The Kiev office market is maturing, with developers becoming more sophisticated and new projects growing in quality and size. However, even with some large projects delivered in early 2008, the office market remains undersupplied. At the same time, many new projects have been announced and if completed by 2011, could more than triple the modern office stock. Among the main trends of the office market are growing demand from local and international companies, decentralisation towards the Left bank and outside the CBD, growth of the office component share in mixed(use projects and development of new office centre formats (business parks).
As at Q2 2008 the total stock of office premises amounted to 964,700 sq m. New supply in H1 2008 was 266,732 sq m, with 17 properties delivered to the market.
The most prominent are BC Parus (rentable office area 41,000 sq m) and BC Iceberg (25,100 sq m). In 2008 the supply is estimated to grow by over 50% YoY.
The average size of completed and announced projects in 2007(2008 (at around 25,000 sq m) grew almost four (fold compared to 2003-2004 (6,750 sq m) and three (fold compared to 2005-2006 (8,100 sq m).
Presently, many projects are completed late due to bureaucratic obstacles in the development process. We expect this tendency to continue in the medium (term perspective.
Currently, demand on the Kiev office market considerably exceeds supply. Steady economic development and further expansion of corporate occupiers continue to drive demand for modern office space. The share of foreign companies in demand remains stable at around 60%. The following sectors represent the main tenants: banks, oil & gas producers, software & computer services, media, food & beverage companies.
There is a trend towards an increase in demand for larger (size premises. For instance, in 2005 the most demanded premises for Class ? were 60(200 sq m,in 2007 – 250-300 sq m, in Q1 2008 – 250-400 sq m.
Due to the lack of high quality office premises, prime base rents demonstrated sharp growth in the last few years. In H1 2008 prime rates increased by 38% and reached USD 1,080 triple net. The vacancy rate remains low at 3.3%. As quality stock expands, tenants will get a broader choice.
However, market saturation, along with rental stabilisation, is not anticipated before 2011. In addition, the new supply will be better in quality, and tenants will be moving out of less competitive buildings. Both of these factors will lead to gradual increase of vacancy rates.
The Kiev retail market continues its active development. Among the recent trends we highlight growing project scale and improvement of their quality (applying advanced construction technologies, professional management, efficient tenants mix, expanding entertainment areas). Other notable developments include growing expe-rience of national developers and the entrance of foreign players, the emergence of global retail brands, including such formats as department stores and retail parks. The most active development takes place on the Left bank of the city.
At the end of Q2 2008 the total stock of quality shopping centers was 241,000 sq m (88 sq m/1,000 inhabitants). It remains well below the levels in major European cities. Taking into account domestic market volume, growing retail turnover and personal incomes, Kiev has high potential for further expansion of retail supply.
Six new centres were delivered to the market in 2007(Q2 2008, including Materik (17,000 sq m), Komod (14,000 sq m), Bolshevik (15,000 sq m), Dneprovskaya Pristan' Phase 1 (18,000 sq m), Kvadrat(Aurora (18,100 sq m), Auchan (12,000 sq m). Kiev currently has 16 quality shopping centres, with 20 more to be delivered in the next 3 years.
As a rule, announced projects enter the market with 6-12 month delay due to limited supply of land, low skills and deficit of labour and lack of financing. If all announced projects are implemented, the total stock will grow three (fold by 2011 reaching over 600,000 sq m.
Current demand significantly exceeds supply. High retail turnover growth (by over 29% per annum, on average) and high profitability of investments into the retail market (9-10% yield) stimulate demand for quality premises and expansion of developer activity.
Due to the lack of high quality projects on the market and high demand, vacancy rates remains below 1% and will stay low for the next three(four years.
At present, premises of 120-140 sq m are in highest demand. Hypermarkets generally occupy spaces ranging from 7,000(14,000 sq m. The entertainment segment is dominated by cinema and bowling chains and is rapidly developing.
Rental rates in Q2 2008 increased slightly in comparison to last year, mainly a reflection of inflation. Average rental rates for premises of 100-150 sq m range from USD 960 to USD 1,800. For hypermarkets average rents are USD 160-180.
Prime rental rates in existing shopping centres increased by 10% from 2006 reaching USD 2,200 sq m per year, excluding OPEX and VAT.
Recently, mixed payment schemes have gained popularity (fixed payment plus a turnover component).
The Kiev warehouse market started its dynamic development recently, with the first quality projects appearing in 2006 (e.g., Mirage, Fim Center and L(Town). Although several large logistic complexes were put into operation since then, the demand for modern premises exceeds the supply. The market continues to expand actively, and many new projects are announced for the coming years. Yet, we expect the implementation of some projects to be postponed, therefore supply will increase gradually.
Long (term lease agreements for 7-10 years are becoming popular, projects are growing in size. The investment activity is picking up as well: for example, the Akron Group purchased East Gate Logistics in 2006 and West Gate Logistics in 2007.
TThe total warehouse stock has more than doubled in 2007. Among the largest delivered properties were East Gate Logistics (40,000 sq m), Kiev East One (18,000 sq m), Omega (15,000 sq m) and Mirage 2 (15,000 sq m).
We expect the stock to increase five (fold by 2010. The warehouse sector attracts developers by lower construction costs — compared to office and retail sectors — shorter construction periods and lower competition.
The following factors will facilitate further market development: the expansion of retail sector, the entrance of new international manufacturing and retail companies, growing interest from international logistic companies and development of local ones and the importance of Kiev as a transportation hub
Currently, the highest demand is for premises of 1,500-3,000 sq m. Foreign companies dominate the demand with 65% of the total take-up. The main users are professional logistic companies, Ukrainian and international distributors.
The most popular locations are those close to the Kiev Ring Road 30 km zone, outside of Kiev, in the western part of the Kiev Region (Zhitomir highway, Kovel highway), in the South (Odessa highway, Dnepropetrovsk highway), routes in the Russia direction (to Kharkov and Chernigov).
Prime warehouse rents in Kiev are higher than in most European cities amounting to USD 150 USD/sq m/year (net of OPEX and VAT).
Since 2006 rental rates increased by 25%. In Q2 2008 the vacancy rate amounted 3.5%. Occupancy level in constructed properties is mostly influenced by location. The demand for quality warehouses located closer to the city still exceeds the supply. As supply expands, rental rates are expected to gradually stabilise.
/ Source: Jones Lang LaSalle