2019 was marked by further improvement of market sentiment and actual transactional dynamics in the investment market. This was driven by continued currency stability, improved dynamics of the commercial property markets in Ukraine, and an increasing number of local companies seeking to deploy accrued equity into real estate both as purely income-producing investments and for owner-occupation.
Occupier demand in offices, retail and logistics markets throughout Ukraine has strengthened throughout the last two years and, there are now signs that lack of available supply is hindering some relocation and expansion plans. Pipeline delivery, though increasing, remains constrained, resulting in office vacancy levels in Kyiv and the key regional cities being at historic lows not witnessed since 2008. This is having the effect of driving up rents, a trend that is likely to continue in the short to medium term.
Commercial real estate in Ukraine is generating annual Yields 12-14%.
During 2019 new supply in the office market sector amounted to around 59,600 sq m.
Low development activity during the earlier periods combined with relatively strong occupier demand, largely driven by IT companies, industrial companies and companies providing business services, has continued to put upward pressure on effective rents for office space in Kyiv - in 2019 prime base office rent in Kyiv was around USD 30 per sq m.
Prime yield for office properties in Kyiv is around 11.5-12% and it is projected to remain at the current level in the short term. Office properties in Kyiv remain an attractive asset class for investment acquisition in Ukraine, however, the availability of quality product at price, perceived by the market to reflect fair value, is becoming scarce.
The average vacancy rate in Kyiv decreased in 2019 to 6.2%. This is due to the fact that for several consecutive years the offer of new business centers on the market was minimal, and those premises that were commissioned were absorbed relatively quickly due to the development of the IT industry in Ukraine and the activities of outsourcing companies. The leaders in popularity among tenants are high-quality class A business centers located in the central areas of the capital that meet such requirements as a well-thought-out concept, the presence of a large parking lot, excellent views, modern engineering systems, etc.
The rate of provision of office space in Kyiv is significantly lower compared to other European cities. At the same time, an increase in demand from tenants, a decrease in vacancy and an increase in rents indicate the potential of this market segment and the prospects for its development.
Despite the fact that there are currently a sufficient number of land plots for the development of office centers, a shortage of funds and difficulties in attracting borrowed capital remains a limiting factor in the market.
Office Property Market in Kyiv
In 2019 occupier demand in the warehouse sector was largely driven by traditional logistics and transportation service providers, as well as retailers. E-commerce was also a major driver of the firm’s warehouse interest in the past years, some companies use warehouses for manufacturing.
Prime rents for the most sought-after warehouse and logistics properties in the Greater Kyiv area were subject to further upward pressure in 2019, and the trend is likely to continue during 2020. The prime yield for logistics properties remained at 12.75% in 2019 and is currently projected to remain at this level during the next year.
Weak development activity combined with strengthening occupier demand continues to keep vacancy at low levels with upward pressure on effective occupational costs in the most sought-after properties. At the end of 2019, primary vacancy further decreased to 1.9%, whilst asking monthly base rents for prime warehousing space increased and were in the range of USD 4-5 per sq.m. These numbers shows that Ukraine has great potential for the development of logistics real estate projects.
Retail remains the most vibrant segment of the commercial property segment. An unprecedented volume of new supply is scheduled for completion in 2019-2020 with 650,000 square meters of the gross leasable area under construction. The Kyiv retail segment counted 1.3 million square meters in 2019.
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