Prices are Gradually Increasing, But There Are a Lot of Homes. What is Going On with Residential Estate Market

There still are a lot of housing starts

The peak of commissioning new homes was in 2017 (5.9 mln sq m). Last 2018 year the amount of constructed homes in Ukraine subsided by 25%. In the first quarter of 2019, the market dropped by 4% more (year-on-year data hereinafter).

New supply is still unevenly distributed across the regions. Last year, the city of Kyiv and Kyiv oblast accounted for 43% of all commissioned homes in multi-apartment buildings in Ukraine. In 2018, the amount of commissioned homes in the capital city fell by 28%, in the first quarter of 2019 — by 36%.

However, the dynamics of issued building permits and the amount of construction sites in and outside Kyiv indicate that construction will not lose momentum. This sphere is still attractive to investors, as evidenced by the announcements of large projects. For instance, there are plans for a large-scale construction development of Rybalskyi Peninsula (Kyiv) involving the businessman Serhii Tihipko and other investors. The cost of the project is estimated to be USD 600 million.

An interesting trend is the steady increase of supply in Kyiv oblast. According to the data of the LUN search service, in January 2019, there were 289 new-builds for sale in Kyiv, and 286 new-builds in Kyiv oblast. However, mostly offered is affordable housing segment (61% and 84% in Kyiv and Kyiv oblast respectively).

The interest in the suburbs is caused, first of all, by considerable difference in pricing. According to the LUN data, while the average price of 1 sq m in Kyiv in May was UAH 24.000, in the suburbs it was UAH 13.200.

The construction development outside Kyiv is related, firstly, to a greater choice of land parcels, and secondly, to lower construction costs. The abundance of new-builds in such localities as Irpin and Sofiivska Borshchahivka caused the emergence of construction sites in localities previously neglected.

It is worth mentioning, however, that it is exactly in the suburbs that there are the biggest problems with utility systems and the quality of buildings. Though, according to the information from the market players, construction developers in Kyiv sometimes build a good-quality Phase 1 to promote a residential complex, and then they are forced to economize, pressured by rising construction costs.

Kyiv region is followed by Lviv, Odesa and Kharkiv oblasts. Lviv is the second city after Kyiv in terms of the pace of construction. This city is also notable for the first case of demolishing an unauthorised construction of a highrise.

But the demand is gradually increasing

This May the average price of 1 sq m in the capital city rose by 2.4% in dollar equivalent and by 4.9% in hryvnia (according to the data of real estate agencies and the NBU’s calculations). This can indirectly mean that the demand for new homes is gradually meeting the supply at last; moreover, the prices are rising not only in hryvnia, but in dollar as well (the market is still functioning informally in dollar equivalent).

At the same time, according to the LUN data, in May the price of 1 sq m on the new homes market in Lviv dropped by 2% both in dollar and in hryvnia, while in Odesa it rose by 1% in dollar and by 3% in hryvnia.

There is also a trend for the prices to rise on the existing homes market (this also indirectly suggests increasing demand). In May, the average price of existing homes in Kyiv rose by 6.6% in dollar and by 9% in hryvnia.

The price increase on the existing homes market can be explained by the fact that investors sell apartments in new-builds, whereas owners of the most run-down properties on the existing homes market, properties not being sold for long, just withdraw them from the market. This pushes up the average prices of existing homes.

It is also not unlikely that the price increase in May is the result of sales slowdown before the elections, with buyers’ wait-and-see attitude. After the elections the process has become active, though in general, summer is a weak period on the market.

General factors of the demand for homes (both on the new and existing homes markets) remain unchanged. First of all, there is demand from the citizens who seek to improve their living conditions and have opportunities for this in the form of already existing apartments or considerable savings. In this respect, the boost of demand is facilitated by the increase in real population income by almost 10% in 2018.

Second of all, investment demand continues high, chiefly on the new-builds market. It can be divided into two components; the first one is short-term speculations, when, for instance, ownership rights are acquired at the start of sales and the beginning of construction works, and are reassigned at a considerably higher price at the end of construction works. The second component of investment demand is long-term investments into residential property with the aim of reselling and/or renting it out in the future.

At the present demand, the competition is growing bigger both for the clients who buy property for dwelling purposes, and for the investors. In 2018, the prices of construction and installation works for residential buildings rose by 19.6%, that is why the increase of construction costs limits the opportunities for price competition. In this respect, large-scale construction companies have vantage ground, with enough safety margin to attract buyers with favourable terms and conditions of installment plans.

In general, there is steady demand among those seeking to improve their living conditions for residential complexes with quality infrastructure and good location. Construction companies and realtors operate with average prices for every class of construction, this being a somewhat unconvincing “mean temperature in the hospital”. It can be assumed that the dynamics of prices for the objects of the same class in Kyiv is quite different based on their quality and location. But unfortunately, there are no detailed data on true transaction prices (considering discounts) that could confirm this assumption.

What will become of the mortgage?

Judging by the pace of construction during last years, the dynamics of prices and the construction companies’ appeals to activate the mortgage, it can be assumed that there still is a surplus of supply on the market of the capital city. Unfortunately, because of the absence of official statistics on sales on the new homes market, all the analytics is based on judgments and expert opinions.

There is an interesting estimate in the report of the City Development Solutions Company for the year 2018. The authors of this report mention that most of the apartments now available on the market will be sold in little more than three years if current trends continue. At the same time, in international practice, demand and supply are considered to be in balance if the estimated time of apartment sale is twelve to eighteen months. This indicates that there is imbalance on the market: there are more homes on sale than buyers ready to purchase.

Mortgage lending of citizens is gradually developing. According to the NBU’s Financial Stability Report, during the first quarter of 2019 new mortgage lendings were credited for UAH 583 million (+5.4%). But it is likely that mortgage lending will not be determinant on the residential estate market in the mid run. Though the development of this type of crediting is important, in particular from the social point of view. Year after year, the residential properties built during the Soviet times are considerably falling in price because of the large supply of new-builds, and, for example, the programs of khrushchevka buildings renovation seem only a distant prospect. So, without affordable mortgages, the owners of such apartments will have little chances to improve their living conditions. At the same time, non-transparency and lack of legal regulation on the new homes market are a big obstacle for many banks to develop their mortgage programs.