Investment perspectives: traditional and flexible offices
Nazar Bench, Owner of Fenix Group Investment and Construction Company
The sector of commercial property demonstrates various reactions to the outcome of COVID-19 pandemia. Although not all actors have postponed their deals, a wait-and-see attitude is still prevalent in the investment market. The share of investments raised towards Ukraine’s commercial property in 2020 has decreased as compared to the years of 2018-2019, when they amounted to over $300 m. annually.
The priorities have also changed: for instance, hotel property investments were more relevant than ever throughout the recent year. Most notably, the introduction of the Ryanair and Wizz Air lowcosters has boosted the tourist inflow. Given the latest developments, demand has increased for warehousing property.
Last year the market of retail and office property was more active. Thus, the situation with the office real estate segment has almost stabilized after the 2014 economic crisis, and so the amount of new floor spaces has doubled.
Investment climate in Ukraine
In 2015-2017, Ukraine achieved considerable results in reforming its banking system. During 2019-2020, the government was working on adopting a number of regulations aimed at improving the construction market transparency and investment prospects. These included the cancellation of share contributions, the law on improvements to construction regulation, new anti-raiding legislation and land reform. Reforms currently continue in the construction segment, including the implementation of a real estate developer electronic account system.
To determine the level of ease of doing business in a particular country experts will most likely consider the Doing Business ranking. Its analysts examine the country’s current legislation that facilitates investment prospects and business development (or hinders it). In 2020, Ukraine has notably climbed up the said ranking to the 64th place out of 190.
Thus, commercial real estate in Ukraine, especially its office segment, can pose substantial interest for foreign investors. The domestic market is particularly characterized by profitability, the presence of promising spaces and skilled manpower suitable in terms of price-quality criteria. However, in today's world the lack of transparent game rules in Ukraine and, as a result, the insufficient protection of financial investments, becomes an obstacle to attracting funds from abroad. And while this tendency prevails, investors continue putting capital into the real estate markets of neighboring countries.
A separate case of offices
The office segment is currently welcoming new capital, as it is considered one of the most promising forms of investment. In general, the payback in this sector ranges from seven to ten years. For example, we estimate the payback period of the Maidan Plaza business center to be eight years. The indicator depends on the location, object class and some other factors.
Ukraine’s office market has shown active project development over the recent years. In the previous two years, the segment was marked by an increase in rental rates and a low vacancy level. Accompanied by increased demand and shortage of supply, this factored into the further investor interest in this sector.
Seven office real estate projects have been commissioned in Ukraine’s capital this year. Moreover, up to 20 more business centers were planned to have been completed by the end of the year. However, we can expect some of them to be already commissioned in 2021. Thus, despite the coronavirus crisis, the amount of office space sold this year will be no less than in 2019.
On the other hand, there is a current tendency towards a vacancy increase. Companies are reducing leased space and are wary of signing long-term contracts (for more than a year). According to CBRE, if in 2018 the indicator was 4%, today it has gone up to about 13%. This trend will continue until the pandemic-related developments are stabilized.
As a result, the decline in demand did have an effect on prices. More specifically, at the beginning of 2020, one square meter in the class A business center would cost tenants about $25-30 per month; at the end of June, the cost dropped to $20-25 per square meter, including maintenance fees and value added tax.
Global office real estate was also characterized by positive developments before the lockdown. As a result, the level of investment in the segment in certain EU countries has rebounded as early as in the penultimate quarter of 2020. However, everything can change depending on the further development of the situation. The number of investments raised will also correlate with the economy. In the meantime, the movement continues towards the optimization of costs by tenants.
Demand for flexible workspaces
Flexible offices with a short-time rent possibility have become a sort of an alternative to traditional offices. The latter are usually rented out in large floor spaces, which is relevant for big companies. But even such tenants can use coworkings for the purposes of cost optimization, when, for instance, choosing a space for certain departments.
Today’s Ukraine is seeing the continuous rise of demand for flexible office spaces. Compared with last year, the total floor space of coworking areas in Kyiv has increased by up to 40%.
The options for the development of such projects, such as the implementation of flexible offices by the developer themselves or in cooperation with other market players (providing of premises for rent or as a merger), are evaluated in each individual situation.
However, well-designed and well-implemented projects will remain in demand anyway. In addition, modern energy-saving technologies and green construction help to reduce the cost of building maintenance and can become a determining factor in attracting certain tenants.
It is worth mentioning that coworking spaces are unlikely to replace traditional offices. Rather, trends and formats of spaces will mix together, be modified and tested for survivability.
For example, in a number of European countries, there was a demand during the lockdown for coworking spaces in non-central areas, often within walking distance of employees' homes. As the market develops, this trend may also come to Ukraine. However, the level of profitability of such projects requires a balanced analysis of location, demand and other factors.
The Ukrainian real estate market has all the prerequisites for attracting foreign investment. Despite the desire for optimization, there is a demand for quality properties in office real estate. However, in order to encourage investors, more action is needed on behalf of the state, aimed at reducing business regulation and ensuring a level playing field for all companies, which should be supported by an independent judiciary.