office real estate. A-class objects occupy only 15% of the market and one third is taken by C-class objects. It is significant that new proposition entering the market is presented by objects of A, B and B+ classes. Objects of C-class appear at the market mostly by reconstruction of old administrative buildings. Creation of such objects is not attractive for investors owing to risk of decreasing its fillability during market’s satiation.

Besides development of Kiev’s real estate market evolution of regional office real estate market is also significant. For example office real estate market of Donetsk doesn’t dispose many professional objects, but this market develops really dynamically. In general, there are about 12-15 office centers in the city which can be referred to B/B+ classes, and most of them function in the city center. In most cases all these objects don’t have big total area. At the same time some projected objects have much bigger square. Most of them are also situated in the central part of the city.

Office real estate market in Dnipropetrovsk in comparison with other Ukrainian cities is one of the most developed. Appearance of first professional objects on the market is regarded to 1990-es. They had not so big square and that is why were absorbed by the market. Local developers were and still remain the main players on the market. Taking into account the situation on the market, developers and investors have started to increase the squares for realizing projects. We have to note that Dnipropetrovsk’s real estate market is also famous for its pioneering point of view in architecture, that gives new and interesting objects to the market. Several important projects are being realized in Dnipropetrovsk. For example business-centre CIVILIZATION (company CONSOL as developer), mixed-use complex “SLAVIJA” (“RATIBOR” group) and other great projects are being processed now.

Until recently office real estate market in Kharkov was presented mostly by reshaped buildings of institutes, hotels, etc. Since 2005 new objects with not big square have been started to appear on the market. For today there are some great projects at the stage of implementation in Kharkov, for example business-centre “Kovcheg”, hotel-centre “PLATINUM PLAZA”. And again main players on this market are local companies particularly “Concern AVEK and Co”, “Macrokap development Ukraine”, etc.

Investment attractiveness of office real estate market is determined by high demand for professional apartments against a background with lack of professional apartments’ supply.

At the same time demand for office apartments in professional objects is generated by average or big national companies, which extend their activity, and also by international companies, which work in Ukraine.

Concerning Kiev it can be noted, that there is a great demand for offices, which are situated in the central part of Kiev and on the Podol. However taking into account traffic problems, regions near central part are also in requisition.

Taking into account deficiency of appropriate apartments, tenants form the demand for object of other classes. Significant increasing of tenant’s requirements is a common tendency. The average size of rented offices also increases.

2007 year was very productive for Kiev’s office real estate market, but not so productive as for market of trade real estate. Although new supply couldn’t fully liquidate disbalance on the market, but anyway it was a big step to meet the demand. That year 10 new objects were proposed to the market. And at the same time a lot of renting contracts with very high rates were signed before new object was put in commission.

However disbalance between demand and supply of professional objects is so high, that even record number of objects that are putting in commission won’t put the axe in the helve.

Even opposite , during 2007 year rent rates have increased significantly (per 30-35%).At the same time the most important facts for rent price forming are the class of the object, its facilities and accommodation of building.

For today rent in some A-class business- centers amounts 100$ for per month, for B-class offices rent totals 30-35$ for per month., wages for C- class office apartments – 25-35$ for per month.

Even in spite of high rent rates, deficit of qualitative office objects caused high indices of fillability and accordingly low indices of vacancy. Current indices of office-centers fillability are total 94-100% , in the same time for most of A and B-class business-centers index of apartments vacancy gains not less that 1-2%.

Moreover, dominating of office rental contracts over bargains is one of the market features. Now the number of rented offices exceeds the number of bought ones. It’s a consequence of high prices on the market and lack of supply.

Some tendencies, which have emerged on the real-estate market of other big cities should be mentioned. Deficit of suitable office-development projects is actual, (e.g.) Odessa and Kiev. There is one characteristic feature: removal of office-centers location to more distant region from the center owing to transport’s problem solving. The necessity to realize the project “Central business district” and its replacement beyond the bounds of city center and building the new micro district appeared in Odessa. The best decision is mixed-use complex with road interchange. Tendency of project range extension and as a result the increase of stories’ number is evident.

For today development of mixed-use projects is typical for real-estate market.

One more very positive tendency is improving the quality of new projects. It’s a result of leaser’s requests extension, growth of professional skills of developers and investors and our expectations of future competition. Of course new office-projects are not ideal, but tendency of new objects improvement is evident. For the future, expansion of high-class apartments (A, B+-classes) share can be expected.

Situation of disbalance on the market and deficit of appropriate land have formed aspiration of developers for developing industrial zones and territories of industrial enterprises, which are often situated in central parts of the city. Also developers became more active with project developing outside the city center. For example projects, which were held in Kiev by “Alakor” and “Seven Hills” companies can be mentioned.

Complexity of land for development allotment, complicated procedure of construction project concordance, lack of appropriate lands for office-projects, etc. are among the factors that prevent from more dynamical development of office real estate market. Concerning Kiev- one great problem-is absence of legislation for building edifices higher that 25 stores.

We can forecast continuing development of office real estate market. Now there are 40 office-projects in Kiev at different stages of implementation, which in future will provide the market with 200 of office apartments. Construction works of some mix-use complexes (“Mirax-Plaza”, “Esplanada”, etc.) are being carried on.

You can hear the statements of development of new industrial zones and creation business-cities, particularly on Ribalskiy peninsula and in Nignaja Telichka region. It is important that now 50-60 stored objects are at the stage of elaboration.

The number of business-centers, which are being built at the moment, is not less than 65.

Concerning market satiation of new objects- decreasing of rent rates is expected. Some problems can be with C-class objects. Today they are filled just due to the lack of professional objects.

At the same time we have to emphasize that for market satiation with the same speed of new objects building as minimum 3-5 years are needed. That’s why currently national and foreign developers and investors have enough time for getting profit in future.