Property Times Ukraine Q1 2010 Green Shoots

Property Times Ukraine Q1 2010

Green shoots

31 May 2010  While the economy of Ukraine was hard hit by the global financial turmoil, combined with political instability in the run-up to the presidential elections, early signs of stabilisation were Contents witnessed in the first quarter of 2010 (Fig. 1).  Despite the first signs of increase in occupier demand, the Executive Summary 1 office property market in Kyiv was still determined as a Economic Overview 2 Offices 5 tenant’s market as opposed to the landlord’s market that Retail 10 prevailed during 2004-Q3 2008. Industrial 13 Investment 16  In the first quarter of 2010, DTZ witnessed a noticeable Definitions 19 improvement in general dynamics on the demand side of the Contacts 20 retail market across Ukraine, with retailers increasingly seeking opportunities to expand, whilst the lack of critical mass of high

quality retail properties in the country remains a major Authors obstacle.  Though the first quarter of 2010 did not bring any significant Marta Kostiuk changes on the logistics property market in the Greater Kyiv Associate Director, area, activity of ‘would-be’ occupiers in the sector increased Head of Research and Consulting +38 (0)44 220 30 60 compared to 2009. [email protected]  Since early 2010, DTZ has seen significant improvement in

Andriy Tymoshenko investor sentiment. As a result, in the first quarter of 2010, the Research Analyst volume of investments into the commercial property market in +38 (0)44 220 30 60 Ukraine exceeded the volume of investments recorded during [email protected] the whole of 2009.

Contacts Figure 1 Macroeconomic indicators in Ukraine

Magali Marton % Head of CEME Research 40 +33 149 64 49 54 30 [email protected] 20 Hans Vrensen Global Head of Research 10 +44 (0)20 3296 2159 [email protected] 0 -10

-20

-30 GDP growth Unemployment Inflation Industrial production

Source: Oxford Economics

www.dtz.com 1 Economic overview

While the economy of Ukraine was hit hard by the global Figure 2 financial turmoil, combined with political instability caused in the run-up to the presidential elections, early signs of Industrial production in Ukraine, EA16 and EU27 stabilisation were witnessed in the first quarter of 2010. % 20 In January-March 2010, several major macroeconomic indicators, including real GDP, industrial output, FDI inflow, 10 nominal and real salaries, as well as stability of the 2008 2009 national currency, demonstrated positive dynamics. 0 Furthermore, the political tension in the country eased due to completion of the presidential elections, formation of the -10 2010 parliamentary coalition and appointment of the new government. As a result, the international ratings of -20 Ukraine were improved by the leading rating agencies. -30 Economic growth -40 Industrial production, Ukraine In accordance with the preliminary estimates produced by Industrial production, EA16 the State Statistics Committee of Ukraine, in the first quarter of 2010, real GDP increased by 4.8% year-on-year. Industrial production, EU27 Source: State Statistics Committee of Ukraine, Eurostat In early 2010, the State Statistics Committee of Ukraine published refined data on economic growth in 2009, when Figure 3 real GDP decreased by 15.1% year-on-year. Real monthly salary, retail sales and consumer In accordance with the official statistics data, in the fourth spending in Ukraine quarter of 2009, economic decline amounted to 6.8% year- on-year and was the lowest during the year due to the low % comparative benchmark of 2008. 40 30 Industrial production and agriculture Despite general negative dynamics witnessed during 2009, 20 since early 2010 the industrial sector has demonstrated the 10 first signs of recovery. 0 In the first quarter of 2010, industrial production increased -10 by 10.8% year-on-year. Among the industrial sectors such industries as mining, chemical industry, metallurgy and -20 machine-building demonstrated the highest growth. -30 The Ukrainian and international think tanks presently Real monthly salary growth Retail sales growth project an increase in industrial production in the range Consumer spending growth from 1.7% to 9.5% year-on-year for 2010, depending on the expected growth in the export-oriented metallurgical, Source: Oxford Economics, State Statistics Committee of Ukraine, IMF machine-building and chemical sectors, as well as general dynamics on the global commodity markets. Unemployment and salaries Despite the crisis, agricultural production was among those In accordance with the ILO methodology, in 2009 the few sectors, which in 2009 demonstrated positive unemployment rate amounted to 8.8% compared to 6.4% dynamics. In the first quarter of 2010, agriculture at the end of 2008. production increased by 5.3% year-on-year. According to the preliminary data, in January-March 2010 Inflation the average nominal monthly salary in Ukraine increased In March 2010, consumer prices increased by 4.7% by 17.2% year-on-year and amounted to UAH 1,993 compared to December 2009. (USD 249). At the same time, real salaries increased by 5.7% year-on-year. According to the projections produced by the Cabinet of Ministers of Ukraine, in 2010, the consumer prices are expected to increase by 13.1% year-on-year, compared to

12.3% in 2009 and 22.3% in 2008. www.dtz.com 2 Economic overview

Retail sales In March 2010, based on the similar considerations, Fitch In 2009, as a result of economic crisis, retail sales Ratings revised Ukraine's outlook from negative to stable decreased by 20.6% year-on-year compared to 17.9% and affirmed the country’s ratings. annual growth in 2008. In May 2010, Standard & Poor’s ratings agency improved In January-March 2010, retail sales decreased by 3.1% the foreign and local currencies sovereign credit ratings on year-on-year compared to the 18.2% decline during the Ukraine from B-/C to B/B and from B/B to B+/B with stable similar period in 2009. outlook respectively, as well as the country’s rating on the national scale from uaA to uaA+. Such upgrade of the Nevertheless, in 2010, retail sales are expected to show ratings was driven by the positive views of Standard and growth in the range from 1.5% to 6% year-on-year. Poor’s on the improved policy coordination, which resulted in improvement in external relations with key trading National currency partners and expected renewal of the IMF programme in Ukraine, stabilization in the country’s external liquidity In accordance with the official USD exchange rate position, as well as acceptable level of expected determined by the National Bank of Ukraine, the Ukrainian government debt at the end of 2010. hryvnya revalued insignificantly from 7.985 UAH/USD in early January 2010 to 7.925 UAH/USD in late March 2010. Figure 4

At the same time, the Ukrainian currency strengthened Dynamics of industrial production, exports and against the Euro from 11.532 UAH/EUR in January 2010 to imports of goods, as well as exchange rate in Ukraine 10.684 at the end of March 2010, mainly due to the % UAH per 1 USD unstable economic situation in the European Union. 100 10 80 8 State budget 60 6 The State budget of Ukraine for 2010 was approved in late April 2010. It allows for the state budget expenditures and 40 4 20 2 revenues in the amount of UAH 324 billion and UAH 267 2008 2009 billion respectively, with the deficit at around 5.2% of GDP 0 0 Jul or UAH 56.5 billion. Jul Jan Jan Jan Mar Mar Mar Nov Nov Sep Sep May -20 May -2 2010 At the same time, the parameters of the State budget of -40 -4 Ukraine can be amended during the year, and the -60 -6 possibility that such option will be used by the country -80 Industrial production Exports of goods-8 authorities remains high. Imports of goods UAH/USD official International ratings exchange rate In March 2010, Standard & Poor’s ratings agency revised Source: State Statistics Committee of Ukraine Ukraine’s foreign-currency sovereign credit rating and local-currency rating, having improved them from CCC+/C Foreign trade and foreign direct investment to B-/C and from B-/C to B/B with positive outlook In January-February 2010, exports and imports of goods in respectively. Ukraine increased by 24.7% and 20.7% year-on-year respectively. The volume of exports of goods rose mainly Among the main factors taken into consideration when due to the improvement in prices and demand for the improving the country ratings were appointment of the new Ukrainian goods on the international markets, while the government headed by the Prime Minister Mykola Azarov, positive dynamics in imports was caused by the as well as formation of the parliamentary coalition. These strengthening of the domestic demand. events are expected by the agency to lead to the renewal of relations with the International Monetary Fund (IMF) and In 2009, total volume of exports of goods and services improvement of efficient cooperation between the Cabinet reached USD 49.22 billion, or by around 37.5% less of Ministers of Ukraine and the Presidential Administration. compared to 2008. The volume of imports of goods and services decreased by around 45% year-on-year, having Based on the improvement of Ukraine’s ratings on the amounted to USD 50.6 billion. international scale, Standard & Poor’s upgraded the country’s ratings on the national scale from uaBBB to uaA.

www.dtz.com 3 Economic overview

In 2009, foreign trade balance of Ukraine was negative, as Figure 5 in the previous years, and amounted to USD 1.38 billion compared to the trade deficit of USD 13.31 billion recorded Net FDI and FDI growth in Ukraine in 2008. billion USD % 12 390 In 2009, net foreign direct investment in Ukraine amounted 10 325 to around USD 4.65 billion, having decreased almost by 8 half compared to 2008. 260 At the same time, according to the preliminary data 6 195 published by the National Bank of Ukraine, in first quarter 4 130 of 2010, net foreign direct investment amounted to USD 977 million, having increased by around 11% year-on-year. 2 65 0 0 The leading Ukrainian and foreign think tanks presently -2 -65 project that in 2010 the net inflow of foreign direct investment in Ukraine will vary in the range from USD 4 billion to USD 8 billion. Net FDI Net FDI growth

Structural reforms Source: National Bank of Ukraine Structural reforms are widely recognised to be crucial for * Preliminary data further sustainable economic development of Ukraine.

In accordance with the National bank of Ukraine, at the The priority spheres, which were defined within the end of 2009, gross external debt of Ukraine amounted to program of reforms developed for the new president of around USD 103.97 billion or approximately 91% of the Ukraine by the Independent International Experts country’s GDP. This volume of debt is considered by the Commission, include pension system and energy sector, experts as not critical for Ukraine, though threatened by as well as taxation system. In the experts’ opinion, currency risks. absence of the significant changes in these spheres will lead to the failures in public finance in Ukraine. The representatives of the leading investment banks

expressed the opinion that the Ukrainian government and The EU-Ukraine Association Agreement, which will mainly several major players in the corporate sector can regulate economic and trade issues between European potentially resume borrowing on the international financial Union and Ukraine, can be concluded in 2010. Smooth markets in 2010. At the same time, the recent negotiations between the parties have been hindered by improvement of the international ratings of Ukraine will the Ukrainian laws and standards in various spheres, positively influence the cost of borrowing. which, amongst others, include agriculture, civil aviation, environment, competition and public purchases. Outlook

Public debt According to the major Ukrainian and international experts, in 2010 Ukraine will witness economic growth in the range According to the refined data published by the Ministry of from 2% to 5%. Economic recovery of Ukraine is however Finance of Ukraine, at the end of 2009, public debt and expected to be driven mainly by improvements on the publicly guaranteed debts of Ukraine amounted to around global commodity and financial markets. USD 39.68 billion (UAH 316.9 billion).

During the first quarter of 2010, the economy of Ukraine In 2009, public debt and publicly guaranteed debts of mainly demonstrated positive dynamics, and this trend with Ukraine increased by over 65% year-on-year due to the high probability will continue through to the year-end. placement of the domestic government bonds, receipt of the tranches of the IMF loan, receipt of the loan of World Ukraine needs to rebalance its economy, correct the Bank for rehabilitation of the financial sector in the country, budget deficit and secure a revival of foreign investments as well as the national currency fluctuations. Nevertheless, by the time the international aid expires and the country’s the ratio of public debt to GDP in Ukraine amounted to debt matures in 2012-2013. around 35% and did not exceed the internationally recognised safe threshold of 60%.

www.dtz.com 4 Office

Supply Figure 6 As of the end of the first quarter of 2010, in Kyiv there was Major indicators of office property market in Kyiv approximately 1,052,585 sq m (GLA) of speculatively delivered office stock, excluding government buildings sq m % / USD per sq m and offices constructed for owner-occupiers. 1 400 000 80 1 200 000 70 In the first quarter of 2010, new office supply in Kyiv was 1 000 000 60 50 very insignificant and amounted to approximately 800 000 12,215 sq m, representing a decrease in delivery of 40 600 000 around 67% compared to the first quarter of 2009. Such 30 dynamics have been mainly caused by the lack of 400 000 20 development financing, as well as decrease in rents and 200 000 10 capital values for office space in the Ukrainian capital. 0 0

In the first quarter 2010, new supply has been dominated by the office space delivered by Ukrainian developers, through the conversion of the former Total stock New supply Take-up industrial and administrative buildings. Vacancy rate Prime rent

Source: DTZ Research In terms of quality of space, the Kyiv office market * Projection remains characterised by a high percentage of buildings Note: All figures are year-end refurbished from old industrial or Soviet-type administrative premises into B and C class offices. Figure 7 Currently, there are almost no true A-class office schemes in the Ukrainian capital in accordance with the Total office stock in Kyiv versus other CEE capitals existing office classification. sq m 10 000 000 Since late 2008, development of many large-scale office schemes planned in Kyiv before the onset of the 8 000 000 financial crisis has been suspended due to lack of 6 000 000 finance and economic decline. Therefore, new office supply will most likely remain restricted through to 2011- 4 000 000 2012, this being the earliest that any material form of 2 000 000 development finance is likely to be available. 0 In 2010, new office supply in Kyiv may amount to over 150,000 sq m (GLA). However, this figure may vary significantly depending on the delivery of several sizeable office schemes by the year-end. Budapest Warsaw Prague

Bucharest Moscow Kyiv In 2010, new office supply in Kyiv will be comprised of office developments in the traditional format, while Source: DTZ Research delivery of business parks will be delayed through to 2012 at the earliest. Table 1 Key office property market indicators in Kyiv 2005 2006 2007 2008 2009 Q1 2010 Directional outlook Stock (sq m) 478,650 560,500 741,400 916,510 1,040,370 1,052,585  New supply (sq m) 115,240 81,850 180,900 175,110 123,860 12,215  Take-up (sq m) 120,000 120,000 230,000 160,000 106,000 27,000  Vacancy rate (%) 3.5 1.2 1.3 4.2 17.6 16.9  Prime rents ($/sq m/ month) 35-40 45-50 50-70 70-85 25-35 25-35  Source: DTZ Research Notes: All figures are period-end and due to non-transparency of the market are subject to continued revision. Take-up and vacancy figures do not include sub-lease opportunities. www.dtz.com 5 Office

Table 2 Major office projects completed in Kyiv in Q1 2010 Project Location* Size (sq m) Developer Developer’s nationality Forum Kinetic NC/right bank 9,950 Forum Group UA BC at 13a Kostyolna St. CBD 2,265 ISA Prime Developments UA Source: DTZ Research * CBD – Central Business District; NC-non-central

Table 3 Major office projects scheduled for completion in Kyiv in 2010-2011 Project Location* Size (sq m) Developer Developer’s nationality Esplanada BC (Parus-2 BC) CBD 43,850 Mandarin Plaza /Tri O UA Mega City BC NC/left bank 40,000 UKO Group UA Toronto-Kyiv BC CBD 37,670 Toronto-Kiev UA Premium Centre BC NC / right bank 36,000 Premium Centre UA / TUR Forum Victoria Park BC NC / right bank 22,500 Forum Group UA Topaz BC NC / right bank 22,000 Artem UA BC at 21 Marshala Tymoshenka St. Obolon 21,100 Stolitsa Corporation UA BC at 7a Klovskyi Uzviz CBD 19,000 Zhytlobud UA Horizon Park BC (phase 2, building 2) NC / right bank 16,900 ISA Prime Developments UA Horizon Podil BC (phase 2) Podil 16,000 ISA Prime Developments UA Rialto BC (Podilskyi) NC / right bank 15,000 Istil Group UA Vynohradar BC NC / right bank 14,800 Local developer UA Magnet BC (phase 1) NC / left bank 13,000 City Capital Group UA Shchekavytskyi BC NC / right bank 10,350 IBK Stolytsya UA BC at 70 Saksahanskoho / CBD 10,300 Elektrotech UA 16b Pankivska St. BC on 201-203 Kharkivske Shose NC / left bank 10,200 Rele UA (phase 2) BC at 26/14 Spaska St. Podil 9,350 Perspektyva Resydencia UA BC at 21-23 Verbova St. NC / right bank 8,690 Solidarnist UA Eleven BC NC / right bank 8,600 Centre Invest UA Maxim BC CBD 7,700 Rele UA BC at 7a Shamryla St. NC / right bank 6,730 Georgiy Ltd. UA BC at 13v Moskovskyi Ave. NC / right bank 6,500 TRC Petrovka Ltd. UA Source: DTZ Research * CBD – Central Business District; NC-non-central

www.dtz.com 6 Office

Demand Figure 8 Despite the first signs of increase in occupier demand, the Office take-up by size of transaction in Kyiv office property market in Kyiv has been still determined as a tenant’s market as opposed to the landlord’s market that 100% prevailed during 2004-Q3 2008. 90% 80% In the first quarter of 2010, around 27,000 sq m of offices 70% were transacted in the market in Kyiv, which is 60% approximately 8% more compared to the take-up 50% 40% registered in the first quarter of 2009. 30% 20% In the first quarter of 2010, office lease transactions were 10% largely driven by relocation of companies seeking to 0% improve quality of the space occupied and minimize their 2003 2004 2005 2006 2007 2008 2009 Q1 occupational costs. Several expansion transactions have 2010 been also registered during the period. <50 sq m 50-100 sq m 101-500 sq m

Office take-up in Kyiv is increasingly dominated by lease 501-1000 sq m >1000 sq m transactions exceeding 1,000 sq m, which reflects their Source: DTZ Research strategic nature, as well as positive market perception of the corporate occupiers. Figure 9

Looking ahead to 2010, whilst overall demand remains Office market vacancy and prime rents suppressed, there is evidence that a number of larger Prime rent, USD per sq m Vacancy, % occupiers are now taking the opportunities presented by the depressed rental market and forthcoming lease breaks 80 20 to seek relocation to more efficient better grade space than 70 16 they presently occupy. These strategic relocations of 60 corporate occupiers are likely to be a major driving force in 50 12 the further maturity of the market. 40 30 8 Vacancy 20 4 At the end of the first quarter of 2010, the primary market- 10 wide vacancy decreased by 0.7% compared to the fourth 0 0 quarter of 2009 and reached 16.9%, including only primary stock available directly from the property owners.

A decrease in primary vacancy in the Kyiv office market Prime rent Vacancy rate during the first quarter of 2010 indicated positive dynamics for office demand; the first sign of stability in the sector Source: DTZ Research since the fourth quarter of 2008.

www.dtz.com 7 Office

Rents Outlook From the third quarter of 2008 until late 2009, office rents Future development of the office property market in Kyiv is in Kyiv fell by over 50%, due to the devaluation of the strongly dependant on macroeconomic conditions, as well national currency and weak occupier demand caused by as the timing of a global and, Ukraine’s economic recovery. economic recession in Ukraine and worldwide. DTZ believes that the office property market in Kyiv In the second half of 2009 the office rents in Kyiv have remains structurally undersupplied in terms of total office stabilised and remained generally unchanged during the stock and quality of the properties available for occupation, first quarter of 2010 at around USD 25-35 per sq m per whilst the increase in vacancy since late 2008 was created month for high-end space reducing down to USD 20-25 per through a fall in occupier demand rather than any excess sq m per month for good central and non-central B class delivery. space and, USD12-17 per sq m per month for C class. Given the existing constraints in the debt finance market, While in 2007-2008 offices in Kyiv were proposed to as well as limited capacity to undertake development out of tenants predominantly in a shell&core condition, since equity due to low rents and increased vacancy, DTZ does 2009 rent has been quoted on office space offered with not anticipate that any material delivery of pipeline stock finishing (i.e. with painted walls, suspended ceilings, will commence in Kyiv prior to late 2011. lighting and carpeting), as in the current market conditions office occupiers are not ready to incur capital expenditures Given the price inelasticity of supply and, the likelihood that for fitting out. the first reactive delivery to any upswing will come from the relatively cheap and quick delivery of refurbished older Based on the assumption that the exchange rate of the buildings, this will in all likelihood leave the market in a Ukrainian hryvnya to the US dollar remains at around condition of an undersupply of higher grade office space, UAH/USD8, through until late 2010 office rents are likely to both in the CBD and non-central locations of Kyiv. generally remain at the current level. These projections are very sensitive to global and local economic conditions, as Therefore, if demand for quality office space in Kyiv well as further fluctuations in exchange rate of hryvnya continues strengthening following the trend established in against foreign currencies. the first quarter of 2010, this in all likelihood will lead to upward movement of office rents.

Table 4 Major office leasing transactions in Kyiv in Q1 2010 Period Tenant Office area Occupier sector* Building Location** leased (sq m) Q1, 2010 Kraft Foods 3,800 FMCG BC at 23a Yaroslaviv Val St. CBD Q1, 2010 WND 3,580 A&M Capital Hall BC CBD Q1, 2010 EBRD 2,599 FIRE Compass BC Pechersk Q1, 2010 KPMG 2,500 BS Baroque BC CBD Q1, 2010 EPAM Systems 2,178 ICT Fahrenheit BC CBD Q1, 2010 WND 1,325 A&M Vector BC NC Q1, 2010 Phoenix Consult 1,057 BS BC at 23a Volodymyrska St. CBD Q1, 2010 OS Direct 889 A&M Vector BC NC Q1, 2010 Grey Group 700 A&M Trio BC Podil

Source: DTZ Research *FMCG – fast moving consumer goods; FIRE – Finance, Insurance, Real Estate; ICT – Information and Communication Technologies; A&M – advertising and media; BS – business services ** CBD – Central Business District, NC – non-central

www.dtz.com 8 Office

www.dtz.com 9 Retail

Supply Figure 10 The retail property market throughout Ukraine remains Modern retail stock in Kyiv underdeveloped in terms of its saturation and quality of sq m sq m existing stock compared to other countries in Central and 240 000 1 000 000 Eastern Europe. 200 000 800 000 As of late March 2010, the total modern retail stock in Kyiv 160 000 was estimated at around 862,720 sq m, or approximately 600 000 310 sq m of modern retail stock per 1,000 inhabitants 120 000 (based on official demographics statistics). 400 000 80 000

This figure counts for all major retail developments in the city 40 000 200 000 of or, over 5,000 sq m gross lettable area (including multi- 0 0 tenant retail centres and ‘big box’ single occupied developments), and reflects a significant undersupply of retail space in the Ukrainian capital, particularly when considering the official versus unofficial population imbalance. Annual supply Cumulative supply

In the first quarter of 2010, the only retail development Source: DTZ Research delivered in Kyiv was the DIY-store Praktiker, located on * Projection the Ring Road in the building adjacent to the operating In total, approximately 98,000 sq m (GLA) of new retail food hypermarket Novus. Also, the retail centre Module space are additionally planned for delivery in Kyiv by the was opened in Bucha in Kyiv region, and it is anchored by end of 2010. the DIY-store Nova Liniya, food supermarket EKO-Market and electronic appliances store Comfy. The centrally-located retail and leisure centre Continental (Esplanada), as well as the second phase of the retail Opening of the 42,000 sq m second phase of the retail and centre Dream Town in Obolon are likely to be delivered not leisure centre King Cross Leopolis in Lviv became the earlier than 2011. major event on the Ukrainian retail property market in the first quarter of 2010. The scheme is anchored by the food In the regional cities 2010 is expected to see delivery of hypermarket Auchan, the home appliances store FoxMart, the retail centres Yuzhnye Sklony and Green Plaza in as well as the DIY-store Praktiker, which has operated Donetsk, the second phase of the retail and leisure centre since late 2008 as the first phase of the development. ‘Donetsk-City’ in Donetsk, the retail and leisure centre Magellan in Kharkiv, as well as the second phase of the The 45,000 sq m (GLA) second phase of the retail and furniture multi-tenant retail centre ‘Sixth Element’. leisure centre Sky Mall is scheduled for technical opening in Kyiv in June 2010. The 17,000 sq m (GLA) extension of In terms of quality in Kyiv and other major cities of Ukraine, the first phase of the retail centre Promenada Park is the existing retail stock is mostly formed by first generation planned in September 2010, in which the food hypermarket retail developments, whilst the deficit of true end- Auchan has operated since late 2009. Also, the retail destination retail schemes remains in the country. Formats centres Mega City and Rainbow are scheduled for opening such as retail parks and fashion outlets are yet to be in Kyiv by end of 2010. delivered.

Table 5 Key retail property market indicators in Kyiv 2005 2006 2007 2008 2009 Q1 2010 Directional outlook Stock (sq m) 422,785 444,985 534,185 647,885 854,220 862,720  New supply (sq m) 77,960 22,200 89,200 113,700 206,335 8,500  Prime shopping centre rents 100-150 120-150 180-220 200-250 120-150 160-180  ($/sq m/ month) Prime high street rents 80-150 150-200 300-350 350-380 100-160 120-180  ($/sq m/ month) Source: DTZ Research Note: All figures are period-end and quoted for retail units of area in a range of 100-300 sq m www.dtz.com 10 Retail

Demand Thus, several food hypermarket operators, including but During 2009, due to adverse economic conditions, local not limited to Auchan, Fozzy Group, Novus by BT Invest, and international retailers in Ukraine revised their strategy. Amstor, Varus, Eurotek, have been considering As a result, some of them left the Ukrainian market or occupation in the new retail developments not only in stopped operations, while others seized the moment and major cities of Ukraine with populations over 1 million continued expansion in the country. inhabitants, but also in smaller cities.

Despite the most negative expectations, the year 2009 In 2009, the Ukrainian DIY chain Epicentre demonstrated turned out to be positive for many retailers operating in the highest activity on the market. In early 2010, the first Ukraine, particularly those in food retail, as well as low DIY-store Praktiker was opened in Kyiv, and the year is and middle price categories of fashion retail. likely to also see opening of the pioneer store Leroy Merlin (Adeo Groupe) in the Ukrainian capital, as well as further In the first quarter 2010, DTZ witnessed a noticeable expansion of the chain Nova Linia across the country. improvement in general dynamics on the demand side of After closing their less profitable stores, electronics and the retail market across Ukraine with many retailers home appliance chains such as Comfy, Foxtrot/FoxMart, increasingly seeking for opportunities to expand, whilst Eldorado and Technopolis continued their expansion in the lack of critical mass of high quality retail properties in Ukraine, even though demand has high income elasticity the country remains one of the major obstacles. for this category of goods. Several foreign retail chains

intended to enter Ukraine before the crisis, however the In early 2010, ‘big box’ retail operators continued to electronics and home appliance sectors continue to be demonstrate high activity, driven by the recognised highly led by national chains. unexploited potential of the Ukrainian market combined with the availability of development land at affordable Despite improvement of general perception about the prices enabling viable delivery of the retail schemes in Ukrainian market, retail operators remain very selective in this format. terms of quality of retail space and occupational terms.

Table 6 Major multi-tenant retail projects completed in Ukraine in Q1 2010 Project City Address Size (sq m) Developer Developer’s nationality King Cross Leopolis Lviv 30 Stryiska Str. 42,000 King Cross POL / UA (phase 2) Development Module Bucha, Kyiv region 48 Nove Shose Str. 21,000 Dragon UA Development Praktiker Kyiv 12 Kiltseva Road Str. 8,500 Local developer UA Source: DTZ Research

Table 7 Major pipeline retail projects scheduled for completion in Ukraine in 2010 Project City Size (sq m) Developer Planned delivery* Magellan Kharkiv 62,500 Kray Property Q4 2010 Sky Mall (phase 2) Kyiv 45,000 Astra Property / OLEDO Group Q2 and Q3 2010 Donetsk-City (phase 2) Donetsk 24,900 Domus 2010 Rainbow Kyiv 19,000 N-M 2010 Promenada Park (phase 1, part 2) Kyiv 17,000 Promenada Center Q3-Q4 2010 Sixth Element (phase 2) Odesa 15,000 Local developer Q2 2010 Mega City Kyiv 13,700 UKOGROUP Q4 2010 Yuzhnye Sklony Donetsk 13,000 Depot Development Group Q4 2010 Green Plaza Donetsk 7,700 Domus Q2 2010 Source: DTZ Research *According to public announcements as of late March 2010

www.dtz.com 11 Retail

Rents Figure 11 From late 2008, the economic recession, hryvnya Dynamics of net monthly retail rents in Kyiv devaluation, decline in real household incomes and retail sales resulted in the strengthening of bargaining power of USD/month/ sq m quality retailers, as well as downward pressure on base 400 retail rents and general cost of occupation of retail space 350 throughout Ukraine. 300

Whilst in 2009 in Kyiv and other major cities of Ukraine 250 retail rents decreased to the level of rents registered in 200 2006-2007, the third-tier cities with populations less 150 700,000 inhabitants suffered more significantly. 100 50 Nevertheless, with increasing activity of retailers in the country and their improved perception of the market 0 potential, in the first quarter 2010 DTZ witnessed growth 2006 2007 2008 2009 Q1 2010 2010* in the base prime rents in the quality multi-tenanted retail developments in Kyiv in a range of 15-25% compared to Prime high street rent Prime shopping centre rent

2009. Similar trends have also been observed in those Source: DTZ Research few western-standard retail developments, which operate Note: All figures are period-end and quoted for retail units of area in a range of 100-300 sq m in other major cities of Ukraine. * Projection

In early 2010, some upward correction was also Outlook witnessed in high street retail rents in Kyiv. DTZ projects that through 2010 the general dynamics of

the retail property market in Ukraine will follow that In the first quarter of 2010, vacancy varied significantly established in the first quarter of 2010. across the retail schemes in Ukraine depending on their general quality. Despite the remaining signs of economic crisis and

comparatively low incomes of the population, the potential DTZ anticipates that, due to the gradually strengthening of the retail property market in Ukraine undoubtedly demand of the retail operators and general lack of the remains high due to its immaturity in terms of quality and quality retail space, the base prime retail rents in well- formats of existing retail schemes, large country size, conceived multi-tenant retail schemes and high street high density of population, as well as its perceived high locations in Kyiv and other major cities of Ukraine will be brand awareness. subject to further upward pressure in the medium term.

DTZ believes that the retail segment, which proved to be Quality remains a crucial factor for the success of all reasonably resilient to the effects of economic crisis, is existing and new retail developments in Ukraine. In the likely to be among the first to show growth when new market conditions it has become particularly clear economic recovery commences due to pent up demand that a well-considered approach to selection of an and high country potential. appropriate location within the urban structure of a city, efficient concept and thoughtful phasing of a retail scheme with due regard to the number and mix of quality retailers operating and planning expansion into the country, will determine its long-term sustainability.

www.dtz.com 12 Industrial & logistics

Though first quarter of 2010 did not bring any significant Figure 12 changes on the logistics property market in the Greater Kyiv area, registrations of enquiries by potential occupiers Key industrial market indicators for the Greater Kyiv area in the sector increased compared to 2009. sq m USD/sq m/ month; % 1 400 000 25 Supply 1 200 000 As at the end of the first quarter of 2010, the total stock of 20 1 000 000 modern warehousing space in the Greater Kyiv area amounted to approximately 1,035,000 sq m. This figure 800 000 15 includes around 76,000 sq m of modern specialized 600 000 10 chilled&frozen and chemical warehouse facilities. 400 000 5 Approximately 32% of total existing modern warehousing 200 000 stock in the Greater Kyiv area is located along the highway 0 0 ‘Kyiv-Zhytomyr’ (M-06).

2002 2003 2004 2005 2006 2007 2008 2009 In the first quarter of 2010, new supply on the logistics 2010* property market in the Greater Kyiv area was formed only Total supply Annual speculative supply by the specialized warehouse complex Ice-Terminal with Prime warehousing rents Vacancy total area of 18,400 sq m. Source: DTZ Research * Projection In late March 2010, in the Greater Kyiv area there was approximately 133,000 sq m of new warehousing space at Figure 13 the advanced stage of construction. If all these schemes are additionally delivered, by the end of 2010 the total Existing logistics stock split by major locations in the warehousing stock may reach around 1.17 million sq m. Greater Kyiv area, as of the end of Q1 2010

The largest logistics pipeline scheme scheduled for Kyiv City delivery in the Greater Kyiv area in 2010 is Brovary 5% 6% M-01 (Kyiv-Moscow), Logistic Centre (Terminal Brovary) of total area around 8% Brovary-Boryspil 49,180 sq m by Aisi Realty Capital. 20% M-03 (Kyiv-Kharkiv)

Other major logistics schemes planned for delivery during M-04 (Kyiv-Dnipropetrovsk) 2010 include Top-Trans Logistics Centre, the warehouse 32% V-log, the office and logistics centre near Vorzel, the M-05 (Kyiv-Odessa) warehouse Impeco, the office and logistics centre UTA 20% Service, as well as cross-docking for fresh products by M-06 (Kyiv-Zhytomyr) Raben near Velyka Dymerka. 5%4% M-07 (Kyiv-Warsaw) DTZ projects that the new supply of the modern warehousing space, which is likely to be delivered in the Other Greater Kyiv area during 2010, will be the lowest for the last four years. Source: DTZ Research

Table 8 Key industrial market indicators for the Greater Kyiv area 2004 2005 2006 2007 2008 2009 Q1 2010 Directional outlook Total supply (sq m)* 72,900 113,400 184,530 384,310 821,780 1,016,600 1,035,000  New supply (sq m)* 20,500 40,500 71,130 199,780 437,470 194,820 18,400  Vacancy, % - 1-2 1-2 1-2 14.5 20.6 19.7  Prime rents (USD per sq m) - 11 11 10.5 7.5-10 5.5-7 5.5-6.5 

Source: DTZ Research * Including ancillary office and mezzanine space Note: All figures are period-end www.dtz.com 13 Industrial & logistics

Demand Figure 14 In the first quarter of 2010, the logistics property market in Take-up of speculative logistics space in the Greater the Greater Kyiv area was characterised by the increasing Kyiv area by quarter enquiries registered of would-be occupiers. sq m In January-March 2010, take-up of modern warehousing 140 000 space in the Greater Kyiv area amounted to approximately 120 000 31,500 sq m, which was by around 69% more than in the first quarter of 2009. 100 000 80 000 However, the take-up of speculative logistics space in the 60 000 Greater Kyiv area, registered in the first quarter of 2010, was still lower than in the first quarters of the pre-crisis 40 000 years 2007 and 2008, when the volume of the transactions 20 000 exceeded 50,000 sq m in each of the periods. 0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Similarly to 2009, in the first quarter of 2010, the most 07 07 07 07 08 08 08 08 09 09 09 09 10 popular deal size registered on the logistics property market in the Greater Kyiv area was in a range from 1,000 sq m to 3,000 sq m. Source: DTZ Research

At the same time, the first quarter of 2010 witnessed two Figure 15 logistics lease transactions for the units of area over 10,000 sq m each. Take-up of speculative logistics space by type of occupiers in the Greater Kyiv area In January-March 2010, occupier demand for modern sq m logistics space in the Greater Kyiv area was dominated by 350 000 the companies operating in the sectors of FMCG, food 300 000 retail and transportation, which similarly to the previous periods remain the most active drivers of the logistics 250 000 demand. 200 000

Despite gradually increasing activity of potential tenants in 150 000 the sector, the decision-making process in relation to 100 000 occupation of the logistics space in the Greater Kyiv area 50 000 has now been more cautious and prolonged, if compared to the pre-crisis periods. 0 2005 2006 2007 2008 2009 Q1 2010 3PLs & Transportation Retail - Fashion Retail - Cosmetics White goods ICT FMCG/Food Retail Automotive Other Source: DTZ Research

Table 9 Major logistics schemes planned for delivery in the Greater Kyiv area in 2010 Scheme Location Total area (sq m) Developer Nationality Brovary Logistic Centre (Terminal Brovary) Brovary-Boryspil Ring Road 49,180 Aisi Realty Capital USA Top-Trans Logistics Centre (phase 1) M-01, E95 23,200 Top-Trans UA V-log M-01, E95 15,000 AIC BEL Office and Logistics Centre M-07, E373 12,400 Local developer UA Impeco M-07, E373 10,000 Local developer UA UTA Service M-06, E40 9,000 UTA Service UA Source: DTZ Research www.dtz.com 14 Industrial & logistics

Vacancy At the end of the first quarter of 2010, the primary vacancy DTZ projects that, other things being equal, by the end of rate in the Greater Kyiv reached approximately 19.7% of 2010 rents for prime warehousing space will remain primary stock available from landlords, compared to 20.6% generally unchanged. in late 2009. Outlook In accordance with DTZ’s estimations, at the end of the Given the current economic conditions, by the end of 2010 first quarter of 2010, the stock available for sub-lease in vacancy in the logistics property sector in the Greater Kyiv the Greater Kyiv area amounted to at least 18,300 sq m, area will remain high with the prime rents generally stable. adding around 1.8% to the primary vacancy rate. Economic recovery and an increase in commercial activity DTZ projects that in 2010 the primary vacancy rate in the is expected in late 2010 – early 2011 and, as a result, logistics property sector in the Greater Kyiv area will increased demand from occupiers may lead to a fall in remain high, though lower compared to the rates prevailing vacancy rates and an upward correction in the logistics in 2009. rents in the Greater Kyiv area.

Rents However, we believe that the price elasticity of In the first quarter of 2010, headline rents for prime warehousing supply is higher compared to other sectors of warehousing space in the Greater Kyiv area varied in a commercial property market in Ukraine, and new logistics delivery can potentially recommence relatively quickly. range from USD 5.5 to USD 6.5 per sq m per month depending on the quality of space, location and general lease terms.

Table 10 Major logistics schemes delivered in the Greater Kyiv area in Q4 2009 – Q1 2010 Scheme Location Total area Developer Nationality Major tenants* Occupancy* (sq m) (%) Ice-Terminal Chilled Warehouse M-01, E95 18,400 Ice-Terminal UA International 55 Seafood Group BF Sklad (phase 2) M-03, E40 48,600 BF Group UA Customs office 30 Warehouse complex M-01, E95 25,000 Technopolis UA Technopolis 36 (phase 1) L-Town specialized warehouse M-04 12,000 L-Town Group UA REM Trans 100 Source: DTZ Research *As at the end of March 2010

Table 11 Major logistics transactions in the Greater Kyiv area in Q4 2009 – Q1 2010 Period Scheme Tenant Occupier sector Total area (sq m) Location Type of deal Q1, 2010 L-Town REM Trans Transportation 12,000 M-04 new lease Q1, 2010 WND WND FMCG 10,000 WND pre-lease Q1, 2010 Prommash Brovary ABB Production 2,300 M-01, E95 new lease Q1, 2010 Aliaska LD WND FMCG 2,000 M-05, E95 new lease Q1, 2010 Office and Logistics WND Retail 1,200 M-07, E373 pre-lease Centre Q4, 2009 Logistics Centre MMK WND Retail 32,600 Brovary-Boryspil RR new lease Q4, 2009 MLP Chayka Sportmaster Retail 13,200 M-06, E40 new lease Q4, 2009 East Gate Logistic Auchan Retail 8,300 M-03, E40 new lease Q4, 2009 MLP Chayka Lan Ukraine Transportation 5,850 M-06, E40 new lease Source: DTZ Research WND – would not disclose www.dtz.com 15 Investment

During the first quarter of 2010, DTZ has witnessed a Figure 16 significant improvement in investors’ sentiment, which was Prime yields in Kyiv secured by decreasing of political tension in Ukraine, the resultant improvement of the country’s international ratings, % as well as the stabilisation of the national currency over the 25 last 12 months despite some predictions of the currency 20 collapse. Meanwhile, rental rates in the commercial property sectors across Ukraine remained generally stable. 15

10 As a result, in the first quarter of 2010, several investment deals were concluded on the commercial property market 5 in Ukraine with a focus on Kyiv. 0 According to DTZ’s estimations, in the first quarter of 2010, the volume of investments into the commercial property market in Ukraine exceeded the volume of investments recorded during the whole 2009. Office Retail Industrial The acquisition of the 20,000 sq m warehouse complex Source: DTZ Research with the adjacent land plot in the Greater Kyiv area by *No transactions, yield perceived by market players

Raben Ukraine was the only true open-market secondary investment transaction registered in the commercial Similarly to 2009, in the first quarter of 2010 investors in property sector in Ukraine in the first quarter of 2010. Ukraine typically were not ready to commit to a single deal of the value over USD 5-20 million, while the most Major investment transactions, which took place in the first attractive opportunities were office, hotel and retail quarter of 2010 in the property sector in Ukraine, include: properties of the area in a range of 5,000-20,000 sq m  The sale of 50% plus one share in the retail and leisure located in Kyiv. center ‘Sky Mall’ of total area around 70,000 sq m by the Estonian company to the Ukrainian OLEDO Group; In the first quarter of 2010, generally perceived prime net initial yields in Kyiv were varying between 13.5-16%, and  The sale of 50% of the interest in the Hilton hotel reflected some increase in capital values compared to project with serviced apartments presently under 2009. In DTZ’s opinion, the gap between asking and bid construction in the central part of Kyiv to two private prices has begun to converge mainly due to the increase in businessmen; value, which investors are ready to offer.  The sale of interest in the three development projects, the logistics complexes in Odessa and Vasylkiv, and DTZ expects that by the end of 2010 prime net initial yields retail centre in Donetsk, by the AIM-listed Ukrainian in Kyiv will decrease further through to 13% for prime office company XXI Century, to a local developer. The total space, 14% for high-quality retail properties and 15% for volume of the deal amounted to around USD 2 million. prime schemes in the logistics property sector.

In the first quarter of 2010, the public announcement was Importantly, due to the longer-term nature of leases in made about the letter of intent signed by BT Invest, HCM Western Europe and in the CEE region, investment yields Group and Stolitsa to merge their assets in the property vary in the range of 5.4-8.25% for properties that are over- sector by 2011. The terms of the deal are not disclosed, rented by 10-30%. At the same time, offered net initial but all three parties are among the leading companies in yields in Kyiv for prime assets range between 13.5-16%, the property sector in Ukraine. after also experiencing a strong downward rental correction in relation to the pre-crisis level. In the first quarter of 2010, a land plot located in proximity to Boryspil International Airport was acquired by an Arabian In the first quarter of 2010, among the most active investor for future development. This deal was one of the investors in the property sector in Ukraine were local most significant on the land market in Ukraine since the companies and individuals with the strong cash position beginning of the financial crisis. Among other land formed by sale of the assets in pre-crisis period. transactions completed by foreign investors in the first quarter of 2010 are the purchase of a 40 ha land plot on Odessa The Russian companies demonstrated strong interest in highway for potential commercial development and, the acquisition of the property assets in Ukraine, but price acquisition of central hotel development site in a regional city. expectations of these players were typically significantly lower than those offered by vendors. www.dtz.com 16 Investment

In the first quarter of 2010, some European investors were Figure 17 also monitoring the Ukrainian property market, but they Prime office yields in Kyiv versus other European were mostly interested in the prime properties, availability capitals of which is very limited in the country. However, after the recent events in Greece, which triggered instability of the % Euro and caused general uncertainty and aversion to risk, 25 this category of investors have temporarily postponed their activity in Ukraine. 20

In the first quarter of 2010, several commercial banks 15 resumed debt financing for a few Ukrainian development companies. Thus, the credit line was recommenced for 10 TMM in Oshchadbank, while the preliminary agreement was reached on the extension of the credit line for 5 KDD Group in Ukreximbank. 0 At the same time, the Eurobond market, which was not 2003 2004 2005 2006 2007 2008 Q1 Q2 Q3 Q4 Q1 available for the Ukrainian borrowers for the last 1.5 years, 2009 2009 2009 2009 2010 became open for corporate borrowers originating from London Madrid Berlin Paris Ukraine, and helped to attract over USD 1 billion debt Amsterdam Budapest Warsaw Prague finance in April 2010. Bucharest Moscow Kyiv

Source: DTZ Research Outlook * All figures are end-of-period The global credit squeeze saw yields in the core markets of Central Europe, as well as in Prague, Budapest and Other things being equal, DTZ expects a moderate volume Warsaw typically increase by around 3% from the lows of of secondary investment deals to be transacted in the late 2007. commercial property market in Ukraine by the end of 2010 due to the narrowing gap between asking and bid prices, Meanwhile, during the same period prime yields in Kyiv relatively high inflation projected this year in the United increased by around 7% despite a far more profound States and Eurozone, as well as yield compression on the downward rental correction being witnessed in the core property markets. Ukrainian capital. Hence, the doubling of these effects has had a strong effect on overall capital values for property assets in Kyiv and Ukraine on the whole.

DTZ believes that, whilst pre-crisis yields in Ukraine were irrationally high in the view of the clearly unsustainable rents, there has been an over compensation of rising yields coupled with significant downward correction of rents, particularly in the office property sector. Therefore, DTZ anticipates that as more confidence returns to the market, yields in Ukraine will decrease relatively quickly compared to compression witnessed in the more mature Central European markets.

In DTZ’s opinion, significant decrease in capital values, which has taken place in Ukraine since late 2008, presents attractive opportunities for investors in view of recognised high potential of the commercial property market that remains structurally undersupplied across all the sectors.

www.dtz.com 17

www.dtz.com 18 Definitions

Offices Office stock Gross lettable area of speculative office schemes (including new buildings and refurbishments) positioned in A, B and C classes and delivered since 1991.

Office take-up Total floor space known to have been let (pre-let) to tenants or sold (pre-sold) to owner-occupiers during the survey period with respective contracts signed. Office take-up includes renegotiations and lease extensions, but excludes sub-leases.

Prime office rent The attainable average prime rent that could be expected for an office unit of a minimum size of 100 sq m in a modern prime quality business centre located in the CBD. The rent is given as a base rent, i.e. no service charge and tax is included.

Retail Retail stock Individual developments or stand-alone retail units with a gross lettable area exceeding 5,000 sq m.

Prime retail rent The attainable average prime rent that could be expected for a retail unit of size in the range of 100-200 sq m located along the high street (i.e. prime high street rent) or in the prime retail scheme (i.e. prime shopping centre rent). The rent is given as a base rent, i.e. no service charge and tax is included. Frontage zoning is not adopted in Ukraine.

Logistics Logistics stock Gross lettable area of modern logistics schemes of area exceeding 1,000 sq m, delivered upon 2001 away from the city centre. Logistics stock includes area of warehousing, office and mezzanine space.

Prime warehousing rent The attainable average base prime rent that could be expected for a modern warehousing unit offering a minimum size of 1,000 sq m in a modern logistics scheme, which is located in a prime location away from the city centre and close to communication links. The rent is given as a base rent, i.e. no service charge and tax is included. It is quoted for warehousing space within the scheme, i.e. it is not a ‘blended rent’, rents for office and mezzanine parts of the property not included.

Investment Prime yield The initial yield estimated to be achievable for a notional property of highest quality and specification in the best location fully let and immediately income producing on present market terms at the survey date.

www.dtz.com 19 Contacts

Managing Director Nick Cotton +38 (0)44 220 30 80 [email protected]

Office Agency

Tenant representation Victoria Goroulko +38 (0)44 220 30 75 [email protected] Landlord representation Daria Rukina +38 (0)44 220 30 74 [email protected]

Retail Agency

Nataliya Mykolaychuk +38 (0)44 220 30 94 [email protected]

Industrial & Logistics Agency

Irene Zalizenko +38 (0)44 220 30 72 [email protected]

Investment & Land Agency

Nataliya Stelmakh +38 (0)44 220 30 85 [email protected]

Valuation

Tatyana Kazakova +38 (0)44 220 30 87 [email protected] Yana Lytvynchuk +38 (0)44 220 31 09 [email protected]

Research & Consulting

Marta Kostiuk +38 (0)44 220 30 84 [email protected] Andriy Tymoshenko +38 (0)44 220 30 60 [email protected]

Property Management

Ben Hunt +38 (0)44 220 30 79 [email protected]

Main switchboard +38 (0)44 220 30 60

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Disclaimer This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ.