Full house: Ukraine’s immature retail market is reaching new heights on a rising wave of foreign investment
Like many of its neighbours, Ukraine has been slow to emerge from the post-Communist gloom. But gradually, with relative political stability and a growing economy, the country is upping its game and now offers much to developers, retailers and investors.
In terms of demographics, Ukraine is second only to Russia in the region with a population of 47m, including five cities of more than 1m people and two of more than 700,000.
Meanwhile, retail sales, boosted by falling unemployment and rising wages, have increased substantially in recent years. According to DTZ, during the last nine months of 2007, retail sales grew by around 28.2% year-on-year compared with 26.5% and 22.4% in 2006 and 2005 respectively.
All this amounts to massive latent potential for the retail market. Nick Cotton, managing director of DTZ Ukraine, says: “The market, if you can imagine a clock face, is at about four o’clock – still very immature. Ukraine stagnated for many years but has found its identity and its path. There is a high degree of confidence among businessmen and consumers, and that is driving inward investment and domestic reinvestment into the economy.”
With such huge undersupply, developers have been rushing to meet demand. In the capital, Kiev, again according to DTZ, supply of modern retail space has risen from zero in 2000 to around 400,000m2 at present. This is predicted to reach around 800,000m2 by the end of 2009, with schemes such as the 18,000m2 Esplanada, the 65,000m2 Gorky Park by Interregional Investment Union and the 123,000m2 Obolonskiy and many others already under construction. This is a substantial turnaround by any standards and a similar situation is occurring across the country.
Cotton says that developers are competing to build shopping centres in cities with million-plus populations. “There will be winners and losers. In Kiev, there are no losers because the market is so chronically undersupplied that even the most poorly conceived, badly located shopping centres are leasing at full occupancy and at high rents. We don’t see that situation being reversed in the short term.”
Many foreign developers enter the market with local companies, which already hold significant landbanks and know the intricacies of the Ukrainian planning system, particularly in Kiev.
“Some of the larger German development funds would find some of the development processes here hard to accept. But the smaller, more agile developers are able to come in and they are doing so,” Cotton says.
Evgeniya Anichkova, head of retail at Jones Lang LaSalle Ukraine, is more candid in saying that it is almost impossible for a foreign developer to work in the country because the market is not transparent.”
This aside, many foreign developers are active in Ukraine, particularly in the regional cities. Dutch group Multi Development has two schemes in Kharkiv on the border with Russia. It will develop with a local company but retain major control on the project. In L’viv, in the west, Italian developer King Cross has also teamed up with a local operator. Phase one of the Leopolis scheme, due to open at the end of next year, will provide about 50,000m2.
In addition, the UK’s Absolute Capital Management fund is developing a major scheme in Odessa on the Black Sea coast. The company wants to build a 185,000m2 trading and entertainment centre called Riviera Shopping City.
The Ukrainian market is still very much in its infancy, but with such strong demand for shops from consumers, and with so much money pouring into the country from foreign developers and investors, its future looks promising.
Rents
? For key cities, the average rent for an investment grade shopping centre is about $55 per m2 per month
? For regional cities over 1m, it is $35 per m2
? For small cities, about $20-25 per m2
? In the short- to medium-term, demand for high-quality retail space in the major regional cities is expected to exceed supply, with retail rents remaining high compared with other CEE cities
Investments
? Foreign investment is picking up, driving yields to below 10%
? Actual yields in Kiev are 8.5-9%, but non-transparency of the real estate market restricts the information available on deals
? “We are seeing massive attention to investment opportunities from western banks. The market is proving to be very resilient to the ongoing credit crunch,” says Nick Cotton, managing director of DTZ Ukraine
? Ireland’s Quinn Group, London & Regional and Kazakh-backed investor Eurasia are active
? In Kiev most stock consists of “first-generation” retail centres
Development
? The deficit of retail space in Kiev is reflected in the high occupancy rate of the good-quality schemes already present. Well-designed schemes are 100% occupied, and even underperforming schemes have occupancy rates of 90-95%
? Local and international developers are demonstrating substantial confidence in Ukraine – particularly regional cities such as Odessa and Dnipropetrovsk – and are investing in modern retail projects
? Many local developers team up with foreign developers for mutually beneficial joint ventures. Apollo Real Estate Advisors, a leading US real estate fund, is working with local company 1849 to develop schemes in regional cities
? XXI Century Investments is the main local development company, active mostly in residential and retail sectors. It has around 10 projects set to open by 2011
