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Яндекс цитирования

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30.01.2009

Kiev. Commercial Real Estate Market Snapshot. The 4 q 2008

Office Market

Economic Background




Ukraine’s economy has grown rapidly since 2000, and from 2005 economic growth was driven by strengthening domestic demand supported by a credit boom and significant capital inflows. By mid-2008 the economy was overheating with consumer price inflation reaching an annualised rate of 30% and banks were increasingly exposed to foreign funding. However, in Q1-Q3 2008, Ukraine showed remarkable resilience to the global credit squeeze, mainly as a result of a very strong domestic demand.

Since early October 2008, deteriorating conditions on the international financial markets caused a sharp slowdown in capital inflows to Ukraine. The country also suffered from continued political instability, surging inflation, a weakening of the national currency (hryvnya) against the US dollar, rising domestic interest rates and, of particular cause for concern, falling export prices for steel. Ukraine’s poorly diversified economy, with an overreliance on exports of raw materials and metallurgical products, has now seen a reduction in private consumption and a palpable loss of both domestic and international confidence.

Economic Growth

During the first nine months of 2008, real GDP grew by 6.9% compared to 7.7% in 2007 and 6.1% in 2006. In accordance with a Consensus Forecast produced by various Ukrainian think tanks in October 2008, by the end of 2008 real GDP is projected to grow by 4% based on a pessimistic scenario and 7.8% according to an optimistic scenario.

The IMF expects 6% economic growth this year.

2009 is likely to bring about a recession in Ukraine due to diminishing volumes of exports, industrial output and bank credits. According to the Consensus Forecast, in 2009 economic growth is expected to be in a range of 3.8% to 6.6%, while the IMF and the World Bank expect an economic contraction of 3% and 5% respectively. According to the IMF, assuming a global recovery in the second half of 2009, the economy could resume its potential growth rate of 5% to 6% by 2011 with inflation at 5% to 7% by late 2011.

Inflation

Consumer prices increased by 16.6% in 2007 and 11.6% in 2006. Under the anti-crisis programme recently adopted by Ukraine’s authorities and submitted to the IMF, inflation is expected to decrease to 17% by the end of 2009 compared to the projected 25.5% in 2008, the highest level for the last eight years.

High inflation will contribute to an increase in the operating costs of the companies, which are heavily exposed to labour and utility cost inflation.

National Currency

In May 2008, the National Bank of Ukraine revalued the official exchange rate of the hryvnya to the US dollar at 4.85UAH/US$ after having kept it unchanged at 5.05 UAH/US$ since April 2005. In October 2008, the hryvnya started depreciating against US dollar and in November 2008 the official exchange rate reached the record level of 6.9 UAH/US$. Salaries in many enterprises throughout Ukraine have been pegged to the US dollar at the fixed exchange rate and, the US dollar was a preferred currency for loans and mortgages taken out in 2007-2008. Thus, the recent devaluation of the hryvnya, combined with deteriorating macroeconomic conditions, have had a significant negative influence on consumer spending via a decrease in the purchasing power of the population. In addition, the rapid strengthening of the US dollar has resulted in this foreign currency deficit and forced the National Bank of Ukraine to reconsider the currency policy in the country having introduced a free market exchange rate.

Financial Support to Ukraine

In November 2008, the Executive Board of the IMF approved a twoyear Stand-By Arrangement totalling US$16.4 billion for Ukraine to help the country’s authorities restore financial and economic stability, as well as to overcome a domestic and international crisis of confidence. In November 2008, the National Bank of Ukraine received the first tranche of the IMF loan in the sum of US$4.5 billion to bolster stability of the national currency and banks’ recapitalization.

The World Bank declared that by end of 2008 Ukraine may also receive a US$500 million loan ‘to battle a crippling economic crisis’.

Unemployment

In accordance with the methodology of the International Labour Organisation (ILO), in the first half of 2008 the unemployment rate in Ukraine was estimated at 6.2%, which was higher than in Bulgaria (6%), Latvia (6%), Lithuania (4.7%) and Slovenia (4.6%), but lower compared to Poland (7.7%), Hungary (7.7%) and Slovakia (10.5%).

The Ministry of Economy of Ukraine forecasts that the unemployment rate will increase to 6.4-6.8% by the end of 2008. The unemployment rate varies significantly throughout Ukraine. In the first half of 2008, the lowest rate was observed in Kyiv.

Household Income

Despite significant increases in recent years, the average monthly salary in Ukraine still remains low compared to Western and Eastern European countries. In January-September 2008 the average monthly salary amounted to UAH1,773 (US$365) compared to UAH1,288 (US$255) in the same period of 2007 and UAH1,004 (US$199) in 2006.

In January-September 2008, real salaries increased by 8.4% year-on-year compared to 12.2% and 21.2% year-on-year during the same period in 2007 and 2006 respectively. The IMF projects that real monthly salaries will increase by 9.1% in 2008 and decrease by 8.7% in 2009.

Analysis of income levels in Ukraine on the basis of the official government statistics is complicated due to the fact that a considerable unregistered ‘grey’ salary segment exists throughout the country.

Under the conditions of a global financial crisis and worldwide economic slowdown combined with loss of domestic and international confidence in Ukraine, the remainder of 2008 and 2009 are likely to become challenging for the country. Assuming that the global recovery takes place by the end of 2009, the Ukrainian economy may renew its potential economic growth of 5% to 6% by 2011.

Pre-crisis conditions in Kyiv

Office Supply




Following previously established trends, the supply side in the first nine months of 2008 did not bring any significant changes to the office market in Kyiv. A severe deficit of quality space combined with strong demand resulted in upward pressure on rents in all segments of the market in the Ukrainian capital.

As at November 2008, in Kyiv there was around 916,500 sq m (GLA) of cumulatively delivered office stock, excluding government buildings and offices constructed for owner-occupiers.

During January-November 2008, total new supply reached around 175,110 sq m. Among the major schemes completed were the second phases of the business centres Leonardo and Ilyinskyi (Lastivka), the business centre at 28 Fizkultury Street and New Technology Business Centre II (Deloitte Business Centre).

As in previous periods, class-B space and properties delivered through refurbishment, dominated the new office supply during the first nine months of 2008.

Only around 7,980 sq m of new space (the business centre Capital Hall) is still to be additionally delivered to the market in Kyiv by the end of 2008, which will bring the total ‘modern’ stock to 924,490 sq m.

Office Demand




Due to the witnessed stable economic growth in Ukraine at the average rate of 7.4% during the period of 2000-2007, as well as international and domestic confidence in the country, since 2007 many companies started to realise their expansion plans. Due to the historic prevailing deficit of quality office space in Kyiv and low volumes of new office supply annually delivered to the market, many companies have significantly increased occupied office space considering not only current occupational needs, but also expected expansion of their business and the resultant need to increase numbers of staff.

Based on the general positive economic dynamics, in January-September 2008 office demand remained very strong in Kyiv, and during the first nine months of 2008 around 140,000 sq m of offices were absorbed.

The quality office space in all the positioning classes was attractive to potential occupiers in Kyiv.

As a result of the structural deficit of quality stock combined with high demand, during the nine months of 2008 pre-lets had become common. Following the trend established during the previous periods, the number of office transactions exceeding 1,000 sq m has increased in Q1-Q3 2008.

During the first nine months of 2008, market-wide vacancy was very low. Due to the low volume of the office property market in Kyiv, vacancy rate varied in the range of 1-2.5%.

Office Rents

Office space in the schemes positioned in the class A was available at rents in between of US$70-85 per sq m per month, while the class-B space was proposed at US$55-70 per sq m per month.

Before October 2008, it was expected that due to a shortage of quality office space combined with high demand there would have been further upward pressure on office rents, which would have been expected to increase by a further 10-15% by end of 2008.

However, the worldwide economic slowdown and the recent onset of the financial crisis in Ukraine have brought significant corrections to these projections.

Post-crisis market development

In view of current economic uncertainty and daily changes on the market, any projections should be interpreted only as pessimistic or optimistic scenarios, and play only an indicative role in relation to future market evolution.

Office Supply

As of November 2008, new office pipeline for 2009 may amount to around 75,000-120,000 sq m depending on the scenario adopted.

The new supply next year will be dominated by class-B office space delivered through conversion of former industrial and administrative buildings.

Due to decreased need of occupiers in office space, availability of sub-lease opportunities has become very common, and this stock has formed an additional significant offer for companies seeking for space.

Development of many large-scale office schemes in Kyiv was suspended. The delivery of true A class premises are anticipated to remain in short supply until 2011-2012, while from 2012-2013 out-of-town business parks may start entering the market.

DTZ expects that many developers may use the next 24 months to seek to revise former large-scale schemes to lower density and to provide for phased development. Hence, whilst overall pipeline stock may be lower, the volume of ‘deliverable’ stock may more quickly recover after macroeconomic conditions improve.




Office Demand

Due to strengthening of the negative impact of the global financial crisis on economy and commercial activity in Ukraine, as well as deteriorating macroeconomic conditions in the country, the fourth quarter of 2008 has seen a significant fall off in office demand in Kyiv.

Many companies, who have already experienced decreases in profits, are trying to minimise their operational costs and optimise business processes, and staff redundancies are becoming widespread.

In order to improve personnel efficiency, some companies, which previously occupied sizeable office units and also spread among several buildings, are now willing to consolidate all their business units to a single building.

An additional factor, which forces managers of the companies to decrease the size of the occupied space, is low flexibility of landlords in their pricing policy and slow reaction to the new economic conditions in Ukraine. Many would-be occupiers are now considering cheaper office space in the non-central locations of Kyiv in preference to more expensive space in the Central Business District of the city.




We project that market-wide vacancy will amount to around 4.2% by end of 2008, but the real figure will depend on willingness of landlords and tenants to come to mutually advantageous terms, and will be higher due to volumes of sub-lease space coming to the market, while methodologically it is not reflected by vacancy rate.

Future development of the office property market in Kyiv, particularly office demand, is strongly dependant on macroeconomic conditions, as well as the timing of global and Ukraine’s economic recovery.

There is no unified outlook on further economic development of Ukraine. Therefore, it is extremely difficult to make any projections on future dynamics of office property market, which is the secondary function to general economic inputs.

Nevertheless, 2009 is likely to be a very challenging year with less demand for office space compared to 2007 and first nine months of 2008. The non-central but efficient class-B office space is likely to become the most sought-after product over the medium term in Kyiv, however subject to availability at significantly lower rental rates when compared to central class-A space.

In 2009, the office vacancy rate is likely to vary in the range of 6.5-11% depending on the scenario adopted.

Office Rents

Due to current economic uncertainty, we believe that by end of 2008 prime rents for office space contracted before October 2008, will remain at the level witnessed before onset of the crisis, i.e. at around US$80 per sq m per month.

The real cost of this office space occupation will depend however on the currency in which the rental rate was fixed. In 2008, lease agreements in several centrally located buildings provided for office rents fixed in hryvnia at the official exchange rate of the National Bank of Ukraine as at the invoicing date. Due to the recent devaluation of the Ukrainian currency against the US dollar, office rents fixed in hryvnya have decreased by over 25% in dollar terms. Some landlords have however gained, where office rents are pegged to the US dollar.

In 2009, prime rents are likely to decrease significantly and will vary in the range from US$45 per sq m per month, based on the pessimistic scenario, to US$60-65, if following the optimistic scenario.

In DTZ’s opinion, the decrease in monthly rents for class-B office space will likely be more moderate and, in the short term will vary in the range of US$25-45 per sq m. These projections are of course sensitive to global and local economic conditions, as well as fluctuations in exchange rate of hryvnya against foreign currencies.

The Office Property Market in Kyiv:

the Hard Facts

General Summary


- Under the conditions of the global financial crisis and worldwide economic slowdown, combined with loss of domestic and international confidence in Ukraine, the remainder of 2008 and 2009 are likely to become extremely challenging for the country.

Assuming that a global recovery starts to take place by the end of 2009, the Ukrainian economy could renew its potential economic growth of 5-6% and previous commercial activity by 2011. Consequently, strong office demand may return during 2010-2011.

- The financial crisis will provide attractive opportunities to proactive and professional developers, bringing the standards of the office property market to new levels. Site purchases at sensible price levels and the improvement of office schemes still at design stage will enable developers to more easily finance them, and more importantly deliver the product which genuinely meets occupier requirements.

- The office property market in Kyiv may now be determined as  a tenant’s market as opposed to the landlord’s market that prevailed during 2004-Q3 2008.

- Taking into account that construction of several sizeable pipeline office schemes in Kyiv was recently suspended, and while new annual supply will most likely remain restricted in 2009-2011, by end of 2011 office rents may rise again to the levels witnessed before the crisis.

- The current market may turn to be advantageous firstly to those developers, who will be able to deliver high-quality efficient office schemes by 2010-2011 to take advantage of the projected space shortages, and secondly to those able to deliver phased and sensibly designed properties to satisfy potentially resurgent demand in 2011-2012.

Notes for Developers

- Under the conditions of the current economic uncertainty, the market has shifted to the benefit of tenants.

- Tenants are becoming more selective, and efficiency of space occupied is increasingly considered a crucial factor in their decision-making process. DTZ suggests that some developers may consider using the current market inactivity to revisit efficiency and quality of their pipeline projects, so that when the crisis passes and full-scale commercial activity recovers their schemes are in pole position to secure the best tenants.

- Flexibility in delivery of sizeable office schemes is very important.

- Therefore, DTZ expects that many developers may use the next 24 months to seek to revise former large-scale schemes to lower density and to provide for phased development. This will be critical in attracting early finance.

- Occupiers will only consider those properties, which are either completed or nearing completion. Most would-be occupierswill not commit to any office development that is unlikely to be delivered in time with 100% probability. Pre-lease agreements prior to commencement of development are virtually impossible to secure in the office market in Kyiv.

- DTZ believes that those landlords will be most successful who demonstrate an ability to ‘seduce’ tenants by showing a high degree of professionalism, flexibility, transparency, as well as a pro-active approach to pricing and incentives. Efficient office schemes can be profitable even at the rents much lower than previous market ‘highs’.

- The standards of marketing should be upgraded and more attention should be paid to marketing budgets allocated by landlords and developers. This might have been unnecessary in a bull market but times have changed.

Notes for Tenants

- Now it is the most favourable time for occupiers, who can use the market opportunity to their advantage and secure the best space available under the best flexible lease terms.

- Occupiers nearing lease expiries or having options to break are in a strong bargaining position to secure significant reduction in their annual rent rolls.

- DTZ believes that there is a significant but as yet unknown volume of space that will in due course be made available by occupiers, however not openly, on the market.


Retail Market

Economic Background




Ukraine’s economy has grown rapidly since 2000, and from 2005 economic growth was driven by strengthening domestic demand supported by a credit boom and significant capital inflows. Though by mid-2008 the economy was overheating with consumer price inflation reaching an annualised rate of 30% and high exposure of banks to foreign funding, in Q1-Q3 2008, Ukraine showed remarkable resilience to the global credit squeeze, mainly as a result of a very strong domestic demand.

However since early October, deteriorating conditions on the international financial markets caused a sharp slowdown in capital inflows to Ukraine. The country also suffered from continued political instability, surging inflation, a weakening of the national currency (hryvnya) against the US dollar, rising domestic interest rates and, of particular cause for concern, falling export prices for steel. Ukraine’s poorly diversified economy, with an overreliance on exports of raw materials and metallurgical products has already resulted in a reduction in private consumption and a palpable loss of both domestic and international confidence.

According to A.T. Kearney’s 2008 Global Retail Development Index, Ukraine was ranked the 17th most attractive market (compared to 5th in 2007) due to poor infrastructure, bureaucratic red tape, political instability and soaring inflation.

Economic Growth

During the first nine months of 2008, real GDP grew by 6.9% compared to 7.7% in 2007 and 6.1% in 2006. In accordance with a Consensus Forecast produced by various Ukrainian think tanks in October 2008, by the end of 2008 real GDP is projected to grow by 4% based on a pessimistic scenario and 7.8% according to an optimistic scenario.

The IMF expects 6% economic growth this year. 2009 is likely to bring about a recession in Ukraine due to diminishing volumes of exports, industrial output and bank credits. According to the Consensus Forecast, in 2009 economic growth will be in a range of 3.8% to 6.6%,while the IMF expects an economic contraction of 3%. According to the IMF, assuming a global recovery in the second half of 2009, the economy could resume its potential growth rate of 5-6% with inflation at 5-7% by late 2011.

Inflation

Consumer prices increased by 16.6% in 2007 and 11.6% in 2006. Under the anti-crisis programme recently adopted by Ukraine’s authorities and submitted to the IMF, inflation is expected to decrease to 17% by the end of 2009 compared to the projected 25.5% in 2008, the highest level for eight years.

National Currency

In May 2008, the National Bank of Ukraine revalued the official exchange rate of the hryvnya to the US dollar at 4.85UAH/US$ after having kept it unchanged at 5.05 UAH/US$ since April 2005. In October 2008, the hryvnya started depreciating against the US dollar and the official exchange rate varied in the range of 5.7-5.8 UAH/US$.




As salaries in many enterprises throughout Ukraine have been pegged to the US dollar at the fixed exchange rate and the US dollar was a preferred currency for loans and mortgages taken out in 2007-2008,the recent devaluation of the hryvnya, combined with deteriorating macroeconomic conditions, is likely to have a significant negative influence on consumer spending via a decrease in the purchasing power of the population.

Support from the IMF

In November 2008, the Executive Board of the IMF approved a twoyear Stand-By Arrangement totalling US$16.4 billion for Ukraine to help the country’s authorities restore financial and economic stability, as well as to overcome a domestic and international crisis of confidence. The purpose of the anti-crisis programme adopted by country’s authorities in late October, supported by the two-year Stand-By Arrangement with the IMF, is to restore financial and macroeconomic stability by adopting a flexible exchange rate regime with targeted interventions, a pre-emptive recapitalization of banks, and a prudent fiscal policy coupled with tighter monetary policy.

This should help to reduce inflation to single digits by the end of theprogram.

Imports

In 2008, Ukraine joined the World Trade Organization, which may result in an increase in imports. However, due to the negative impact of the global financial crisis on the Ukrainian economy, the government may revise the export-import policies, particularly as it applies increased customs duties.

Unemployment

In accordance with the ILO methodology, in the first half of 2008,the unemployment rate in Ukraine was estimated at 6.2%, which was higher than in Bulgaria (6%), Latvia (6%), Lithuania (4.7%) and Slovenia (4.6%), but lower compared to Poland (7.7%), Hungary (7.7%) and Slovakia (10.5%). The Ministry of Economy of Ukraine forecasts that the unemployment rate will increase to 6.4-6.8% by the end of 2008. The unemployment rate varies significantly throughout Ukraine. In the first half of 2008, the highest unemployment rate was registered in Ternopil, Rivne, Zhytomyr and Chernivtsi oblasts with the lowest rate observed in Kyiv, Odessa, Dnipropetrovsk and Donetsk oblasts, as well as in the Autonomous Republic of Crimea.

Household Income

Though having significantly increased during recent years, the average monthly salary in Ukraine still remains low compared to Western and Eastern European countries. In January-September 2008 the average monthly salary amounted to UAH1,773 (US$365) compared to UAH1,288 (US$255) in the same period of 2007 and UAH1,004 (US$199) in 2006. In January-September 2008, real salaries increased by 8.4% y-o-y compared to 12.2% and 21.2% y-o-y during the same period in 2007 and 2006 respectively.

The IMF projects that real monthly salary will increase by 9.1% in 2008 and decrease by 8.7% in 2009. Analysis of income levels in Ukraine on the basis of the official government statistics is complicated due to the fact that a considerable unregistered ‘grey’ salary segment exists throughout the country.

The customised research of the Ukrainian cities with populations over 100 thousand inhabitants conducted by the international sociological company GfK in 2004-2007 revealed that the estimated average income per capita was the highest in the cities with populations around 1 million including Odessa, Kyiv, Kharkiv, Dnipropetrovsk and Donetsk. At the same time, income growth in Odessa, Kyiv and Kharkiv was higher than the average for the cities with populations of over 100,000 inhabitants, and varied in the range of 32-41%, while in Dnipropetrovsk and Donetsk income growth was lower than average. According to GfK, in the majority of the cities in Ukraine the relative level of welfare has not changed considerably in recent years.

Retail Sales

Retail sales in Ukraine have been steadily increasing over the past few years. During the first nine months of 2008, retail sales increased by 25.1% y-o-y compared to 28.2% and 24.4% in 2007 and 2006 respectively. We project that in 2008 and 2009 this indicator will decrease due to the worsening macroeconomic conditions in the country.

Consumer Spending

According to Renaissance Capital, on average consumer spending grew by 20% per annum in the past five years driven by salary growth of 29% per annum in nominal terms since 2002. The share of food spending as a percentage of the total dropped from 59.1% in 2002 to 51.4% in 2007. This still remains high compared to the developed countries with less than 35% share.

In the next two years the share of food items in total spending is likely to remain flat or even increase by 2-2.5%, driven by expected high food prices and utilities inflation, lower retail lending and a fall in real incomes, leading to reduced spending on non-food durable items.

Inflation and retail


Experts of Renaissance Capital believe that the negative impact of inflation on retail market will be two-fold:

• Drop in branded products consumption In the first nine months of 2008, annualised food price inflation of 21.6% exceeded that of income growth of 15.4% year-to-date.

This will lead to a drop in consumption of the branded/premium foods, which are the most expensive in the consumer basket and will become less affordable. As a result, retailers are likely to face a drop in turnover and profits for the foreseeable future.

A pick up in branded/premium goods consumption is unlikely in the near future and, Renaissance Capital expects it will substantially lag behind income improvement and inflation slowdown.

• Increasing operating costs

High inflation will contribute to an increase in retailers’ operating costs, which are heavily exposed to labour and utilities costs inflation. As a result, the retail operators’ margins will be under pressure in the foreseeable future.

Growth of retail vs. the rest of the economy

Renaissance Capital believes the slowdown in economic growth will have a direct negative impact on growth in the retail sector. This will be a reflection of the slowdown in consumer income growth coupled with reduced consumer spending due to uncertainty in mid-term earnings. The final factor will be reduced retail lending, leading to lower demand for durable goods.

In addition, the lack of new banking capital to fund retail chain expansion will force the retail chain operators to revise their growth plans and focus on profitability optimisation of the existing chains.

On a positive note, the retail segment is likely to be among the first to show growth when economic recovery commences due to pent up demand and improved macro outlook.

Importance of regional expansion for retailers

According to Renaissance Capital, modern retail penetration in Ukraine is still minimal. If Ukraine is to follow the path of its western peers, a higher penetration would need to be achieved via nationwide expansion of the retail chains in both food and non-food segments.

At this stage, Kyiv enjoys the largest modern retail stock in the country. High real estate prices and lack of available properties act as a barrier to entry offering moderate growth opportunities compared to the country-averages. However, the regional retailers still seek to open shops in Kyiv solely due to its “prestige” status.

Regional retail markets offer limited competition, low penetration rates of the modern retail formats and relatively inexpensive real estate properties compared to Kyiv. However, consumer spending capacity in the regions lags that of Kyiv as a result of 15-25% lower individual incomes on average. However, the regional market size to be captured exceeds that of Kyiv, offering a sound growth and margin improvement opportunity to the retailers seeking nationwide presence.

Nationwide presence provides the retail chain operator with an additional leverage to negotiate with the suppliers of goods using its large-scale operations and opportunities for the suppliers to expand their market presence. This is not possible for the regional retail chains.

Lack of logistics capacity to support nationwide expansion was one of the primary reasons for the rather slow opening of new shops in the regions. This issue is actively being addressed by the specialized developers both in Kyiv and the major regional cities of Ukraine.

An existing lack of quality properties for retail nationwide has contributed to a slow regional expansion of modern retail formats in the past. The current market conditions will negatively impact the construction volumes, leading to further delays in the opening of new stores by expanding retailers.

Under the conditions of a global financial crisis and worldwide economic slowdown combined with loss of domestic and international confidence in Ukraine, the remainder of 2008 and 2009 are likely to become challenging for the country. Assuming that the global recovery takes place by the end of 2009, the Ukrainian economy may renew its potential economic growth of 5-6% by 2011. We believe that the retail segment is likely to be among the first to show growth when economic recovery commences due to pent up demand and improved macro outlook.

Retail Market Summary

General Overview




Despite the economic slowdown, the retail property market throughout Ukraine remains underdeveloped in terms of its saturation and quality of existing stock compared to major cities in Central and Eastern Europe.

In Ukraine, with a total population of over 46 million, there are 24 oblasts and the Autonomous Republic of Crimea. Out of 25 major regional centres, there are 5 cities with official populations over 1 million (Kyiv, Kharkiv, Dnipropetrovsk, Donetsk and Odessa), as well as 2 cities with populations over 700 thousand inhabitants (Zaporizhzhya and Lviv).

DTZ believes that in the medium term the window of opportunity is likely to remain open to developers of quality multi-tenant retail centres in the major cities of Ukraine with populations of over 700,000 inhabitants.

The cities with populations in the range of 200,000-700,000 inhabitants will become attractive to developers and, in particular, to retail operators on the larger scale after 2011-2012. Nevertheless, those regional cities with poorly diversified economic bases, particularly in metals, such as Zaporizhzhya, Kryvyi Rih and Mariupol, may be seen to suffer higher degrees of slowdown.

Supply

2008 failed to bring any significant change in the capital city of Kyiv or other major regional cities of Ukraine.

Around 109,700 sq m (GLA) of new retail space was delivered in Kyiv in Q1-Q3 2008. Of particular note were the multi-tenant retail centres Kvadrat-Aurora and Materyk, which opened in the densely populated areas on the eastern bank of the Dnieper River, and the fourth phase of the retail and leisure centre Karavan (2,700 sq m GLA), which remains the largest retail development in Kyiv. The French retailer Auchan also opened its first hypermarket in Petrivka area in Kyiv, and the scheme is likely to be expanded further. In late September 2008, the retail and leisure centre Blockbuster anchored by the IMAX cinema was also delivered in the Ukrainian capital.

Major retail developments opened in other cities of Ukraine in 2008 include Dafi Retail Park in Kharkiv (56,070 sq m), the first phase of Karavan in Dnipropetrovsk (18,840 sq m out of 76,200 sq m total planned GLA), the second phases of Karavan in Kharkiv (57,050 sq m total GLA) and Sunny Gallery in Kryvyi Rih (31,000 sq m total GLA).

Significant schemes planned for delivery in major cities of Ukraine in 2009-2010 include Riviera Shopping City in Odessa, Leopolis and King Cross Leopolis in Lviv, Magellan in Kharkiv and the second phase of Karavan in Dnipropetrovsk, as well as the second phase of the retail and leisure centre Sky Mall and the centrally located retail scheme Esplanada (Continental) in Kyiv.




The majority of existing schemes in the Ukrainian cities, including those recently delivered, may be classified as first generation retail developments. Most of them will need to be repositioned in order to remain sustainable in the longer term, as increased competition from sizeable well-conceived suitably-located retail developments will enter the market in the medium term. Retail properties in the formats of retail parks and factory outlets have yet to appear in the country.

The retail property markets in the major cities of Ukraine remain underdeveloped compared to major cities (comparable in terms of population, economic structure, and their importance) in other countries in Central and Eastern Europe. However, purchasing power and welfare of population, as well as price levels for different countries should be considered.

The regional cities with population under 500,000 inhabitants are likely to be saturated with retail space more quickly compared to larger cities of Ukraine.

Despite the sizeable pipeline retail stock previously planned for delivery in the regional cities of Ukraine in the medium term, the current credit squeeze and slow down of expansion by some retailers already brought significant corrections to this figure.

On the positive side, the current financial crisis may bring attractive opportunities to active developers and investors and, may give impetus to extensive retail development in Ukraine, which until recently was held back by high land prices.

DTZ believes that considerable retail potential still exists in the major cities of Ukraine, which, due to the current financial crisis and internal economic situation in the country, will be realised by developers and retailers after 2010-2011.

Demand

Currently, around 500 brand retailers operate in Ukraine with the majority trading as franchises. In the past two years, major international retailers have been opening throughout Ukraine.

The German wholesaler Metro Cash & Carry, which opened its first outlet in 2003, continues its aggressive expansion throughout Ukraine. The chain currently operates 21 cash & carry stores in cities with populations over 200,000 inhabitants.

The hypermarket Auchan welcomed visitors to their pioneering scheme in Kyiv in early 2008. The second scheme by Auchan is planned for delivery in Makiivka near Donetsk in 2009.

In late 2007, a hypermarket by the Russian retailer O’Key opened as the first phase of the retail and leisure centre Sky Mall currently under construction near Moskovskyi bridge on the left bank of the Dnieper River. O’Key has been aggressively expanding in Kyiv and other regional centres of Ukraine, and its outlets already operate in Zaporizhzhya and Kryvyi Rih, as well as in the retail and leisure centre Dafi Retail Park in Kharkiv. Hypermarket O’Key is also scheduled for an opening in the first phase of the retail and leisure centre Admiral in Simferopol.

The German hypermarket operator Real is believed to have secured space in several pipeline retail developments in the regional cities of Ukraine with the first store opening in Riviera Shopping City in 2009.

The first store of DIY chain OBI recently opened in Dafi Retail Park in Kharkiv. Delivery of other stores by OBI is planned next to the retail centre Amstor in Mariupol in 2008 and in Riviera Shopping City in Odessa in 2009. In 2008, it was announced that OBI has established a joint venture with the Ukrainian company Privat Group in order to actively expand in the Ukrainian market, however given current market conditions this development plan may be reconsidered.

In 2007, the DIY operator Praktiker established its first outlet in Makiivka near Donetsk. Delivery of other stores by Praktiker is planned in 2009 in Mykolayiv and Lviv.

The DIY operator Leroy Merlin is known to have opened an office in Kyiv, however the chain has not made any announcement regarding any schemes in Ukraine yet.

Marks & Spencer launched their first franchised store in 2007, while in May 2008 Inditex Group opened a flagship shop Zara on Khreshchatyk Street in Kyiv.

Despite the general perceived lack of quality modern retail space in the major cities of Ukraine, attractiveness of different cities for retailers varies significantly due to differences in retail market potential. This may result in vacancy even in a high-quality retail development located in the city with presently lower potential. For example, in the high-quality retail and leisure centre Sunny Gallery, recently opened in Kryvyi Rih, the vacancy rate of over 20% has been observed in the gallery, which is larger than we would currently consider appropriate for the city.

Due to escalation of the financial crisis and delivery delays of several sizeable projects in Kyiv and other major cities of Ukraine, some retailers have temporarily suspended their expansion plans. Major cities of Ukraine with populations of around, or more than 1 million inhabitants remain the most attractive to retailers, while only around 20% of them are currently considering smaller regional cities with population less 500,000 inhabitants.

Rents

Until the recent onset of the financial crisis, due to strong demand and deficit of quality stock, retail rents have been subject to upward pressure in the successful retail centres in Kyiv and major Ukrainian cities with populations over 700,000 inhabitants.

Retail rents in major Ukrainian cities have been higher compared to CEE cities due to a structurally undersupplied market.




High street rents currently tend to be higher in all major regional cities of Ukraine. This may change with further development of these markets and, will largely depend on the availability of quality retail stock and the urban structure of each city.

Kyiv high street rents remained generally stable in 2008, as opposed to the trend observed in 2004-2007 when these rents increased rapidly. Retail rents in prime centrally located shopping centres slightly increased during the year. At the same time, rents for typical retail units in multi-tenant retail centres situated within or in close proximity to densely populated residential neighborhoods have not changed. DTZ projects that retail rents will remain generally stable in all the locations of Kyiv by end-2008 and in 2009.

In the first half of 2008, in the second-tier cities with populations over 700,000 inhabitants retail rents both in high street locations and reasonable quality multi-tenant retail centres increased, as a result of active expansion of retailers onto these markets. Due to insignificant quality pipeline stock, scheduled for delivery by 2011 in these cities, retail rents will remain stable.

The third-tier cities with populations less 700,000 inhabitants, which in the first half of 2008 appeared on the ‘expansion radar screens’ of many retailers, appeared to be much less attractive to them in present market conditions. Furthermore, many retailers postponed expansion to these smaller cities through to 2010-2011 when delivery of sizable quality schemes, as well as economic recovery are expected. Such trend has resulted in downward pressure on retail rents both in high street locations and multi-tenant retail centres in the third-tier Ukrainian cities.

Trends and Lessons

• Under the conditions of a global financial crisis and worldwide economic slowdown combined with the loss of domestic and international confidence in Ukraine, the remainder of 2008 and 2009 are likely to become challenging for the country. Assuming that the global recovery takes place by the end of 2009, the Ukrainian economy could potentially renew its potential economic growth of 5-6% by 2011. We believe that the retail segment is likely to be among the first to show growth when economic recovery commences due to pent up demand and improved macro outlook.

• The financial crisis may bring attractive opportunities to active developers and investors and, may give impetus to extensive retail development in Ukraine, which until recently was held back by high land prices.

In DTZ’s opinion, the current situation forms optimal conditions for efficient land banking by professional western developers.

• Despite sizeable pipeline retail stock previously planned for delivery in the regional cities of Ukraine in the medium term, the current credit squeeze and slow down of expansion by some retailers have already brought significant corrections to this figure. As a result, retailers will focus on those retail properties, which will be delivered to the market in the short to medium-term.

• DTZ believes that considerable retail potential still exists in the major cities of Ukraine, which, due to the current financial crisis and internal economic situation in the country, will be realized by developers and retailers after 2010-2011.

High potential of the country is related to the brand-awareness of the Ukrainian inhabitants, which forms a strong foundation for further sustainable development of the retail market in the country.

• Ukraine is a large country in terms of geographical size when compared to many European neighbours. Therefore the rule ‘location, location, location’ will more than ever be a crucial factor for the success and competitiveness of retail developments.

• Quality has become a critical success factor for all new retail developments in Ukraine. In the current conditions it is particularly clear that a well-considered approach to selection of an appropriate location within the urban structure of a city, its efficient concept and thoughtful phasing with due regard to the number of quality retailers operating and planning their entrance to the market, will determine the long-term sustainability of a retail scheme.




 


 


 

/ Source: DTZ



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