Why will apartment prices not go down? We will tell you about the situation in the real estate market
The original text by NV Business
How do you assess the status of the market of new buildings in Kyiv by autumn 2020? Has the demand been restored?
The first half of the year, and this should be recognized, was a tough period, with a test for the real estate market. The key challenges were certainly related to the pandemic and the consequences of the large-scale lockdown we were in. Currently, there have also appeared some complexities related to tough times before the election, when the construction industry is an ideal domain for political strategists where candidates earn political points from the voters, creating the visibility of the so called fight for justice.
If we have a look at customer spendings, we cannot complain about the first decade of the year. Sales figures were excellent, everybody placed stakes on 2020 being productive and successful for the market of new-built real estate. But then the pandemic came, and there occurred a logical demand decline. The customer took a waiting standpoint and was watching the market attentively: trying to get clear about the situation and to understand who would survive.
I would like to mention that our company was among the developers which did not stop the works on site for even a single day. And already by July we managed to restore a considerable part of demand.
And as far as sales are concerned — is the customer ready to invest into real estate now?
We can see that currently investment into real estate is perceived as a real and efficient mechanism of saving the capital against inflation, with further capitalization. That is a more understandable tool for our citizens.
I can assure you that people show their willingness through real deals. August was a highly successful month for our company, we worked with delayed demand and actively signed contracts. In September the demand did not disappear – just the opposite, it went up.
Real estate is being bought in absolutely all segments: the sales rate is high for both the comfort-class and business-class segments.
But in all the sales in the groundbreaking stage segment are much worse than they used to be. The customer strives to secure himself against the risks of long-delayed construction and is ready to invest into a facility at a higher stage of readiness. That is why the developers building only for the money from sales risk being back to square one. This financial model has just become obsolete. Edelburg Development does not start building any single facility by the time we have at least 50−60% of the overall estimated cost.
Edelburg Development’s portfolio, besides residential real estate, includes several office facilities. How are these projects developing now?
We have both office, and commercial and office real estate. Some facilities have already been built, while some are in the construction phase. In both cases we record higher demand from prospective tenants. Commercial real estate facilities have a high potential, if the correct concept is selected, if positioning and the value you bring to tenants and visitors are well-elaborated.
In none of our projects do we chase for metric area or strive to build and sell as much as possible. Our projects are always ergonomical, comfortable and tailored to the end user’s needs. Let’s take, for instance, the Shopping and Leisure Centre Cherry Mall in Vyshneve — with a cinema, sports club with swimming pools, child centre and food retail. Having fit it with anchor tenants, we considerably improved the overall town’s infrastructure.
Now we are also building a shopping and office centre in Nyzhniy Val Street, with 6 thousand sq. m. of commercial areas and 9 thousand sq. m. of office space. Our plan is to put the facility into operation in a year’s time.
Many analysts seriously predict the fall of the epoch of traditional offices and decline in the interest of the core target audience — corporate segment. Aren’t you afraid of such scenario?
I guess it is too early to dismiss office work. But we are in for traditional office reformatting: the search of the most efficient correlation of working and public areas, flexible spaces, probably, a part of traditional offices will move to the co-working segment.
Currently, the problem of lack of offices premises in Kyiv is still there. I guess the capital may still absorb from about 500 thousand sq. m. up to 1 mln. sq. m. of such premises.
Make your own judgment: before the quarantine the vacancy rate in the offices of Podol was no higher than 5%, all locations were either occupied, or contained a lot of built-in premises which did not always meet the expectations of large tenants.
The demand exceeded the supply several times, and after the quarantine it has not disappeared. Practice has shown that not all employees can cope with working from home. As the result, productivity rate goes down, this affecting both personal and general outcomes.
This year, besides the pandemic, stands out for the local election planned for the end of this autumn. Does the pre-election campaign affect the real estate market in any way?
Most developers have delayed launching their projects due to the pre-election fever and postponed them for the period after the election, not to attract any extra attention from those willing to drum up hype. We also have prepared a full package of design documents for two facilities and will not launch construction for two more months, until the election is over.
Coronavirus, the election definitely constitute a serious challenge for the construction industry, however, we are faced with no less urgent problems, to be more specific – the reform of the State Architectural and Construction Inspection. How does it affect the market, in general, and the work of your company, in particular?
Indeed, it is absolutely impossible to assess the reform at its current stage, since no results can yet be seen. I cannot tell that market development got stuck because of those transformations: still, the old bodies are in charge of both issuance of permission documents, and putting of the constructed buildings into operation. The reform is ongoing, while developers are only waiting for the changes to happen.
What promising directions can you see in the domestic real estate market? What segments, formats, locations are you going to invest into?
As I have already mentioned, we are ready to jump already with two projects in the housing segment, and we will be ready to share information about them in the nearest future. The first one is a comfort-class facility for the affected investors of ‘Elita-Tsentr’. That is a very important, social case for our company. The package of permission documents has been completed, we are ready to start working on site since November 1.
The other facility is Home & Park Fifth Quarter, which we are going to implement jointly with the Perfect Group company. Moreover, we have rather ambitious plans for the commercial real estate segment. We have submitted documents to obtain a license from the international organization World Trade Center. That is a moment of historic importance for Ukraine. Since all developed countries have the association that helps business develop. In fact, we are opening up an opportunity for the small- and medium-sized segment to work with international companies – these are 330 cities in 90 countries. Our BC on Voznesenskyi Descent will become a sort of a hub for international companies that will be offered flexible business environment for ongoing work in our country, highly competitive cooperation terms as well as an opportunity for providing legal and consultancy services.
Let us speak a bit about the market in general. The year 2020 will leave its mark in history also as a year of active mortgage promotion. At least, a lot is spoken of it, even by the top officials of the country. Do you think we have mass affordable housing credits?
It seems to me that currently mortgage in Ukraine is popular rather in the secondary market, and not in the market of new buildings. And to be frank, it can hardly be called affordable and mass, since the interest rate still remains high, the downpayment contribution amounts to 30−40% of the apartment cost, and starting with the second year the credit rate becomes floating — it may reach on average 15−17%.
Mortgage can definitely become a powerful market driver, but developers have already learnt to live without it. They have started giving their customers unique long-period installment offers — from 3 to 5 years, without any increase in the cost and interest growth, with the minimum downpayment. That is much more beneficial and comfortable for the client than taking a credit in a bank.
And finally, let us answer the question most frequently asked by consumers: will the prices of newly constructed building fall, and when?
I always ask a question in response: where can they fall? What sound developer will start building and selling for a loss? For everything to fall, the market should fully stop. Right, the 2008 crisis was accompanied by the price fall, but then apartments cost three-to-five times more, while being built for approximately the same $600. And I am sure that such unfair profitability gave the market its lesson.
The current pricing policy, in fact, has reached its bottom mark. With the average cost in comfort class being from 18 to 21 thousand UAH/sq.m., the minimum prime cost we may get is 15−16 thousand UAH. The profit of 3−4 thousand UAH, or 20% is the maximum of developer’s profitability one can afford. Taking into account the fact that the project is under construction for some 3−4 years, all companies work at the minimum profitability rate. There can be no price below this one. Therefore, now, I am sure, is the most favourable time for investing into real estate. Developers have curtailed their ambitions, adapted to the market reality and to the demand.