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The Forecast of Residential Housing Market Development

What are the prospects of further development in the residential housing industry? Hardly anyone dares to disagree that the number of players on the market will reduce – and, by the way, this is precipitantly happening now. In this respect, bankruptcy poses threat for both small companies having realized 1-2 projects and big players who became fascinated at a certain stage with large-scale projects, ran into debts and now have no sources to finance their activities. Lots of foreign players are expected to lose interest in the market especially in its residential housing segment. High level of corruption and non-transparency of licensing procedures, as well as significant risk level, etc., used to be compensated by high business profits. In conditions of reduced prices and demand the Ukrainian market will not be as attractive as it used to be.

Regarding the residential housing projects, the completion stage objects will enjoy more advantages. The builders and owners will first of all do their best to bring exactly such projects to their logical end. The projects launched with participation of foreign investors and major national industrial and financial groups will have more chances to be finalized. The projects being constructed in the centres of big cities with more than one million inhabitants and correspondingly possessing more reserves for changing prices in order to attract buyers will also appear in better conditions. Worse conditions will accompany large-scale projects with indefinite sources of further financing. The economy segment projects in city suburbs with no significant reserves for reducing prices will be affected most of all. Projects in most of small towns will face the same challenges except resort centres.

Assessment of fund sources for financing residential housing is important for forecasting further market developments. It seems possible to expect an extremely low probability of resuming mortgage loan activities as well as crediting construction developers and owners directly in short-term and mid-term future. Restructuring of old debts looks much more feasible. Builders’ own resources are limited, and, additionally, hardly anyone will take the risk to spend them in today’s situation. Thus, mostly people’s current incomes and available savings can be used to build up the cash inflow sources. It’s obvious that only a very limited number of people can afford buying real estate for their current incomes. That’s why a lot will depend on how the population spends the available savings. The factors of residential housing deficiency and the factors of its low quality currently preserve their importance as they keep building up a significant deferred demand which, however, has slightly reduce recently due to certain outflow of out-of-town visitors from big cities. The population has enough savings to revive the residential housing market, however, people are not in a hurry to spend them because of their uncertainty in the future of the economy. Additionally, the current level of prices does not facilitate a considerable number of potential deals. Thus, one can expect a further price reduction. For a certain period of time, a situation will be observed on the market when one can find flats on sale with similar specifications and features but with very different prices governed by the level of urgency of sellers’ financial requirements. The prices might be expected to reduce to the levels when the demand for real estate can be financially supported without mortgage lending. Real estate prices before the active introduction of mortgage lending in Ukraine can serve as the reference prices in this case.

In mid-term future, it also looks unlikely that speculative capital might flow into residential housing, i.e. that real estate will be purchased not for residing but for commercial purposes. Real estate will be purchased as an investment only by a small number of people who even in spite of the crisis have idle money and look for investing it. However, these deals are not believed to have a significant influence with the whole market.

‘State money’ might also become a source of fund flow into the residential housing market. Taking into account the disastrous consequences of ceasing the construction market, the state lobbied by the construction business is trying to revive the market. This intention is supported by a number of regulatory and legal instruments adopted. However, even at the beginning of the second quarter of 2009, in the full swing of the crisis, there is no clear understanding of terms, mechanisms, volumes and sources of financing the construction industry. Moreover, even if the declared support volumes reach the market they won’t be able to dramatically influence the industry sector.

In general, implementation of the above mentioned expectations as to attracting funds to the residential housing market directly on the mentioned market of the residential real estate under construction will to a great extend depend on the factor of builders’ credibility. Currently, there is no feverish demand or supply shortfall on the market, so the buyers have time and possibility to make a better choice. In this situation the builders who can shine out among other players against the background of a disastrous fall of credibility to the construction market will enjoy a significant advantage. Naturally, we mean the builders with positive previous history who will keep constructing their objects only at allegedly slower rates. Unfortunately, there are examples when some builders prefer to store available funds referring to the world crisis and applying to the state for help instead of employing their capacities to continue construction works.

Thus, the crisis in the residential housing industry is expected to result in clearing the market of weak, unprofessional and dishonest players, in reducing prices and in decreasing construction volumes. Recovery from the crisis will depend on restoring buyers’ confidence in construction developers and owners which in general might look unlikely in the mid-term future. State funds could somewhat exhilarate the sector but currently it’s difficult estimate their value, terms and conditions of reaching the construction industry.