Construction at the expense of investors – a big problem of the Ukrainian real estate market. Serhii Kucher

NV Business, business digest

June,2020

Having experienced the slowdown of consumer activity during the quarantine period, the real estate market is beginning to recover gradually. Interest in liquid projects increases, and the number of deals as well. Serhii Kucher, CEO of Edelburg Development, in his interview with NV told about the consequences of spring turmoil for the country’s economy, and developers in particular, apartment price forecasts and the future of the development market.   

In what way has the large-scale lockdown experienced by the country due to coronavirus outbreak affected the Ukrainian real estate market?

Quarantine has affected absolutely all spheres of our lives. Business has suffered losses, and it is still difficult to assess their scale. Given the economic consequences and risks, I am confident that countries like Ukraine should not be quarantined even in the current situation. Indeed, in Europe, where quite severe measures with heavy fines have been implemented, people stayed at home, and here quarantine was more “for a show”.  

During the quarantine period the real estate market simply froze. Whenever developers claim that everything is ok and sales were ongoing, believe me – it is more about chest-thumping. Quarantine is a huge psychological stress for purchasers.  

But I am happy that the market is recovering and stabilizing at a fast pace. Sales have almost reached the level we saw before March. This proves once again that the construction industry has been and, hopefully, will be the engine and the driver of the Ukrainian economy, which will give a powerful impetus to the development of the country. Therefore, the government should support this market to ensure its proper functioning.

What main consequences will coronavirus outbreak and quarantine have for the primary real estate market?

Here, it is important to specify that the market is divided into two major segments – residential and commercial real estate properties. Thus, according to my observations, investors and tenants have become very watchful of office and retail facilities. During the quarantine period, many people have learned to purchase online, and what is more important – the corporate sector has become used to working remotely.
 

In the office market, IT companies have absorbed a huge segment. And they were among the first to realize that they can work from home without losing their productivity. That is why I consider that downfall of indicators in the segment, in particular, drop in rental rates, re-evaluation of spaces, rotations of tenants, will certainly be.
 

Talking about residential facilities, the consequences of quarantine will mainly affect the companies without any “fat pool”, that do not have any cash pile to support themselves. I suppose that in summer-autumn we will experience a crash in the market. But, at the same time, it is disadvantageous for large and systemic companies for the market to shake, that is why either merger or acquisition of those who have failed during quarantine will occur. I am already aware of some of these cases. Projects and promising sites will go to developers who have sufficient financial resources to implement them.

According to your estimates, has a solvent buyer returned to the market?

I don’t think that some sort of surge in the consumer activity is waiting for us. Given the economic consequences for the country, the market will lose about 20-30% of total sales.

We experience something that I have talked about a year or two ago: the practice of constructing at the expense of an investor and a purchaser is a thing of the past. Developers will live off sales less and less. This is a typical worldwide practice when a developer has a minimum of 40-50% leverage to launch a successful project. The only subtle difference is that it is a bank loan abroad, and personal funds here, which is not always right. After all, there are many more risks not to handle the load if a developer does not have enough money, experience or the project is not liquid.

Will the situation increase competition between market players this year?

Competition in our market is perhaps one of the strongest. As a result, it will only grow, which is beneficial for a purchaser. Because the quality of projects, infrastructure, living environment will be improved. If our economy class facilities appear at least visually similar to business class facilities with floor-to-ceiling windows and non-trivial architecture, it will be a considerable advantage.

Let’s be honest. Developers of economy class facilities will sell them more like gems, paying more attention to external features of a project. Unfortunately, quality will still be problematic. I do not believe that a developer will be willing to spend more on an economy class housing development than it was before. It will just be more aesthetic, nice, luminous.

In your opinion, is the affordable mortgage at 10% interest announced by the President possible by the end of the year? It could increase demand and stimulate the market.

I do not believe in 10% mortgages. I do not think they will appear neither this year nor the next one. Don’t get me wrong, the issue of cheap home loans is not as easy as it may seem. The situation with budget revenues is critical, moreover, the state of economy after the quarantine is very complicated. Look what is happening to IMF loans: the requirements are too tough, they do not provide too much money, and I doubt it will change. I think they will keep us on the brink of default. Of course, it is no good for Western partners if we default, but there will not be much money. Aa a result, budget programs will be cut, utility prices will rise.

Given many of these factors and variables, I am confident that mortgage in Ukraine can be possible only if the large western capital arrives. And such home loans should be granted at 5−6% interest. Because a 10% mortgage, even if it appears by some miracle, will not be popular among purchasers.  

How do you assess the prospects for the development market?

I suppose that in 2021 the market will be more or less the same we will have in September. By the middle of the next year, it will be clear what awaits us in the long term – a rise or a fall. It will depend on the economy-wide component and on the geopolitical vector of the country’s development.

Same as before, the residential real estate market is quite attractive for an investor. Under the conditions of lacking stock market and high level of distrust in the banking system, people consider real estate to be a safe form of saving personal funds. In addition, real estate not just saves funds, but it also helps accumulate capital funds. You can earn from resale of an apartment or use it as rental property.    

By Viktoriia Bereshchak.

18.06.2020