Nai Pickard

High yields for opportunistic investors

Ukraine has been affected by the economic downturn from both a development and investment perspective. However, major possibilities remain for more opportunistic investors looking to take advantage of high risk or distressed projects providing high returns.
In Kyiv office demand has fallen as vacancy rates have increased, retail has shifted to a tenants market and vacancy in the industrial sector stands at around 40 percent. The country, however, due to its location and natural resources, is in a good position to bounce back when the world economy goes through an upturn.
"The global crisis has hit Ukraine severely. Ukraine entered the economic recession together with the US, Japan, the EU-15 and Russia and recovery will depend on the macroeconomic situation, in particular on demand for Ukraine’s key export products, political stability and when credit resources come back. The property market situation in Ukraine has changed 1 80 degrees since the end 2008 nearly all major projects were put on hold. And projects that are 50 percent complete are desperately seeking investment capital to complete their projects as with debts to the banks to cover, they need to complete their projects to create revenue to repay their loans. Rental levels were declining rapidly and yields have increased to 20 percent," said Terry Pickard, Group Chairman of NAI Pickard, one of the major consultants based in Ukraine. According to DTZ, the vendors market weakened in early 2008 and in the first three quarters of the year 90 percent of investment went to Kyiv or in the greater Kyiv area. Retail schemes attracted 41 percent of income producing and forward purchase investment transactions completed on the Ukrainian property market in 2008. For example, Meyer Bergman acquired the Aladdin retail and leisure centre in Kyiv at a yield slightly above 1 0 percent. Also a portfolio of city centre office buildings owned jointly by private Dutch investors and Unibail Rodamco was sold. Apart from these transactions and some minor deals there has been a profound slowdown in investment activity.
"Since early October 2008, tight conditions on the global financial markets combined with increasing economic and political instability in Ukraine compared to the decreased cost of entry to the more mature and less risky markets caused a sharp reduction in capital inflows to Ukraine. Most foreign investors are more cognizant of political risks in Ukraine than before," Terry Pickard explained.
The office sector has been through a shift from the dynamic and expansion stage to the slowdown and recession stage, says Pickard. The third quarter of 2009 was marked by continued decrease in demand for high quality office space, which started at the end of 2008. As of August, 2009, prime rents are $30-35 per sqm per month not including operating expenses with downward tendency during 2009. On average, vacancy rates in Kyiv’s business centres increased up to 15-17 percent in comparison to 2-3 percent in the same period in 2008.
In the the retail sector there has been a shift in the balance of power between landlords and retailers - it is now a tenants market.
Terry Pickard commented that due to tailing demand for retail space, rents dropped by 60 percent in August 2009 compared to December 2008. The vacancy rates in Kyiv’s shopping centres have increased from 1.3 percent in December 2008 up to 3 percent. A number of developments schemes that were planned to be brought into operation in 2009-2010 have now been put on hold. Nevertheless, new shopping centres, such as Domosfera, Arax and 4 Room opened in 2009. The French operator Auchan opened their first hypermarkets in the Kyiv and Donets regions in 2008 and had planned to launch one more in the next two years but have now changed their strategy and are opening four new shops up to the end of 2009 (in Kyiv, Kryvyi Rig, Zaporizhia and Simferopol). The company is due to take over vacant retail space from the O’Key chain which went bankrupt.
"The highlights of 2008 were the entrance of new players or increasing numbers of new projects. Now the process of retail takeover has started. Today in Ukraine the biggest 25 players are controlling only 16 percent of the retail market, while in the UK, Germany and France 85 percent of the retail market is controlled by 4-5 major chains. The retail takeover in Ukraine started this spring from the regions. A number of Ukrainian companies have purchased their competitors. It is most likely that foreign chains will consider the advantage of purchasing bankrupt Ukrainian retailers. The peak of owner changes is likely to take place at the end of the crisis, just prior to market pricing nearing the bottom," explained Terry Pickard.
The industrial/warehousing sector has also slowed down. In August, 2009, prime rates for modern warehousing facilities within a 30 km zone around Kyiv were $6-$7 per sqm per month, not including operating expenses. Vacancy rates are currently 40 percent. Due to the economic worldwide decline, most warehousing developments are now on hold.
Yields in all sectors are difficult to access in the current rapidly changing economic environment. Given the present constraints over both development and investment finance in the market, investor requirements for the minimum level of yield are difficult to assess.
However, from DTZ enquiries, to a number of active investors it would seem that opportunities may be considered at a 16 percent minimum level net initial yield for prime investments leased at market rentals in Kyiv. Due to the high level of perceived risks, in Kyiv quality development projects may be currently attractive to those few active developers at a minimum development yield in the range of 30-50 percent. 

Ukraine experiences a total decrease in construction

In Ukraine the construction sector is experiencing significant and unexpected changes. For 2009, 73 percent of construction companies expect the Ukrainian construction industry to shrink. These facts were reported by СЕК Research, whose general partner is KPMG. These findings also indicate that the first signs of the decline started to appear at the beginning of 2008; nevertheless companies did not perceive this as the start of a potentially broader and longer crisis. Mow the economic crisis fully influences the sector. All interviewed companies feel themselves limited in their business - mostly by insufficient financial resources coupled with poor demand and tough competition. Due to the mentioned problems the capacity of construction firms has decreased by 50 percent.

Text: Gary J. Morrell
Source: Investment Guide