Ukraine’s construction market amid the pandemic in 2021: a mixed bag

Written by Sergii Zapototskyi – UVECON, EECFA Ukraine

Since Ukraine is dependent on global economic changes to a great extent, the global crisis triggered by the pandemic has greatly affected its construction industry. Let’s see how.

Good news, bad news

The pace of housing construction significantly slowed down in Ukraine; the index of construction products for 2020 in the residential real estate segment amounted to 81.5% in comparison with 2019. At the same time, the average price per square meter grew by 6.5%. Yet the volume of non-residential constructions remained almost unchanged (99.3%) and civil engineering constructions even outstripped 2019 (111.6%) due to the implementation of the state program dubbed ‘Big Construction’ within which more than 3.9 thousand km of roads were repaired, and 114 schools, 100 kindergartens and 101 sports facilities were either built or reconstructed.

Source: freepik.com

As a real estate expert evaluation shows, more properties are being bought in the large cities of Ukraine such as Kiev, Odessa, Dnipro, Kharkiv and Lviv. The reason is the growing population number which is a good stimulus for the economy, construction, the development of engineering and social infrastructure, as well as business activity. In these cities, including the capital city, this year might see a further rise in prices and a greater revival of the real estate market (an increase in construction projects of residential complexes, cottage settlements, low-rise residential buildings, office and shopping centers, underground and ground parking lots).

The latest EECFA Construction Forecast Report Ukraine can be purchased on eecfa.com.

Residential

Influencing factors and reform on the downside

In 2021 the key influencing factors, which are also the risks for the real estate market of Ukraine, may be the failures of healthcare and vaccinations, which will lead to the disappointment of consumers and a passivity on their side.

And this year the factors making real estate investment risky will not be eliminated either: corruption and administrative/regulatory problems like the reform of SACI (State Architecture and Construction Inspectorate of Ukraine). SACI was planned to be liquidated on grounds of being a “corruption department”, and a transparent system for issuing permits and construction supervision was to be created instead. But what happened was that the market was simply halted. The system is on the brink of collapse; already built facilities are not being put into operation and many projects scheduled to start last year were postponed by developers. A series of defaults by high-profile developers (Arkada Bank, Ukrbud, etc.) also undermined investor confidence in the residential segment – financing housing construction in Ukraine is mostly carried out at the expense of future homeowners.

Suburban housing construction and mortgage program on the upside

Amid the pandemic most buyers are focusing on suburban housing construction as during the lockdown the remote work scheme emerged and many companies are willing to permanently switch to it. Thus, living in a city with its transport and environmental problems lost its lure for many when one can live 20-30 minutes away from the city in a comfortable suburban home. We are returning to the concept of full-fledged satellite cities with various types of buildings (multi-storey terraced houses, townhouses, cottages, etc.). Therefore, the growth in the volume of suburban construction seems to be a promising trend for the market this year, and possibly in subsequent years as well.

In March 2021 a new government program for providing preferential mortgage loans is expected to be launched. Mortgages at 7% are a long-awaited tool to revive Ukraine’s construction market and reduce the cost of housing loans. Developers say affordable lending could increase home sales by at least 10%.

Commercial

The commercial real estate sector in Ukraine had a significant blow due to the lockdown:  rising vacancies, dropping rental rates, and new construction works still being postponed.

Retail

Retail was the first to be hit by the spring 2020 lockdown as many shops and malls were closed. In November 2020, there was a so-called ‘weekend lockdown’ in effect, while a full lockdown occurred from January 8 to 24, 2021. During the lockdown consumer demand fell sharply, but then it recovered quickly. The NBU (National Bank of Ukraine) estimates that the pandemic-related crisis hit this segment less than it did offices as it was boosted by rising incomes and the quarantine flexibility (the entertainment segment was hit hard, though). Vacancy rates in the market rose by 5.4pp, and the average daily traffic in shopping centers sank by 25%-40%. In large cities of Ukraine, new supply in 2020 was about 113.5 thousand sqm. GLA, and even more shopping centers are planned to be completed in 2021-2022. This year, for instance, at least three shopping and entertainment centers are to open in Kiev (​​147.5 thousand sqm. GLA) and two in Kharkiv (122 thousand sqm GLA), among others.

Office

Offices were hammered by the pandemic, which led to a drop in rates to 10% in total in the first half of 2020. The balance of supply and demand will likely deteriorate in the near future. At the end of 2019, developers announced to release a significant volume of new supply for 2020 (about 230 thousand sqm). However, by end 2020, the real indicator of new supply was 105 thousand sqm, and completion dates for the rest was postponed to 2021-2022. Only 49% of the total office space announced for 2020 was completed last year. Now supply exceeds demand, but the situation will likely change if business activity in Ukraine revives after the pandemic subsides.

Hotel

The nearly 70% decline in passenger traffic at airports caused a decrease in hotel occupancy to the level of 15%-20% during the strict lockdown and to the level of 30%-35% in the laxer period. (For comparison, in the pre-quarantine period it was 53%). Thus, new formats had to be introduced, so an office/co-working component or service apartments were added to the hotel function.

Industry

Growth in online commerce in the pandemic increased demand for warehouses, making this segment the most resilient in the current crisis. In the long term, a decrease in vacancy and an increase in rental rates for warehouse and industrial premises are expected due to hiked demand, limited supply and the small number of projects under construction.

Ukraine C-19 situation in construction (status on 23 April 2020)

Written by Sergii Zapototskyi – UVECON, EECFA Ukraine

Physical restrictions

  • On 12 March, the Cabinet of Ministers officially quarantined the entire territory of Ukraine for three weeks due to COVID-19, with a number of restrictive measures, mainly for educational institutions and some on air traffic and border crossing at most checkpoints in Ukraine.
  • On April 6, in order to combat the spread of COVID-19, the government introduced additional restrictions prohibiting being in public places without a face mask, going out without identification documents, being outside in groups of more than two persons, visiting parks, squares, recreation areas (except for walking pets for one person), going out to sports grounds and playgrounds, visiting social security institutions and the like; catering, shopping and entertainment centres, fitness centres, and cultural institutions. The quarantine introduced by the government was to expire on April 24 but owing to the sharp increase recorded in the number of COVID-19 cases (especially after the Easter holidays) the quarantine has been extended until 11 May 2020.

Construction works

  • Even though there is no direct ban on construction, there are several restrictions. According to the recommendations of the Ministry of Health and WHO, as well as according to the orders of the Cabinet of Ministers, main restrictions refer to the recommended number of people per square meter of area at construction sites, and the requirement to provide workers with personal protective equipment and antiseptics. Traditionally, employees are instructed on these requirements.
  • Of course, not all construction work can be carried out in full with these significant quarantine restrictions, but developers try to meet the deadlines for delivering their projects.
  • There is a difficulty in the supply of building materials and the delivery of construction crews.

The new EECFA Ukraine Construction Forecast Report is planned to be issued on 29 June 2020. Sample report and order

Anticovid measures in construction

There are no direct measures to support the construction sector, but indirect protectionist measures include a moratorium on conducting tax audits, postponement of filing declarations, and the prohibition for commercial banks to raise interest rates under the loan agreements for the duration of the quarantine.

Factors limiting the construction sector’s performance

  • Construction has not yet been hit hard as it is a long-term business, but if the situation drags on until June, the market might stagnate.
  • The construction market in Ukraine faces two key challenges: 1) economic deterioration that derives from the inefficient management (and not from COVID-19) but is aggravating the already difficult economic situation associated with the virus; 2) the instability associated with a pandemic. As now no one can predict how long the quarantine will last, most participants in the real estate market are on standby. Investors do not spend, except for primary needs, until the situation becomes clear. In addition, there is the uncertainty of what will happen to the global economy which may continue to decline even after overcoming the pandemic.
  • As the active construction season usually begins in April, developers, to the extent of their financial resources and available materials, are trying to continue construction by isolating construction sites and taking security measures. This applies to both building residential and commercial real estate.
  • Companies interviewed by LIGA.net (leaders in the construction market such as Integral-Bud, Kievgorstroy, KAN Development, SAGA Development, Perfect Group, UDP) assure that they have enough finances to continue working at all facilities. However, this is not the case for medium and small construction companies. The latter need working capital and the possibility of obtaining preferential loans. If the pandemic drags on for a long time, this will hit housing construction in the first place because in Ukraine it is largely financed by buyers of future apartments. Residential complexes under construction that are queuing can freeze the construction of subsequent ones with only current ones being completed.
  • Commercial real estate is built as a long-term investment by developers and is based on longer-term financial models, making it less vulnerable to the temporary restrictive measures. But it is more dependent on global economic changes that affect the financial condition of investors. Also, much more imported materials are used in commercial real estates than in housing construction, so the restoration of production in Europe and the world will influence the continued construction of office and shopping centers in Ukraine. The appreciation of the US dollar has already led to an increase in the price of imported materials, and thus we should expect a price rise in domestic ones. Metal suppliers are already raising prices, for example. European building material producers are expected to increase prices after the end of quarantine measures in their countries. Construction companies need money to pay off their current obligations before starting to work again. Therefore, many developers in Ukraine are already looking for the possibility of borrowing at a subsidized 5%-7% interest rate for the entire construction period – 1.5-2 years.
  • Civil engineering had grandiose plans for the current year, but they are becoming increasingly unrealistic due to a significant lack of funds for financing.