2008's Retail Property Market Overview
/ Source: Colliers
The Kyiv office market in 2007 continued to follow the previously announced trends. New supply in the office segment was quite comparable to the previous year’s figure, reaching approximately 172,000 sqm. The positive macroeconomic situation in Ukraine led to a 10.2% increase in industrial production, which in turn contributed to a further increase in demand and resulted in take-up of approximately 250,000 sqm.
Due to high demand vacancy rates remained critically low, around 0.7–2% throughout the whole year. As a result, the market has witnessed noticeable growth, with rents attaining 38% increases for Class A space and 37% for Class b space.
Due to the high investment attractiveness of the office market in Kyiv, several investment transactions occurred in the first half of the year. Kazakh investment group Eurasia IPG purchased two properties on Zhylianska St., Iceberg business Center (25,000 sqm of GLA, Class A) and nTbC-II (10,000 sqm of GLA, Class A), while UK investment fund London & Regional Properties purchased Podil Plaza (18,000 sqm of GLA, Class A) on Skovorody St. most investment transactions in the office segment were completed with a yield of 9.5–10.5%; however, the average yield for prime office premises in Kyiv has slightly compressed, closing the year at around 9.0–9.5%.
The Kyiv office market continues to grow at a moderate pace. During 2007 an additional 172,000 sqm of office space was added to the existing stock, which is quite comparable to the added supply in 2006. by the end of 2007 the total stock of Class A, b, and C office space was estimated to be around 785,000 sqm. As predicted in the Colliers mid-year report, almost 45% of the newly delivered office space was Class A space, such as from Parus business Center at 2 mechnikova St. (54,000 sqm of GLA), and Iceberg business Center at 73–79 Zhylianska St. (25,000 sqm of GLA). The remaining space was made up of 38% Class b and 17% Class C. Therefore, the share of Class A office space in the total stock of office space has increased from 12% in 2005 and 8% in 2006 to 17% in 2007, changing the existing structure of the office premises make up.
The current development pipeline of office premises is estimated to be around 200,000 sqm in 2008 and 250,000 sqm in 2009, which should bring the total amount of office space in the Ukrainian market to 1.2 million sqm.
However, these volumes will not be sufficient to alleviate the shortage of office premises and satisfy the ongoing increase in demand.
more active growth of new supply is only expected to begin in 2010–2011. Developers still consider the CbD a very attractive area for office development.
However, lack of suitable land plots in the historical center of Kyiv, high prices for land sites in the CbD, and the emergence of new demand patterns such as increasing demand for excellent transport accessibility, sufficient parking space and large average area of floors, are causing developers to consider alternative options. The decentralization of the market and development of the submarkets is an established trend.
Among the potential areas for future office development are industrial parts of Podil district, the area along Peremogy Ave., the area of moskovska Sq., and the left bank of the city, including boryspil direction. Several large business parks have been announced for delivery on the left bank of the city including Livoberezhnyi business Park (60,000 sqm of GLA; Ukrainian developer), osokorky business Park (100,000 sqm of GLA; Ukrainian developer) and business Park on Vyrlytsia Lake (150,000 sqm of GLA; XXI Century).
A favorable economic situation with annual GDP growth of around 7.3% and good prospects for the coming years was the main driving factor behind the growing demand for high quality office space. The demand for office premises increased in 2007 compared to the previous year, and continued to exceed the available supply. As a result, the gross take-up of office space (total amount of space leased or sold) in 2007 reached the highest volume since 1998, closing the year at approximately 250,000 sqm, which is a 79% increase compared to the 140,000 sqm total volume in 2006. Leasing transactions amounted to about 83%, while selling transactions constituted approximately 17% of the gross take-up volume in 2007.
An increase in the average leasing transaction was one of the main trends of 2007. Deals of less than 500 sqm accounted for only 5%, which is low compared to 11% at the end of the previous year, while the share of transactions of more than 2,000 sqm increased from 54% in 2006 to almost 68% in 2007.
Similar to the previous year, most users of high quality office space were international companies, who ccounted for approx. 71% of the total take-up, compared to 73% at the end of the previous year. The remaining 29% of absorbed space was distributed between Ukrainian (18%) and Russian (10%) companies. overall, the distribution of occupied office space, as was predicted by Colliers International, is quite similar to 2006 except with a slight increase in the share of Ukrainian companies. In the coming years we expect a further increase in demand from Ukrainian companies, which is a result of the positive economic situation and increased business activity in Ukraine.
According to the compiled market data almost all of the leasing transactions in 2007 occurred due to relocation. At the end of the year this share was approximately 78%, compared to 61% in 2006 and 28% in 2005. Increased demand and tenant’s requirements for large units were one faction, while the inability of occupiers to expand within the existing office location were the other when looking at the reasons behind the high share of relocation in the gross take-up.
In contrast, the share of lease transactions due to entry and expansion decreased to 17% and 5% respectively.
Vacancy and Rental Rates
The Kyiv office market continued its flat trajectory, ending the year with extremely low vacancy rates of 0.75%, down from 1.5% in the end of 2006. The amount of vacant space by the end of 2007 amounted to 4,600 sqm, while the total stock of office space delivered in 2007 was estimated to be 172,000 sqm. Vacancy rates remained low during the whole year ranging from 0.7% to slightly over 1.5%.
The low vacancy rate and lack of high quality office premises on the market were the primary reasons for the significant increase in the rental rates. The average rental rate (net of VAT and service charge) for Class A space closed the year at $62/sqm/month, which is a 38% increase compared to the previous year figure of $45/sqm/month. At the same time, average rental rates for Class b space increased from $35/sqm/month in 2006 to $48/sqm/month by the end of 2007. Therefore, 2007 experienced one of the highest increases in rental rates since 1998, continuing the trends established in the previous year. Services are charged at cost and were estimated to be at a range of $4.5–7/sqm/ month, up from $3–6/sqm/month in 2006.
Rents for car parking space have followed the general trend as well, increasing from $80–150/space/month in 2006 to $80–200/ space/month in 2007 for surface parking, while underground parking space was leased at $150–500/space/month.
We believe that the Kyiv office market will follow the upward trend established in the previous two years. The office stock will continue to grow through the addition of speculative office space with around 200,000 sqm in 2008 and 250,000 sqm in 2009, which will not be sufficient to narrow the existing gap between the demand and supply.
The positive economic prospects of the country support predictions of a high and sustained demand for quality office premises. As a result, the share of pre-leased and pre-sale transactions is expected to increase in the total structure of take-up.
Taking into account the huge gap between demand and supply that will prevail for at least the next two years, the vacancy rate for Class A and b office space will most likely remain at the current low level, around 1–3%. The situation will not change considerably until at least 2010–2011 when significant volumes of new projects declared for commissioning during 2010–2011 could potentially satisfy the demand.
Given rising demand and lack of high quality office premises in Kyiv, the base rental rates for Class A and b office space will continue to rise. Rental growth rate for the Class A office space will most probably not be lower than 30% in 2008 and 20% in 2009.
The Kyiv industrial market continues to remain the least developed segment of the Kyiv commercial real estate market while at the same time it is growing the most rapidly. following the splash of developers’ activity in 2006, the year 2007 was characterized by record high volumes of top quality warehouse space delivered on the market, and by further intensification of construction activity.
The year 2007 was also noticeable as the first investment transaction in the Kyiv warehouse property market happened. A newly delivered project – Andakta, a chilled warehouse complex, was sold to international investor. Another international investor Akron Group completed the purchase of East Gate Logistic in the early 2008 and currently a few more investment transactions are nearing completion. The early stage in the development of the market means higher risks, and as a result has forced higher yields (typically between 10–11%) in comparison with the other segments of the Kyiv commercial real estate market. However, it does possess a strong disposition to decline in the medium run once the market becomes more sophisticated.
notwithstanding a significant increase in new deliveries, the supply and demand imbalance will continue to exist due to a number of large occupiers entering the Ukrainian industrial market (especially logistic operators and retailers) and expansion of activity of the existing ones.
All these factors, together with the high level of rental rates, significant number of projects planned for delivery in the near future, and a critically low vacancy level indicate that the industrial market has already entered an expansion stage, which in turn allows us to expect intensive development of the given segment during the next several years.
The supply of high quality warehouse space during 2007 reached unprecedented levels for the Ukrainian warehouse market, amounting to 113,000 sqm delivered to the open market, which is twice as high compared to the previous year. Warehouse facilities built for owner occupation in 2007 accounted for only 10,000 sqm.
overall, we estimate that at present the total stock of modern warehouse space in Kyiv equals 338,000 sqm. We also expect this amount to increase by approx. 443,000 sqm of speculative supply during the next year, out of which around 140,000 sqm have been pre- let in 2007. In 2009 the stock will increase by an additional 450,000 sqm subject to timely commissioning. Such considerable volumes of new supply, especially during the year 2008, are a result of both growing developer’s activity on the market and delayed supply from the previous periods. for example, originally scheduled for completion in 2007 the Komodor warehouse complex with the rentable area of 65,000 sqm will not be delivered until early 2008.
The majority of developers are ready to invest more and construct higher quality projects in order to meet tenant’s increasing requirements towards storage conditions. As a result, almost 90% of the newly delivered warehouse facilities satisfy quality standard of Class A space while the rest can be categorized as Class b. In the future we expect the share of professional quality properties to increase further, while Class b projects will represent only rare cases of reconstruction.
In line with an increase in quality, the amount of warehouse space incorporated into new projects is also growing. Developers are gaining confidence in the ability of the market to absorb larger volumes of new supply, and a significant share of warehouse complexes pipelined for the following two years have between 50,000–100,000 sqm of rentable area, while on average the projects delivered in 2003–2005 did not exceed 15,000 sqm. Low market transparency, prolongation of moratorium on sale of agricultural land (which has been a major source of sites for industrial development), and complicated permitting process are the main barriers for foreign developers to enter the local market.
At the same time the resulting situation has led to the establishment of a new trend, where there are foreign-Ukrainian joint ventures.
Currently Ukrainian developers possess a significant share of the market. furthermore, the Ukrainian developers' share in the cumulative supply of warehouse space scheduled for 2008–2010 increased to 40%, compared to the 25% in 2006. This can be partially explained by an increase in the number of projects that are going to be developed by local companies, but the main reason is the fact that most of the quality land for industrial projects is owned by local developers, many of which lack the needed expertise and financing to realize quality projects. In this respect, we expect an increase in the collaboration between foreign developers and Ukrainian ones.
Such cooperation is mutually beneficial as a joint venture is the easiest way to enter the Ukrainian market for foreign developers, while local companies gain access to a source with development expertise and financing. At the present moment, several joint ventures for warehouse project development in Kyiv and the regional markets are being negotiated.
built-to-suit developments are not very widespread in Ukraine, compared to the European markets. Due to the large deficit of modern warehouse space available on the local market, the majority of developers find it easier to deliver generic warehouse space on a speculative basis to the open market.
Currently, a supply of standard warehouse premises, usually adjusted to the needs of logistic operators (which constitute the largest share of demand) is dominating.
In the long run, with the increase in competition, local developers gaining more experience and the emergence of new players with specific requirements, built-to- suit developments will gain more popularity.
Approximately 60% of all the announced projects are located along the transport corridors going to the west, on the Kyiv region’s right bank. Transportation route E-40/m-06 (in the direction of Zhytomyr) continued to be the most actively developed, accounting for almost 40% of warehouse space scheduled for 2008–2010.
Developers’ attention towards E-95/m-05 transportation route (heading towards odesa) has increased recently and several large warehouse projects that account for 11% of pipelined supply will appear along this highway. The importance of eastern transportation routes, especially E-40/m-03 highway (in the direction of Kharkiv), in the cargo distribution system is also steadily increasing and 28% of the future warehouse space is expected along it.
Demand in the Kyiv market during 2007 continued to increase, with the rates exceeding the growth of new supply. According to our estimation, by the end of 2007 immediate demand for quality warehouse space was about 500,000 –550,000 sqm.
At the present moment, the highest demand is observed for small units of 1,000 –3,000 sqm and medium units of 5,000–10,000 sqm.
However, the tendency for an increase in the average size of a deal is clearly observed on the market. Large tenants who need more than 20,000 sqm of warehouse space are starting to appear on the local market. for example, logistics operator Fordon leased more than 25,000 sqm while retail chain mTI occupied around 18,000 sqm.
Rapid economic development facilitated expansion of incumbent operators’ activity and encouraged the entrance of new players.
This, along with a huge demand deferred from the preceding years, were the main drivers of demand over the last year. A growing number of companies are willing to relocate into better quality warehouse projects, which has also contributed to the widening deficit of the modern warehouse space.
As was the case in the previous year, the largest demand came from the side of logistic operators and retail chains, which cumulatively generated almost 80% of required space. In regards to leasing activity in 2007 logistic operators occupied 46% while 36% was used by retailers, showing that these categories of tenants currently are the most active.
overall, annual absorption in 2007 exceeded 250,000 sqm of warehouse space, which was significantly greater than available supply.
In order to secure warehouse premises, tenants signed lease agreements not only for the newly delivered space, but also for warehouses scheduled for commissioning in 2008.
During the next year Colliers International expects strengthening of demand for prime quality warehouse space in regional cities of more than 1 million people. Stable economic growth over the last years and increasing consumption potential together with a large population promote expansion of retail operators’ activity outside of the capital. Retail logistic operators entering regional markets usually accompany the development of the retail sector. Consequently, the simultaneous presence of two major sources of demand on the regional markets and the virtual absence of quality warehouse facilities may serve as a powerful magnet for many local and foreign industrial developers.
Rental rates and vacancy
Significant increases in construction costs exerted an upward pressure on rents. However, this effect was almost fully offset by the significant volume of new supply delivered. As a result, annual growth of rental rates did not exceed 10%. In-town warehouse facilities were an exception as rents increased by 20% due to the growing demand and lack of new supply.
overall, by the end of 2007, base monthly rents for top quality warehouse facilities stabilized at levels of $8–12 per sqm in the projects located in the Kyiv region and about $15 per sqm for in-town warehouses, sometimes pushing for as high as $18 per sqm. These rent rates were some of the highest among European markets. net rents exclude operational expenses and utilities ($1.5–2.5 per sqm per month) and VAT of 20%. As before, the lion’s share of the new supply was let out far before the commissioning date of the project, and vacancy levels remained close to zero.
The following trends will characterize further development of the warehouse segment:
- Record high level of development activity in the Kyiv industrial market will be preserved and can even increase during the following 2–3 years, which becomes evident from the growing number of projects planned for commissioning in the short run.
- Number of players in the warehouse property market will continue to increase. The opportunity to enjoy the benefits of an underdeveloped market will attract new specialist developers, while growth of domestic markets will encourage expansion or entry of retail and logistics operators’ activity into the Ukrainian market.
- The significant increase in volume of new supply expected in 2008–2009 might cause cumulative stock of modern warehouse space to rise more than three times, however saturation is unlikely to happen.
- Quantitative and qualitative shifts become clearly observed on the market. The share of Class A warehouse space in the cumulative stock is steadily increasing through both the delivery of a larger number of premium quality projects and an increase in those projects’ average size.
- Increase in the amount of modern stock in 2008–2009 will facilitate escalation of investment activity on the local market.
- Transport corridor in direction of Zhytomyr will continue to be the most actively developed in 2008–2009. However, the attractiveness of the other transportation routes such as the transport corridor heading towards Kharkiv and odesa, is steadily increasing.
- Low market transparency and prolongation of the moratorium on the sale of agricultural land in 2008 will be the main constraints for international developers willing to enter the local market. on the other hand, the positive aspect is that it will lead to the emergence of international and Ukraine joint ventures, which undoubtedly would favor the development of the market.
- The share of built-to-suit construction projects will increase in the long-run as local developers becoming more experienced and are able to guarantee timely delivery of the projects.
- With the growing competition in the sector of generic warehouses, developers will minimize market risks through diversification of different types of warehouse premises within one project.
- Rental rates for warehouse facilities located within the 30 km zone around Kyiv are expected to stabilize during 2008. With the timely delivery of projects scheduled for 2008, there might be a downward dynamic. Rental rates for in-town warehouse projects are likely to increase further due to the lack of supply.
- More developers are starting to consider regional markets, especially cities of more than 1 million people, and are following the expansion of retailers and logistic operators’ activity there.
The Ukrainian retail market continues to enjoy healthy and robust growth. In 2006 no large professional shopping centers opened in Kyiv, and most of the attention in the market was drawn to the regions of Ukraine. 2007 has been similar, with a limited supply of new retail premises in Kyiv. Steady increases in personal income and retail turnover growth, in addition to the absence of competition, allows Ukraine to remain in a top position within the prestigious A.T. Kearney Global Retail Development Index (behind India, Russia, China, and Vietnam).
We would like to pinpoint the following trends that determined retail market development in 2007:
- The existing imbalance between the supply and demand was not alleviated by the commissioning of new retail premises in Kyiv and the regions due to the high interest of international and local retailers looking to expand their chains throughout Ukraine.
- Lack of suitable land plots in Kyiv and complicated permitting processes forced some international developers to change their priorities and acquire land sites in the regional cities of Ukraine.
- Several well-known hypermarket operators strengthened their presence in Ukraine by opening initial stores or securing locations in future projects.
- The first international DIY operator was commissioned in a regional city, while other international DIY chains settled into the Ukrainian market.
- The appearance of a new retail format in the form of department stores was observed in the market.
- There is a strong possibility of some top retailers starting to play the role of mini- anchor tenants within shopping centers.
- The number of international brands both in Kyiv and regions increased.
- The number of entertainment operators in Ukraine increased, and current Ukrainian entertainment operators expanded their services.
- The dollar depreciation and increasing interest from the European developers caused the emergence of a new trend: rental rates started to be stipulated in EUR.
- Rental rates increased in 2007 both in shopping centers and on main streets, while vacancy rates remained critically low.
Due to the current trends, the investment market for retail premises in Ukraine remains very attractive. During the second half of 2007, downtown shopping center Globus, located in the underground part of maidan nezalezhnosti, was purchased by London & Regional Properties
The Kyiv retail market continues to grow at a moderate pace. During 2007 an additional 53,000 sqm of modern retail premises were added to the market, increasing the total retail stock by approximately 18%. based on Colliers’ estimation, the total gross leasable area (GLA) of retail space reached around 356,500 sqm. The main retail schemes commissioned in 2007 were:
- Komod a neighborhood scheme (10,000 sqm of GLA) located on the left bank of the city. Proximity to the metro station and intense traffic flows near the retail scheme location make this shopping center quite popular among visitors, although it has some shortcomings in the architectural concept.
- 2 nd phase of the Bilshovyk shopping center (around 9,000 sqm of GLA), comprised of a part of the shopping gallery and a skating rink. Strong anchors supermarket megamarket and the skating rink in addition to the excellent transport access are the advantages of this retail scheme, while limited visibility and complicated architectural concept might have a negative influence on its competitive potential. The 3rd phase of Bilshovyk shopping center is scheduled to open in 2008.
1 st phase of the mixed-use complex Materik (16,000 sqm of GLA) located at 154 borschahivska St. was commissioned on the premises of a former geared plant. The scheme is anchored with supermarket Rainford and enjoys good transport and visual accessibility. However, it suffers from complicated floor plans and a somewhat uneven tenant-mix with a lack of big name retailers. The developer of the project is also planning to open the 2nd phase of Materik, which will be represented by an entertainment component, in 2008.
- 1st phase of Sky Mall shopping center represented by the hypermarket o’KEY (18,000 sqm of GLA) and accompanied by a small gallery of impulse goods. The project is being developed by Panorama Group within the multifunctional complex Dniprovska Prystan and has a professional architectural concept (Chapman Taylor).
2nd phase (shopping gallery) is scheduled for delivery in 2008. The current development pipeline is estimated to be around 170,000 sqm of modern retail space in 2008, approx. 95,000 sqm in 2009 and more than 330,000 sqm in 2010. Therefore, 2008 is going to be more fruitful than previous years. If everything goes in accordance with the developers’ announcements, 2008 will see the commissioning of the following retail schemes: Esplanada, a mixed-use complex (55,000 sqm of GLA); 2nd phase of the Sky Mall shopping center (45,500 sqm of GLA); entertainment center Blokbaster (25,500 sqm of GLA), the delivery of which has been postponed until 2008; Kvadrat on Perova (19,100 sqm of GLA); and Materik on Dniprovska naberezhna (18,400 sqm of GLA).
However, there is a possibility of delivery delay for project such as Esplanada.
other projects that are expected to be delivered in the next year are the 3rd phase of Bilshovyk (6,000 sqm of GLA) and the 4th phase of Karavan (2, 000 sqm of GLA).
Among the unique projects in the retail market in Kyiv scheduled to open in 2010 is a mixed-use complex Aquapark that is being developed on Dniprovska naberezhna St., connecting the two most populated city districts of osokorky and berezniaky. The project will include a unique anchor of an indoor aqua park (total area of approx.10,000 sqm), a yacht-club, and business and retail premises. Due to the great location, professional concept, and unique anchor, the opening of the scheme will become a prominent event in the Kyiv retail market.
The most attractive locations for retail projects remain Petrivka and obolon (northern districts), downtown, and the left bank of the city. However, several large-scale projects with GLA of more than 200,000 sqm have been announced for delivery outside of the city border. for example, KDD Group is planning to deliver a large-scale shopping and entertainment complex located along the Zhytomyr Highway, around 40 km from the city center. A trend seems to be developing where the average size of future developments is increasing compared to existing retail schemes. The average size of retail projects scheduled to open in 2008 is around 33,000 sqm, while the average size of the projects which are going to come up in 2010–2011 could be more than 100,000 sqm.
The regional retail market remains very active. both national and international developers are looking at the market with high interest.
In 2007 the 2nd phase of the Karavan shopping center was commissioned in Kharkiv. Karavan enjoys great popularity despite that only the hypermarket, a part of the shopping gallery, and a building materials supermarket have thus far been completed. The 2nd phase of Frantsuzkyi Bulvar shopping center, in the form of an ice skating rink (around 1,300 sqm of GLA), was opened in Kharkiv. The 1st phase was delivered in 2005, but the developer has been delaying the construction process since. In case of a successful delivery of the remaining phases, the project could reestablish its popularity.
In march 2007, Vavilon shopping center, with GLA of approx. 13,000 sqm, was opened in Dnipropetrovsk. The developer of this project has postponed the opening since the end of 2006, trying to improve its concept and attract more quality tenants. Due to the relatively small size, it could be difficult for this shopping center to create critical retail mass for the attraction of a large number of visitors. Another project delivered in Dnipropetrovsk is Miriada shopping center, located on Kalinova St. The shopping center, with around 9,000 sqm of GLA, was the first project of the Ukrainian chain miriada being developed by ICD Investments.
odesa is one of the most attractive regions for the development of retail property, which explains the fact that the odesa market is one of the most developed regional markets.
In 2007, Sady Pobedy shopping center, with approx. 20,000 sqm of GbA, was delivered.
It is located in Arkadia, one of the most prestigious residential areas of odesa, and it is the only luxury class shopping center in the regions. Despite the unique format and the presence of a professional architectural concept, the developer faced a problem of finding sufficient number of tenants within the luxury segment.
Other regional cities
Other large Ukrainian cities, Donetsk and Lviv, did not witness the increase in existing GLA, while in Zaporizhia only the 1st phase of the shopping center Flagman (hypermarket o’KEY) was delivered in 2007. The 1st phase of the Sunny Gallery Shopping mall ( hypermarket o’KEY) was also opened in Kryvyi Rih.
based on the announced developments, by 2011 the cumulative stock of high-quality retail premises could reach 540,000 sqm in Kharkiv, 400,000 sqm in Dnipropetrovsk, 500,000 sqm in odesa, 170,000 sqm in Donetsk, and 280,000 sqm in Zaporizhia and Lviv. Therefore, there is a significant amount of announced projects in the regional cities that could bring some markets very close to saturation. In order to estimate the market’s attractiveness in the regional cities, we have analyzed 23 cities with populations over 200,000 (excluding Kyiv). Two parameters under consideration were: existing supply (present and announced for the near future with GLA per 1,000 citizens) and purchasing capacity determined as a product of the number of citizens and an average monthly salary (official rates).
The following chart demonstrates:
- Top left sector includes the least attractive cities: Poltava, Zhytomyr, Ivano-frankivsk, Chernivtsi, and Sevastopil. They are characterized by low purchasing capacity and relatively high stock of existing retail premises.
- Cities in the bottom left sector (Khmel- nytskyi, Vinnytsia, mykolaiv, Cherkasy etc.) and top right sector (Dnipropetrovsk, Kharkiv, Lviv, Zaporizhia, odesa) could not be described as definitely promising, though for different reasons. In the first case, the low supply of retail space is combined with low purchasing capacity of population. In the second one, the situation is reversed, and there is sufficient consumer potential with a relatively high existing
supply of retail premises. The final decision regarding investment attractiveness of the city requires additional analysis of the potential of these cities.
- Cities located in the bottom right sector are the most attractive for investments: Donetsk, Kryvyi Rih, and mariupol. The lack in supply of professional retail premises is combined with high purchasing capacity.
Developers and investors
The retail segment remains very attractive to foreign developers, both western and Russian. Difficulties with acquiring land plots in Kyiv, as well as bureaucratic and problematic permitting processes, have forced some international developers to change their priorities and acquire land sites in the regional cities of Ukraine. for example, one international developer, Acteeum Group (financed by meinl European Land) purchased a land plot in odesa and announced the construction of regional shopping and entertainment center Hippodrome, with 62,000 sqm of GLA. Similarly, London-based property company 1849 PLC, which had entered the Ukrainian market in 2005 with plans to develop shopping centers in Kyiv and other Ukrainian cities, acquired three land plots in the regional cities of Chernivtsi, Poltava, and Zaporizhia.
Among new entrants were the Israeli company Africa Israel Investments Ltd who are going to develop a mixed-use complex of approximately 150,000 sqm of GbA in Zaporizhia, while other international developers such as Israel Global Trade Center SA, british developer Parkridge Group, and belgian Ghelamco are actively looking for appropriate sites in Ukraine. At the same time, one of the major European developers of inner-city chopping centers, ECE, together with US investor DDR announced in may 2007 their plans to invest in the Ukrainian retail market is one more way to enter the Ukrainian retail market is to enter into a partnership with local players. for instance, multi Development entered into a partnership with Kharkiv developer UCDC and started to develop two projects in Kharkiv.
A favourable economic situation, an increase in household income, and retail turnover growth guarantees the increase of the internal market’s capacity and consumers’ activity.
Household income increased by 16.1% in 2006 and 12% in 2007, while retail turnover growth in Ukraine constituted 28.8% in 2007, up by 3.5% compared to the previous year. The strength of the consumer market fundamentals is also reflected in the increase of the Consumer Confidence Index, which reached the 102.7 mark in August 2007. 1
One important feature of the Ukrainian retail market is the increasing presence of well-known hypermarket operators. The french-owned operator Auchan signed a partnership agreement with furshet, and the first hypermarket will have approx. 18,000 sqm of GLA and will be opened in Kyiv at the beginning of 2008 on the former area of Kyivkabel plant (Petrivka district). new hypermarkets from Auchan are scheduled to open in 2008 in cities such as Donetsk, Horlivka, and Dnipropetrovsk. meanwhile, the Russian-owned o’KEY hypermarket entered the market in 2007 with three hypermarkets: the first one with approx. 18,000 sqm of GLA opened in November as part of the 1st phase of Sky Mall in Kyiv, and the other two were opened in Kryvyi Rih and Zaporizhia as the anchors of shopping centers developed by Panorama Group. In november, it was announced that German retail operator Real signed a lease agreement with one of the shopping centers in a regional city. meanwhile, other retailers including Ramstore, Casino, and Carrefour are considering the Ukrainian retail market one other Russian retail operator, Vester, has also managed to secure locations in a number of projects. The first hypermarket, with approx. 5,000 sqm of GLA, was opened as an anchor in the shopping center Podoliany in Ternopil, while a large supermarket, with 2,500 of GLA, was opened in December 2007 in Simferopol (shopping center FM). other supermarkets are scheduled to open in mariupol (shopping center Azov Plaza), Kharkiv (shopping center Slobozhanskyi), and other regional cities of Ukraine.
In november, the first DIY hypermarket Praktiker was opened in makiivka (Donetsk region). The total area of the hypermarket is 9,800 sqm. Praktiker is planning to open four DIY hypermarkets in Kyiv, Lviv, Luhansk, and Kharkiv next year. Estonian company Ehitus Servis announced the opening of their first DIY store, with a total area of more than 16,000 sqm, for the spring of 2009 in Donetsk. Another European DIY chain, obI, is planning to open its first hypermarket within the retail park Dafi in Kharkiv, while Leroy merlin and Israel’s largest DIY operator Home Centers are still looking for possibilities in Ukraine.
While analyzing demand for retail premises from the tenant’s side, Colliers International noticed several trends. The first one is the emergence of a new retail format in the shape of department stores. one of the leaders in the UK retail market, Marks & Spencer, opened in the Komod shopping and entertainment center in the first half of 2007. Their other stores opened in the Promenada shopping centre and the Vavilon shopping center in Dnipropetrovsk, and they are going to launch their next shop (770 sqm) in the 4th phase of Karavan in the spring of 2008. Several other retail giants, such as UK’s department store Debenhams, the netherlands’ C&A, and Sweden’s Hennes & mauritz (H&m) are considering entering the Ukrainian market soon as well.
The second trend is that some top retailers with average store size of 700–1,500 sqm could play the role of mini-anchor tenants within shopping centers. Among the future brands that could play such roles in Ukraine are ZARA, River Island, TopShop, and new Yorker – all already well established in the Ukrainian market. for example, Inditex Group, one of the largest fashion retail groups, has already signed a lease agreement on Khreschatyk St. and is going to open its flagship store ZARA in the beginning of 2008. They also bring several brands to the Ukrainian market, including, massimo Dutti, Pull and bear, bershka, Stradivarius, oysho, and Zara Home. It was also announced that finnish clothing retail chain, Stockmann, is considering the Ukrainian market and is going to enter Ukraine with the opening of its lower market segment store Seppala. As they need a minimum of 7,000 sqm for a Stockmann department store and would prefer to open their first store in the downtown area, this will make for a definite problem.
finally, the third trend is the increasing number of international brands, both in Kyiv and the regions. Several international retailers who are currently leaders in their market segments are going to join the Ukrainian market. These include German retailers Douglas (perfumes) and Deichmann (shoes), the british TopShop, the Italian Conbipel, and the french Decathlon, all who are in the process of searching for suitable premises to lease. meanwhile, Jones Apparel Group is considering the launch of two brands in Ukraine – Le Suit and nine West.
Among the long-awaited arrivals are also such brands as oasis, Pimkie, Tatuum, Laurel, Replay, Cinti, Camaieu, and Smyk/ Empik. However, most of them are operating under franchise agreements. Among the outstanding events of 2007 which influenced the franchise market, was the purchase of 43.4% of maratex (runs Esprit and Peacocks shops on a franchise basis) stock by one of the leading operators of consumer brands in Poland, Empik media and fashion Group (Em&f Group). As a result, the maratex company has received an exclusive right to bring to Ukraine the Canadian shoe brand Aldo and River Island. The first Aldo store opened in December in the Karavan shopping center, while others are scheduled to open in 2008 in Kyiv, Lviv, Dnipropetrovsk, and Kharkiv. maratex company has previously brought to Ukraine the Spanish brand Cortefiel, Pedro del Hierro, and linen brands Palmers and bodique.
Operators in leisure sector
There is an increase in the number of entertainment operators in Ukraine. Russian cinema operator Paradise Group of Companies (cinema chain Pyat’ Zvezd) signed a lease agreement in one of the shopping centers in Kyiv. In July 2007 it was announced that Russian operator Kronverk Cinema is planning to open its 7-screen multiplex in the Dafi shopping and entertainment center in Kharkiv. Other multiplexes of Kronverk Cinema are going to be launched in Kyiv and regional cities of Ukraine, while the Russian operator Cinema Park will also be present in several cities in Ukraine. Two more Russian cinema operators, InvestKinoProekt and RosCinmenaInvest, are actively considering the Ukrainian market.
Among the international players are Polish Silver Screens, which are planning to open their first multiplex in Lviv in 2008, and Warner brothers, who are still looking at Ukraine.
The situation has also changed within the segment of children’s entertainment centers. In 2007 Russian operator Crazy Park secured a location within a shopping center in Kyiv, while Play Day and Igromax are actively monitoring the market. We should also mention the new trend of Ukrainian entertainment operators occupying new niches. for example, Ukrainian bowling operators Vitamin and Club 300 are planning to launch their first children entertainment centers in future projects in Kyiv. Therefore, the Ukrainian market is following the world trends within the entertainment segment.
Rental Rates and Vacancy
Most retail rental rates are stated in dollars, thought there is a continuing trend to stipulate rental rates in euros as well. Standard lease terms are 3–10 years for non-anchor tenants and 10–20 years for anchor tenants, both of which are subject to rent reviews. nevertheless, a landlord’s market continues to prevail. Base rental rates for units of 100–300 sqm varied from $110 to $240/sqm/month in successful projects with a slight increase in some shopping centers compared to the previous year. The rates were in the range of $50–70/ sqm/month in less successful projects. This reflects the previously established trend of rent differentiation between high-quality retail schemes and less successful projects, which will be even more profound with the delivery of additional professional projects in 2008–2009.
At the same time, asking rents for prime retail locations on Khreschatyk have reached $250–380/sqm/month. Due to the lack of quality retail premises on the market, vacancy rates remained critically low during 2007. forecast The number of projects scheduled for delivery in 2008 in Kyiv will not be sufficient to satisfy the existing demand. However, there are many large-scale projects coming onto the market in 2009–2011. As a result, there is an emerging trend of tenants becoming more demanding in regards to the quality of premises, which indicates possible future competition among projects.
2008 will be also a year for either the opening of or starting on construction of several large projects in the regional cities, which indicates high interest among the main market players in retail developments in the regions.
The demand for high-quality shopping centers in 2008 will remain high as more and more professional retailers show their interest in the Ukrainian market.
Rental rates will continue to grow during the next year at a moderate pace, both in the shopping centers and on the high streets. This can be explained by the limited supply of new retail premises in 2008, a large part of which has been already pre-leased in 2007.
The absence of appropriate retail premises may force some international retailers to open their stores on the high streets, which will stimulate their further development.
Though it is the least developed among the capitals of Central and Eastern European countries, the Kyiv hospitality market is currently poised to begin development in terms of quality and quantity. The delivery of two projects in the top end segment have not satisfied the existing market imbalance, and occupancy and room rates were not affected.
The expected entrance of large international hotel chains was partially realized with the opening of the Hyatt Regency hotel in 2007, while the expected opening of an InterContinental hotel in 2008 in Kyiv and the signing of management agreements by Accor, Hilton and Rezidor Hotel Group will further this growth. The regional markets create interest in both developers and hotel chains.
UEfA‘s decision for Poland and Ukraine to host the 2012 European Championship was the second important reason for the hospitality market revival. Expected tourist inflows along with the virtual absence of quality accommodation facilities in hosting cities engaged both government authorities and developers in the hospitality market development.
The Kyiv hospitality market in 2007 experienced both quality and quantity shifts in supply. Hyatt Regency Kyiv, a world- famous hotel brand, was commissioned mid year. now there are three 5 star hotels in Kyiv, with a total supply of 661 rooms.
Another large opening in the top end segment was the delivery of boutique-hotel Riviera located in the Podil district. The property of 80 rooms is categorized as a 4 star hotel. Overall, the new supply of 4–5 star hotels in 2007 compounded 314 rooms, which was a 20% yearly increase. To compare, in 2006 the new supply growth in the top end segment in Kyiv compounded around 14%.
The commissioning of a few other projects announced for 2007 was ultimately delayed until at least 2008. We do expect one large top end project to be delivered to the Kyiv market – a 5 star InterContinental hotel (about 280 rooms). overall, the total supply of 4–5 stars hotels in Kyiv is expected to increase in 2008 to above 2,200 rooms, which is a 15% growth. In addition to the opening of international hotel chain the Hyatt Regency Kyiv, commissioning of the InterContinental project is expected in the first half of 2008. management agreements with Hilton (delivery in 2009–2010), Accor (Sofitel, delivery in 2010), Rezidor Hotel Group (Radisson boryspil, 2009) and InterContinental (Holiday Inn, 2009) were signed as well. Furthermore, the international hotel chain expansion to the regional markets was reiterated by Rezidor Hotel Group’s management agreement for two hotels near Yalta (declared opening in 2009).
According to the existing announcements, other international groups (Accor, Hilton) are planning to enter hotel projects in regional cities, primarily in large industrial centers such as Donetsk, Dnipropetrovsk, Kharkiv, Luhansk, and Zaporizhia, and tourist destinations such as Lviv, odesa, and the Crimea.
In general, the hospitality market in Kyiv has entered into a period of active development with plenty of new large projects announced along with declarations of entry by international hotel chains and local developers. nevertheless, there are currently only a few projects under development in Kyiv, and therefore a significant improvement in supply for the top end segment will not be for at least 2–3 years.
In 2007 the demand for hospitality services in Kyiv and in Ukraine continued to increase. The demand was traditionally drawn by improving business activities and by intensifying international cooperation in economic, political, tourism, and other sectors.
Similar to the previous years, the demand for quality hotel services in Kyiv exceeded existing supply. This corresponds to the growth in room rates and a high level of occupancy in the top end segment of the hospitality market.
The foreign inflow to Ukraine in 2007 significantly increased and reached more than 20 million people1. by country origin, the visitor distribution was that 33% of incoming tourists came from Russia, 30% came from European countries, 30% came from CIS countries, and approx. 6% came from other countries, including the USA, Canada, and Asian countries.
Another important component of the demand in the hospitality segment in 2007 was the growing popularity of conferences and trainings. The trend promotes higher occupancy in all segments, particularly in the top end segment.
With the expected economic development, demand in the hospitality market will keep growing. Demand for quality hotels will also become apparent in industrial cities like Donetsk, Dnipropetrovsk, Kharkiv, Zaporizhia, Luhansk and odesa.
In 2007 room rates in most hotels experienced increases, despite already being at a high level. The average growth rate of hotel room rates in 2007 compounded above 25%3.
While the room rates for the top end segment of hotels increased 30–35%, the medium-segment hotels showed less significant growth of only about 10–15%.
In the mid- to long-term, with the potential of market saturation, room rates in Kyiv hotels might slowly decrease. However, this possible slow down is not expected any earlier than 2012 given the substantial delivery of new projects.
Due to increasing demand for top end hotels in Kyiv along with the moderate growth in supply, most of the hotels in Kyiv experienced high occupancy rates. The average occupancy rates for the 4 and 5 star hotels in Kyiv was estimated at approx. 70–80%. The current market situation follows the trends observed in the past few years and has not changed significantly with the delivery of the two new projects in 2007.
Average occupancy levels in Kyiv hotels are not expected to change significantly due to the positive demand trends. occupancy rates and pricing may change only with eventual market saturation and the delivery of a number of new large projects.
Major market trends established in the preceding years will mainly continue:
- steady development of the hospitality segment in Kyiv and the Ukraine as a whole;
- further continuous growth in demand for quality hotels;
- delivery of 4 and 5 star hotels managed by international hotel chains;
- low probability of hotel market saturation until at least 2012;
- moderate growth of room rates will continue, until market saturation occurs;
- quality projects in cities hosting UEfA 2012 European Championship;
- interest to enter medium segment projects in regional markets like Luhansk, Zaporizhia, Kryvyi Rih, and Ivano-frankivsk by international chains;
- growing attractiveness of tourist destinations for large hospitality projects.