18:41 PM Monday, June 25, 2018
Real Estate
Residential Real Estate Bubble Inflates in Ukraine
A construction boom is flooding Ukrainians cities with cheap apartments. Analysts says the new projects are creating an oversupply that will keep residential complexes unprofitable for years to come.
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KYIV -- What if you built it, but nobody came?

A construction boom is flooding Ukrainians cities with cheap apartments. Analysts says the new projects are creating an oversupply that will keep residential complexes unprofitable for years to come.

While Ukraine’s overall economy is to grow by 1-1.5 percent this year, but construction is expanding at 10 times that rate -- nearly 14 percent this year. With new highrise dotting the horizons of Ukrainian cities, developers seem to think towers will fill up with Ukrainians who distrust banks and with some of the estimated 1 million Ukrainians left homeless by the war in the Donbas.

But despite seductive billboards on highways and panel ads in the Kyiv and Kharkiv metros, buyers are not responding. In Kyiv and elsewhere, the boom is driving prices down below the cost of construction, according to Sergey Kostetskiy, an analyst with the realty firm S&V Development.

"In 2007 - 2008, about one million square meters were being added to the market every year," said Kostetskiy. "Real estate prices fell significantly, but, now, there's the same amount of buildings going up."

Poor Investment

For buyers, an apartment is no longer a great investment. Before the 2014 conflict, an average apartment owner could pay off the purchase price with six to seven years of rentals. Now, that same apartment will require up to 30 years of rentals to pay itself off, Kostetskiy said.

For developers, losses start after apartment prices fall below construction costs.

The State Statistics Service reported last week that the overall value of construction projects in the first three quarters of 2016 increased by 13.7 percent to $2 billion, from the same period last year. Residential construction grew by 13.6 percent, to $523 million, from the same period last year.

Much of today’s towers under construction were started before the global economic downturn of 2008, restarted later, then frozen with the 2014 conflict with Russia in 2014. With large amounts capital invested into projects, the developers are reluctant to abandon them.

"Demand is minimal," said Kostetskiy. "But they are continuing to build regardless."

Ukrainians Prefer Bricks over Banks

Helping developers is Ukrainians’ mistrust of banks. Since 2014, 80 Ukrainian banks, or one third of the total, have been closed for unprofessional practices. In addition, Ukraine’s population is gradually urbanizing as the rural population ages and declines. Finally, the secessionist standoff in the Donbas has displaced about 1 million people inside Ukraine, sending tens of thousands to live in Kyiv.

But, demographics are not on the side of apartment builders. Due to low birth rates, emigration, economic stagnation and loss of Crimea, Ukraine’s population has shrunk by about 18 percent since independence in 1991.

Then in 2014-2015, revolution, war, and then economic depression took a toll on apartment values.

"The massive decline in Ukraine's house prices, which occurred in 2014 and 2015, is attributable to the Ukrainian hryvnia's loss of value… due to the war," reported the Global Property Guide. "This period has been a headache for realtors, with some contracts being cancelled due to buyers' inability to convert currency, while sellers refuse to accept hryvnia."

Prices Still Fall in 2016

According to a July report by this international web site, the rate of fall in Ukraine's housing prices slowed in 2016, but the decline continued. Average apartment prices dropped by just over 2 percent year over year in the first quarter.

With declining prices, developers face friction with early buyers, people who paid more for the same units years ago.

These trends mean that builders can’t maintain the pace of construction. They cut the size and, sometimes, the quality of work crews, ensuring that construction work stretches out indefinitely.

"People are buying apartments that will never be finished," Kostetskiy said.

According to John Crockett, an American runs the Kiev Real Estate Recovery Fund, many Ukrainians park their money in residential units as alternatives to holding cash in banks.

But, many of these units are bare concrete shells and are not habitable. Meanwhile, large proportions of the new residential complexes remain empty.

"If you look at the buildings at night, no lights are on," said Crockett, who invests in high end apartments in central Kyiv’s established neighborhoods.

For comments and story tips, please contact UBJ Kyiv Correspondent Igor Kossov at

Photo: On central Kyiv’s prestigious Bohdana Khmelnytskoho Street, the concrete shell of this residential highrise was completed in 2013. But since then, work has been frozen. (Credit Maryna Sorokina)

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