Ukraine is becoming more and more attractive for real estate investment due to integration with the EU, the strengthening of the national currency after the crisis and almost continuously growing prices per square meter, especially in large cities.
Ukrainian real estate market
After the rapid fall in prices during the 2014 crisis, the Ukrainian real estate market is well on track to recovery. Prices for new apartments in Kyiv increased by 0.39% in the second half of 2020 compared to the first half. The average square meter cost rose to $ 1,035 after 3.34% declining in 2019 and 4.03% in 2018. Huge growth is noticeable in comparison with 2014, when the real property market fell by 36.62% according to S&V Development.
“The COVID-19 pandemic has had a noticeable impact on the housing market, albeit a short-term and limited one,” says the 2021 Ukrainian Financial Stability Report. “Unlike previous crises in Ukraine, large-scale market transformations are not expected this time. The market will return to equilibrium as quarantine restrictions are gradually eased. Despite the crisis, the demand for housing will still remain high.” Analysts predict that prices will keep rising, fueled by a weaker hryvnia and low developer margins. This means that for investors – both Ukrainian and foreign – there are favorable conditions for investing in real estate in Kyiv and other large cities of Ukraine.
Along with the rise in the cost of purchase of a residence, rental rates, which have fallen by almost 30% since the beginning of the crisis, are now growing. In early 2021, the growth in rental rates in Kyiv is as follows:
- one-bedroom apartments – USD 276 per month, which is 1.5% more than in the early 2020;
- two-bedroom apartments – USD 374 per month, which is 1.9% more than in the early 2020;
- three-bedroom apartments – USD 444, which is 1.8% more than a year ago.
Shevchenkivskyi district, with the rent for a three-room apartment is about $ 590 per month, is still the most expensive in Kyiv, followed by Pecherskyi ($ 560 per month) and Obolonskyi ($ 457 per month). In recent years, most rental rates have switched to the national currency, hryvnia, to protect landlords from currency fluctuations. This plays into the hands of Ukrainian investors, relieving them of being pegged to the US dollar exchange rate.
Investing in residential or commercial real estate: differences and features
The choice between residential and commercial real estate is an inevitable crossroads faced by an investor. Each option has its own features, pros and cons, which ultimately determine the profitability of the investment in a particular case.
The advantages of investing in commercial real estate:
- It is easier to estimate profitability. The market value of residence is determined by demand, average price in the area of its location, class, number of rooms, type of finishing and other factors, based on which it is difficult to make a short-term or long-term forecast of growth in value. It is easier to calculate the market value and estimate potential profitability of a commercial space because it is largely a matter of the income generated from the property itself. Therefore, the price of commercial real estate usually rises more proportionally, making it possible to estimate the approximate profitability in the future.
- Long lease terms. Commercial leases are longer than residential leases. Housing rent usually starts from 12 months, while the term for commercial space lease is usually at least 3 years, more often 5 and 10 years. The advantages of a longer rental are as follows:
– stable cash flow;
– decrease in the share of vacant premises;
– predictability of income and expenses in the long run.
Longer lease periods definitely also have disadvantages, for example, renting out space at a price lower than the current market price based on a previously concluded contract.
- A reliable way to invest. Despite the fact that the real estate market is sensitive to changes in the economy, it remains more predictable and reliable for investing money in comparison with shares, bonds and other financial instruments.
Advanrages of residential investments
- Stable results during the economic downturn. Residential real estate is much better off with economic downturns than commercial retail spaces. When the market is in a downturn, retail stores, restaurants, cafes, salons and food service establishments usually suffer first and hardest. Even in good economic conditions, small business owners have a high percentage of risks and a strong cost loading. The COVID-19 pandemic and the restrictive measures introduced in this connection, which mostly hit small enterprises with rented space, demonstrated the vulnerability of small businesses. No matter what happens in the economy, people need a place to live, so when a downturn hits, landlords do not suffer as much and do not feel the crisis as quickly as small and medium-sized businesses do.
- Low barrier to entry. It’s easier to start investing in a residence, because it requires a minimum of experience and much less money compared to investing in commerce. Commercial transactions are much more complicated, and buying commercial space often requires much more money than buying a multi-room apartment. And the risks are higher. First, there is a lot more funds at stake. And all this money is invested in a real estate asset, which, in the event of a crisis, cannot be physically moved or quickly liquidated.
- Large pool of potential buyers and tenants. After the first two lockdowns in Kyiv and other cities of Ukraine, there are thousands of empty retail spaces, there are simply not enough tenants for all of them, which significantly reduces the cost of rent and the investor’s profit. On the other hand, residential lease is in steady demand in Kyiv, Lviv and other cities. It takes less time to find a tenant for an apartment, and the terms of obligations between the parties are shorter than in the case of a commercial lease. This allows the owner of the square meters more flexibility to change the lease terms, taking into account market environment.
In residential real estate, it may be helpful to understand the general ratios and to know key concepts such as ROI and capitalization rate. With regard to commercial real estate, it is important to understand and evaluate these and many other indicators. Investing in commerce is more like owning a small business. The most important here is the increase in net operating income. Except for other ratios, information such as service records, expenses and rental history, and profit & loss accounts must be handled.