n the report of Erste Group on the property market of Central and Eastern Europe published in Austria, the bank analysts recommend to invest into developers and construction companies of the South-Eastern Europe and CIS countries. This conclusion is made on the grounds of financial indices of the biggest Austrian companies investing into real estate. Among them GTC, Immoeast, Orco Property Group and ECO Business-Immobilien. “The companies working at the market of CIS countries or those planning to enter these markets, are valued by us higher than the companies not working there”, says Peter Bartek, an analyst of Erste Bank.

As an example, Mr. Bartek makes a reference to Immo International whose management recently declared it will focus its activities on the countries of South-Eastern Europe and CIS. By 2008, its dividend yield is expected to reach 24% and earnings per share (EPS) € 1,71, the capitalization being € 567,2 million. At the same time, the forecasted dividend yield for the company ECO Business-Immobilien working only in Austria and Germany is 0%, EPS € 1,03 and the capitalization € 360,2 million. Mr. Peter Bartek refers to Ukraine as one of the most attractive countries in terms of to 5% in a month and for the warehouse premises – by 6%-8%. This trend arises from the fact there is still great demand for commercial property; at the same time, many units declared for the year 2007, were not put into operation, the market saturation with commercial property is being postponed. Earlier, the experts predicted the market saturation with commercial and office property by the year 2010.

In compliance with calculations of Kiev real estate experts, the profitability level of the investments into commercial real estate projects in Ukraine amounts to 12% 15% in a year. At the same time, the markets of the commercial property in the countries of Central Europe – Hungary, Czech Republic and Poland are already saturated and demonstrate drastic reduction in the profitability of commercial objects by 6% in a year. It is therefore not surprising that Ukraine is “intriguing” the foreigners with very profitable – compared to other countries – conditions for augmenting the capital: the pay-back period of the commercial property is 3 to 5 years, of the office property – 5 to 8 years; in Europe, the pay-back period of the commercial and office property is 10-15 years and 12-15 years respectively.

Not so long ago, three foreign companies have simultaneously declared they are entering the Ukrainian real estate market. Such declarations testify – the market is getting more stable and predictable. The foreign investors have understood the “game rules” and are ready to play in accordance with these rules and receive profits. Today, these few companies would not be serious competitors for local developers and construction companies. However, their successful experience will attract other, less risky companies. It will result in improvement of various projects, use of western and eastern experiences of the projects’ implementation in Ukraine. It would probably be untimely to speculate whether the prices would fall as a result of the arrival of foreign investors – everybody wish to receive as many returns as possible. The arrival of foreign banks to the Ukrainian financial market can serve as a confirmation.

Office Real Estate The structure of this market is still fairly undeveloped: for instance, the aggregate office area of specialized office centres in Kiev is 539 000 sq.m (9%-10% of the market) and the area of non-specialized offices (very often, Commercial Property Waits For Unprecedented Price Growth expansion. Among European capitals, Kiev occupies one of the last places by the volume of the office real estate market – 0,38 sq.m per capita. Therefore, experts forecast this country will demonstrate in 2008 one of the highest growth rates of this index – 19 %. The same situation as the company’s information reveals is being observed in all segments of commercial and residential property in Ukraine.

“The capitalization rates for the Ukrainian property are higher than in Eastern Europe and fluctuate between 10% and 12% depending on the segment. In Europe, this index equals some 3% to 6%”, says Yevgeniy Baranov, junior partner of Dragon Capital. “Moreover, the rent rates in Ukraine are among the highest in Europe”, mentions Pavel Shmarov, Financial Director with FIM Group.”If in Poland for instance, warehouse lease comes to $4 for 1 sq. meter, in Ukraine it will be $15 for 1 sq. meter.

At the same time, the experts of Kiev real estate companies forecast for the year 2008 the monthly rise of prices for commercial property at 5% to 7%. It is being expected that all the segments of commercial property will get more expensive. In particular, for the commercial premises, the monthly increase will be by 5% to 7%, for the office premises – by 3% these are former apartments or premises of R & D institutes refurbished and redesigned for the office use) – 4,6 million sq.m (90 % of the market). This is one of the lowest indices in Europe; for comparison, in Warsaw the aggregate area of specialized office property amounts to 2,4 million sq.m., in Prague – 1,9 million sq.m., in Budapest – 1,6 million sq.m. According to experts, the Ukrainian capital lacks 4,5 million sq.m. of office premises. Subject to annual construction of 300 000 to 400 000 sq.m. of the office area, this imbalance between demand and supply could be shortened, by 2025, to 1,5 – 2 million sq.m. As of today, the shortage of the office property is main reason behind soaring prices and rent rates.

In the last years, there was a lot of interest for Ukrainian office real estate from the part of foreign investors. The first resale transaction took place at the end of September 2003 – a group of foreign investors has bought from an US investment fund the Kievan business-centre “Artem” with the area of 10 000 sq.m. for $ 15-17 million. The transaction of purchase and sale of the Kievan business-centre “Leonardo” became the most expensive one in the history of commercial property market. In April 2006, the shareholders of the “Forum” bank have sold the “Leonardo” business centre with the area of 13 000 sq. m. and with the highest rent rate in Kiev $ 58-$ 70 for a sq. m., to the Irish investment and construction company Quinn Group for some $ 80-$ 100 million. Soon the office centres of the A class – “Iceberg”, “Dominant” and “Podil Plaza”, with the area of 19 000 sq. m. will be sold, for the approximate price of $ 50 million. The investor and developer of the centre was the Turkish developer “Demir Eurasian Investments Ltd.” The “Iceberg” business centre is already sold.

The experts predict for the future steady growth of so called multi-use complexes in Ukraine. In accordance with the classification of Urban Land Institute, a multi-use complex is an entity which obtains revenues from three or more functional sources having independent demand.

There are now in Ukraine 15 multi-use complexes with aggregate area of some 380 000 sq.m. The majority of them are commercial and office buildings, 8% of the areas are trade centres, 11% business-centres. It should be mentioned that around 70 multi-use complexes are now being designed and built at the territory of Ukraine.

The multi-use entities are interesting for many developers, due to a number of factors stimulating this interest: diversification of risks, rise of the land value, political factors, synergy of various constituents, stability of the complex, reduction of market risks. In accordance with the information of Building Business magazine, the best trade complexes are located in Dnepropetrovsk, Donetsk and Kiev.

Commercial Real Estate

The trend of shortage of highgrade areas, growth of rent rates (by 15%) and unprecedented investment activity is observed also in the segment of commercial property. After Kiev, the rating of attractiveness of regional centres in terms of investments into commercial property is as follows: Dnepropetrovsk, Donetsk, Kharkov, Zaporozhye, Odessa.

The foreign retailers – representatives of non-food and mixed group of goods can hope for a success. They have at their disposal such advantages as large discounts, experience of work in line with newest trade technologies and ability to organize an efficacious service support. One of the biggest European store-operator specializing in the trade with construction materials, Praktiker AG which is a division of the German “Metro” has declared its intention to set up in 2008 in Ukraine 7 shops, the construction of 1 shop costs around $ 100-140 million.

Given all the aspects of the commercial property construction in Ukraine, foreign investors show preference to one of the two options of entering the Ukrainian market. The first option is purchase of the finished entities with tenants. The second option is joint establishment of the project, with participation of a Ukrainian legal entity. It has the right of the land ownership and undertakes to ensure documentary and juridical follow-up.

Land

The dynamics of the price growth for the land plots in the last three or four years is one of the highest compared with other investments assets. The land plots were rising in price faster than real estate. The revenues from this rise were at the minimum two to three times higher than deposit rates. This fact resulted in the investment inflow to the market of transactions with land which was bought primarily for subsequent resale.

Purchasing land for subsequent resale is now a very profitable business. There are land plots whose price has multiplied by many times in the course of several years. For instance, plots in Vishenky and Osokorky (suburbs of Kiev) became more expensive in the last three years by a factor of 12,5.

It is difficult to expect that the prices will soon stabilize – many foreign buyers take keen interest in the Kievan suburbs, although the land prices in Kiev keep pace with overseas prices. One “sotka” (Russian and Ukrainian measure of area = 100 sq.m.), it means, 100 sq.m. near London costs from ? 3000 upward. As predicted by Nationwide, the land price of 5 Sotka (500 sq.m.) near the British capital bought for ? 25000, will rise in 15 years to ? 234581 in the case there is no construction permission. If such permission is available, the price can reach ? 419569.

In the Ukraine, experts have calculated that the price surge for the land near Kiev was, in the last two years 86% 650%, depending on direction. In Kharkov, the prices grow at minimum by 100% a year; the brokers do not forecast this process will slow down in the coming year.

So, what factors determine the price of a land plot?

• Use destination,
• Distance to the town,
• Prospective and prestigious direction,
• Area and relief of the plot,
• Availability of access roads,
• Availability of utilities at the plot or nearby
• electricity, gas, water,
• Availability of constructions at the plot,
• Natural environment and locality: nearby availability of a park, forest, river, lakes etc.
• Social surroundings: availability of railway road, prospects of a change of use destination.

Thus, in compliance with General planning scheme of Kiev’s development until 2020, the city’s authorities plan to remove from the city or shut down some 40 enterprises occupying more than 100 hectares of land. Another 5 enterprises will be restructured. Many of these enterprises are already closed due to environmental hazards, another part was bought by construction companies and either restructured or there will be residential construction on their land; others will be removed from the city to the outskirts. Naturally these land plots look very prospective in terms of their subsequent use.

The land remains the most attractive destination for investments. Even people having remote relationship to business in Ukraine realize that you can buy a plot and “forget” about it for several years. Then you will be able to resell it at a double or even a triple price.

In Ukraine, during 7 months of 2007, land plots and rights of their rent were sold half as much again the year 2006. The market participants explain this trend by the stable demand for land and, respectively, high profitability of the land resale; it is also quite possible that the moratorium on land sale and resale will be lifted.

In accordance with information of the State Agency on Land Resources of Ukraine, in the course of 7 months of 2007, land plots and the rights of their rent (3900 he) were sold at the amount of UAH 2,2 billion. As Mr. Igor Yazuk, head of the Agency comments, this index is already 50 % up on the whole preceding year.

The experts explain this high activity at the market of land sale and resale with the steady rise in prices making this business very lucrative. The high demand for land plots could also be explained by possible cancellation in 2008 of the moratorium on sale and resale of land. Many experts believe the cancellation of the moratorium will result in the land price explosion; therefore, many try to buy plots beforehand.

It should be said there is a moratorium in Ukraine – effective until January 1st, 2008 – on purchase and sale of land plots having agricultural destination, of both state and municipal property. Mr. Vladimir Rybak, Vice-prime minister on issues of residential and municipal economy, predicts the number of land plots sold will increase. “If even now when the land sale is prohibited by law, the investors and businessmen try to buy land by hook or by crook, in the case the moratorium will be lifted, these cases will multiply”. It is being expected the land plots will be purchased first of all by the investors who had rented the land for the period of 49 years in the hope the moratorium will be lifted, if not now then in a year or two”.

Land Is the Most Important Commodity

The land prices in Crimea grow steadily. The most expensive plots are located, quite naturally, at the resort areas. First of all, it is the south coast of Crimea – the coast of Black Sea from Foros to Alushta, including such resorts as Yalta, Simeiz, Miskhor, Gurzuf, Partenit. Here the price of one”sotka” (100 sq.m.) does not fall below $15000 and in the downtown of Yalta, within the trolleybus ring, can exceed $40000. At present, Yalta is on the second place after Kiev in terms of the land prices, leaving behind Odessa. One of the reasons of skyrocketing prices is that the number of land allocations, including those assigned for individual construction has substantially dropped after the “Orange revolution”.

It would be difficult to find a “leading region” in Crimea with a record price increase in this summer. If in the last year these regions were Tarkhankut and south-eastern Crimea, now the prices are steadily growing on the whole coast except Perekop. There are some offers even for Razdolnoye region (northern Crimea) which was earlier considered a god-forsaken remote backyard of the peninsula although Black Sea there is especially clean. It would be perhaps possible to state the land market within so called Greater Yalta is “overheated” and the interest from the part of investors for the “bare land” at this part of the coast is getting weaker; more popular are to date built-up areas (cottage villages, townhouses, multi-storey buildings). Moreover, given the new general planning scheme, one may presume the land within the by-pass road around Yalta would not be offered for sale.

It is completely naturally the official prices differ from the real ones. For instance, the average cost of four land plots allotted by local city administration in 2005 in Greater Yalta is $1347 for 1 sotka (100 sq.m.). It absolutely impossible now to purchase any plot at this price at the secondary market in Yalta, even those located far from the sea.

At the south coast of Crimea, the prices depend, to a considerable degree, on the plots’ location with respect to the sea and the trolleybus route Sevastopol-Yalta-Alushta. The most expensive plots are those located at the coastal areas with subtropical vegetation. The plots located close to the trolleybus route, have their own advantages – they have infrastructure. However, an essential problem can be uneven relief. As to the villages within Greater Yalta, there may be problems with geology; however, in the most cases the land there is sufficiently even as most of the land plots offered for sale within builtup areas had already been utilized.

Diversity of Choice

The construction of individual houses at the coast is going on more actively than multistory housing. If at the south coast of Crimea – in Yalta and Alushta – the multistory buildings are being erected here and there, sometimes even as whole housing blocks, in numerous settlements and villages from Malorechenskoye to Foros, the most part of built-up areas is formed by cottages of all the dimensions and every hue; some of them resembling true palaces. This is most typical for Foros and Maly Mayak. The same picture is also observed at the south-eastern coast of Crimea; however, the elite cottages are often used there as mini-hotels. Such places as Malorechenskoye, Rybachye, Morskoye, Sudak and Koktebel, have higher potential in terms of investments payback than the resorts at the south coast; here, there is scarcely some space left for new construction and the environmental situation is not very optimistic.

However, there is no chance to acquire land in Greater Yalta and Greater Alushta at a distance from the sea less than 1 km. In the most cases these are plots with old houses to be razed down, therefore real estate companies in their advertisements simply ignore the cost of the house and indicate only the price of the land plot; the price of the plots in such areas fluctuates between $2000 and $4000 for 1 sotka (100 sq.m).

In this region are many estates built at the plots with area exceeding 1 hectare, put together from purchased neighboring plots, having from 6 to 15 sotka each. As a rule, they have all the communications available, including telephone, satellite or cable TV and Internet. According to Sevastopol-based “Jamal” real property company, the price of the plots offered for sale at the south coast of Crimea fluctuates between $135000 to $4 million, area of residential space – from 240 to 1200 sq.m., of the plots – from 2,4 to 30 sotka (100 sq.m.).

In Sevastopol and at the south-eastern coast the market is more “democratic”. The most expensive house among those offered by “Jamal” for sale, located near Sudak, with the area of 450 sq.m., costs $275000. It would be difficult to define the bottom limit, most likely, it would be around $25000 at southeastern coast and $30000 $35000 in the vicinity of Sevastopol. The matter concerns buildings suitable for residence, with electricity and water. The gas supply and telephone sometimes are not available, especially in the south-eastern region. The biggest price spread is in Sevastopol – the upper limit in Balaclava, Laspi and Batiliman would be around $1,5 – $2 million for a house.

And in the Baydary valley the real property is undervalued, in spite of the fact this locality has recreational status. For instance a house “of Tartar construction”, that is, built by local people before 1944, may cost up to $10000. On the other hand, villages in Baydary valley lack water-supply system; instead, there are deep wells excavated before 1944 and you can find artesian springs (also called “Tartar water”) direct at the plots.

In the last time, very popular became Tarkhankut peninsula and Yevpatoria. Such settlements and villages of the region as Chernomorskoye, Olenevka and Mezhvodnoye, are being built up primarily by residents of Kiev and Simferopol. The advantages of this region are obvious – relatively low prices for land and untouched nature. Drawbacks are cold winters, remoteness from Simferopol and poor transport infrastructure resulting in difficulties with supply of construction materials.

In Yevpatoria, both cottages and residential complexes are being built. The most prestigious areas are of course those at the sea coast. The most expensive cottages belong generally to local officials and entrepreneurs. At Tarkhankut, the situation is different – the most expensive houses are properties of Muscovites and Kievers. The price spread here is significant: if in the remote villages near the sea you can buy a small house within the limits of $4000-$5000, in Olenevka with its water-park, the house prices could reach $1 million and more. The neighboring resort city of Saki is less popular, because this is a specialized resort with mud cure facilities, seaside landscapes are not very picturesque, and therefore, there are only few expensive houses.

At the western coast of Crimea, the cottages are mushrooming in Nikolayevka which is the nearest village to Simferopol. Many residents of Simferopol build houses here for permanent residence, their price being around $500000 and more.

Chaotic State Is Disadvantage

There are only few well-ordered cottage communities in Crimea and this segment is being developed not very actively. Undoubtedly, developers do make attempts to create communities with all up-to-date communications, guards and infrastructure. Yet these attempts drive in the most cases prices through the roof, for land only remotely resembling cottage complexes at the south coast of Crimea. The land price in these communities normally starts from $15000 for 1 sotka (100 sq.m.).

The planning of such communities is even more chaotic and thoughtless than in usual individual built-up areas. Striking example could be so called “Santa-Barbara” community situated near the village of Maly Mayak. From a distance, this conglomeration of cottages (among which there are several really elite villas with large plots) looks shapeless.

The permanent reason of conflicts is that the newly built cottages obstruct the sea view. These sort of problems are inherent to other cottage communities at the south coast – “Natashino”, “Autka”, “Massandra park”, “Dubki”. Moreover, the plots are allotted by 4 to 6 sotka creating the impression of an ant hill.

In the settlements “Glade of Fairy Tales” and Parkovoye at the south coast of Crimea, so called “recreational cottage complexes” were constructed or, to put it easier, expensive suburban communities for a summer stay. In these communities, the architects have foreseen both cottages of “economy-class” with 6 sotka and bigger units. The price of 1 sq.m. starts from $2000. Now, better options seem to appear, one of them being the settlement “South Symphony” which is being built in the vicinity of Yevpatoria where the price for a house starts from $1700 for 1 sq.m.

The townhouses are a relatively new dwelling type in Crimea. From all the townhouses in Crimea only two communities may be named townhouses as such, in their pure form – so called “Yachting Centre” consisting of 30 three-storey cottages and “Gurzuf Park” where in addition to villas are 17 townhouses. The infrastructure could be completely different. In “Lazurny-Elit” the infrastructure is represented by a cultural & administrative complex (billiard rooms, computer and playing rooms, shops), a beach, own embankment, playground for kids with pool, sport facilities, boats etc. The price of 1 sq.m. is around $2800. In the “Spanish Village” there is an own electric power substation and high pressure gas branch. Here, 1 sq. m. is being sold at $2000. In “Villas Galata” the area of each plot is 14 sotka (1400 sq.m.) of which 10 are free; each villa has a swimming pool, own beach and a yacht marina is being built (price of 1 sq.m. starts from $3000). In “Emerald Coast-1” all the cottages are designed in such a way that from each one opens a splendid view of “Adalary” rocks. “Emerald Coast-2” is notable, first of all, for its park vegetation at all plots with landscape design; the prices vary from $1500 to $1800 respectively. In “Livadiysky” and “Glizinia” the landscape vegetation is used to provide delimitation between the plots. The last community has also a cactaceous orangery. The cottage here could be purchased at the price starting from $3000 for 1 sq.m.

Also so called “elling”(slipway) communities could be attributed to wellordered built-up areas; these are cottages having access to the sea and quite often parking place for a motor-boat or scooter. The coastal line is mostly in a long-term rent. Ellings are being built within the precincts of a town and also beyond them, as a rule, on a territory already having full infrastructure and own beach (in rent). The first experience of this sort was in Alushta, at the area of eastern beaches. Another example could be Alushta co-operative societies “Dolphin”, “Uyut” and “Utyos”in Maly Mayak. An elling has generally two or three storeys; it can be as comfortable as a townhouse.

One square meter without finish could be sold at $1200-$1300, with finish (economy class) – at $1800, with more qualitative finish – at $2000-$2500. Of course, it could not be compared with “Santa Barbara” – there are no offers less than $3000 for 1 sq.m., although the cottage complex designs are inferior to those of elling cooperatives.