Property Times Ukraine Q1 2013 Office tenants, time to go to market! 13 May 2013 Despite generally positive dynamics in 2011, Ukraine’s economic growth slowed down and deteriorated in 2012, however a relatively stable national currency Contents and low inflation enhanced domestic consumption in the country. During the first quarter of 2013, general business dynamics in Ukraine remained suppressed. Economic overview 2 Office 5 Around 27,200 sq m (GLA) of offices were delivered in Kyiv in the first quarter of 2013. However, during the remainder of the year new office supply in the city Retail 10 may amount to around 250,000 sq m (GLA), representing an increase of over 17% Industrial & logistics 15 on the existing stock and putting further downward pressure on effective rents Investment 15 in the sector. Increased availability of office space and lack of unified pricing Definitions 22 strategy, undertaken by landlords operating on the market in Kyiv, provides opportunities for office occupiers to optimise their rental position. Since the onset of the financial crisis in Ukraine in late 2008, total modern retail Authors stock in Kyiv increased by over 82%. More projects are in delivery pipeline both in Kyiv and across Ukraine, which, if delivered to current schedules, will lead to a Marta Kostiuk considerable increase in retail stock in the country by the end of 2015. As a result, Director, Research and the Ukrainian market will offer more opportunities for retail chain expansion, but Development Consulting localised retail rents will be subject to downward pressure, particularly in poorly conceived first generation retail schemes in light of the strengthening competition + 38 (0)44 220 30 60 within the sector. [email protected] Robust demand combined with low volumes of pipeline speculative stock in the Dmytro Sokolskyi warehousing and logistics property market in the Greater Kyiv area form preconditions for further increase in occupancy and rents in the short to medium Senior Research Analyst term. Nevertheless, the price elasticity of warehouse supply is higher compared to +38 (0)44 220 30 60 other sectors of the commercial property market in Ukraine, and new logistics [email protected] delivery could recommence relatively quickly. Whilst the amount of M&A volume within real estate sector in the first quarter of Contacts 2013 was significant, DTZ estimates total direct investment volume in Ukraine Magali Marton during the period at only around USD 4 million. Prime property yields in Ukraine Head of CEMEA Research remain at high levels compared to other European capitals, showing increases during the last six months of 2012 and stabilising in January-March 2013 (Fig. 1). +33 (0)1 4964 4954 [email protected] Figure 1 Prime office yields in Kyiv versus other CEE capitals (%) Hans Vrensen 20 Global Head of Research 15 +44 (0)20 3296 2159 10 [email protected] 5 0 2010 2003 2004 2005 2006 2007 2008 2009 2011 2012 Q1 2013 Q1 Budapest Warsaw Prague Bucharest Moscow Kyiv Source: DTZ Research Note: All figures are period-end DTZ Research Ukraine Q1 2013 Economic overview Figure 2 Macroeconomic indicators in Ukraine (%) Despite generally positive dynamics in 2011, Ukraine’s economic growth slowed down and deteriorated in 2012, as 40 the country faced new challenges. Nevertheless, a relatively 30 stable national currency and low inflation enhanced 20 domestic consumption. 10 0 In January-March 2013, general business dynamics in -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014* Ukraine remained suppressed. -20 2013* -30 Economic growth GDP growth Unemployment According to data published by the State Statistics Inflation Industrial production Committee of Ukraine, real GDP increased by 0.2% in 2012. Source: State Statistics Committee of Ukraine, Oxford Economics * Projections Whilst during the first two quarters of 2012 the Ukrainian economy demonstrated some positive dynamics with the economy growing by 2-3% year-on-year, in the third and the fourth quarters of the year real GDP decreased respectively by (-1.3%) and (-2.3 %). Industrial production The experts project that in the first quarter of 2013 Ukraine In January-December 2012, industrial production decreased by witnessed zero economic growth. The official figures on real (-0.5%) year-on-year. During the year industrial production grew GDP growth during the period are to be released by the in such sectors as mining industry by 1.9%, as well as production State Statistics Committee of Ukraine in June 2013. and distribution of electricity, gas and water by 2%, while the processing industry witnessed a (-2%) annual decrease. In April 2013, Oxford Economics projected that harsh winter weather has raised the risk of recession continuing through In the first quarter of 2013, industrial production decreased by the first quarter of 2013, limiting full-year GDP growth to (-5%) compared to the respective period of 2012. During the about 1% even if there is sufficient funding to cover the large period negative growth dynamics was witnessed across all major current account deficit. The think tank also forecasted that industrial sectors in Ukraine, apart from food processing, wood economic growth in 2014 will be at 4.4% year-on-year. processing, pharmaceutical industry, as well as production of home appliances, computers and optics equipment. The IMF projected that Ukraine will show zero economic growth in 2013, whilst in 2014 the GDP growth is expected Major international and Ukrainian experts concur that in 2013 by the organisation at 2.8% year-on-year. the annual growth in industrial production will be in the range of 0.7-1.5%, depending however on general dynamics on the The Ministry of Economic Development and Trade of global commodity markets and in the export-oriented Ukraine issued the Consensus Forecast on the basis of the industries in Ukraine. working seminar with the experts held on 5 April 2013. According to the Consensus Forecast, real GDP growth is Agriculture expected in the range from (-5.4%) to 3% year-on-year (1.2% Despite positive growth dynamics in the first half of 2012, as on average) in 2013 and 1.3-4.6% (3.3% on average) in 2014. a result of the whole year agricultural output decreased by (-4.5%) year-on-year, mainly due to high comparable base The 2013 State Budget of Ukraine is based on the projected formed by the 19.9% annual growth in 2011. real GDP growth figure at 3.4% in 2013. In January-March 2013, agricultural output in Ukraine A recovery to annual economic growth of about 4% is increased by 5.8% year-on-year compared to the 0.5% growth forecast by Oxford Economic for 2014-2016. However, this during the respective period in 2012. will be substantially below the rates achieved in 2006-2008 before the external deficit and banks’ debts became The agricultural sector, followed by IT sector, has been problematic in Ukraine. regarded by the experts to be one of the most attractive and fastest growing sectors for investments in Ukraine. www.dtz.com Property Times 2 Ukraine Q1 2013 Inflation Household income and spending In January-December 2012 consumer prices increased by 0.6% According to the data published by the State Statistics year-on-year, compared to the 8% average inflation registered Committee of Ukraine, the average nominal monthly salary in in January-December 2011. The 2012 State budget of Ukraine Ukraine in January-December 2012 was UAH 3,025 (equivalent was based on the 7.9% CPI growth projection. to USD 379) compared to UAH 2,633 (equivalent to USD 330) in 2011. In 2012, real salaries in Ukraine increased by 14.4% The basic consumer price index, which reflects demand compared to the 8.7% annual growth during 2011. pressure, increased in December 2012 by 0.8% to December 2011, also slowing down considerably compared to the In January-March 2013, the average nominal monthly salary previous year (6.9% in 2011). amounted to UAH 3,080 (equivalent to USD 385), increasing by 9.5% compared to the respective period in 2012. Experts believe that key reasons for low inflation in Ukraine in 2012 included lack of consumer growth, high harvest, According to the preliminary official statistics data, in 2012 stable administrative prices and absence of significant real disposable income in Ukraine grew by 9.7% year-on-year. currency fluctuations. Real salaries in Ukraine increased by 9.9% in January-March In the first quarter of 2013, consumer prices in Ukraine 2013 compared to the 14.7% growth during the first quarter decreased by (-0.5%) year-on-year. In January-March 2013, of 2012. the basic consumer price index increased by 0.5% compared to the respective period of 2012. When analysing household income in Ukraine, it is worth also noting that a considerable unregistered ‘grey’ salary segment According to Oxford Economics, slack demand helped keep exists. GfK Ukraine estimates that approximately 28% of salary prices stable in the first quarter of 2013. The experts project, is paid unofficially, and this figure may increase during 2013 however, that removal of subsidies necessitated by the due to unfavourable economic conditions and suppressed budget deficit, could push the rate to over 5% by end of business dynamics. 2013, with earlier hopes of a sharp drop in imported energy costs now receding. According to the Consensus Forecast as of April 2013, real disposable income growth is expected at around 5.1% as at The 2013 State Budget of Ukraine, which was approved in the end of 2013 and 4.6% in 2014. early December 2012, is based on consumer price inflation at 4.8%, whilst Oxford Economics projects CPI to increase by The 2013 State Budget of Ukraine defines the subsistence 3.7% during the year.