Troubled Ukraine Real Estate Market Shows No Signs Of Recovery

The Ukraine real estate market has plummeted since 2008, as years of corruption, political instability and a complicated regulatory process helped fuel a housing bubble that quickly collapsed …

The Ukraine real estate market has plummeted since 2008, as years of corruption, political instability and a complicated regulatory process helped fuel a housing bubble that quickly collapsed under the weight of a weak currency, inflation and declining GDP. While the country’s GDP is expected to improve in 2010, continued political instability and lack of reform continue to strain the country’s real estate market and economy. See the following article from Global Property Guide for more on this.

Ukraine’s property market has been in crisis since 2008. GDP collapsed in 2009, falling 14%, and the country has suffered a fiscal crisis, somewhat relieved by a massive IMF bailout. Transactions have plunged, construction is almost at a standstill.

By March 2010 Kiev house prices had dropped 40.5% from their August 2008 peak, to UAH 2,516 (US$ 317.3) per sq. m. (from peak prices of UAH 4,227 (US$ 533) per sq. m.  In the first quarter of 2010 house prices were still falling, though the rate of decline has been decelerating.

Ukraine’s housing boom (2005 to 2008) was fueled partly by foreign buyers, but also by strong economic growth (7% GDP growth per annum 200-2007) and interest rate differentials. The boom was encouraged by pro-west President Victor Yushchenko’s ‘Orange Revolution’ electoral victory.

The housing boom saw four fast and furious years:

  • In 2005, prices of flats in Kiev, the capital, rose by an average of 60% y-o-y, according to Blagovest.
  • In 2006, the average price of flats in Kiev rose 51%.
  • In 2007, the average price of flats in Kiev rose 44%.
  • In 2008, the Kiev flats price rise slowed to 17.6%.

From 2002 to 2007, house prices skyrocketed 562%.

A significant number of buyers were British, with some Americans, Emiratis, Cypriots, Kiwis and Canadians. Ukraine’s wealthy elite also joined in the buying frenzy, pushing prices way beyond the means of the average Ukrainian.

Then in late 2008 foreign demand plunged, as US and UK homebuyers struggled with the global crisis. Then domestic Ukrainian demand plummeted, due to a collapse in demand for Ukraine’s main product, steel.  Ukrainians’ average income fell 12.9% during the year to IH 2009, according to the State Statistics Committee of Ukraine.

Corruption fueled the boom

An important aspect of the boom (as in other post-Soviet countries) was a genuine shortage of acceptable housing.  Because of corruption, political instability, and a complicated regulatory system, the supply of new apartments has barely risen, despite the astounding price increases in the past few years.

Securing a construction permit in Ukraine is mired in corruption. Those having direct ties to high ranking officials, who are prepared to pay large bribes, come out as winners in land allocations.

According to the 2010 Ease of Doing Business report by the World Bank, Ukraine was ranked 181st out of 183 countries for the ease of obtaining construction permits.  Real estate developers need to obtain project documentation which includes town planning documentation, official project requirements, and the construction project itself, receipt of construction work permits and the start of the building construction.

It is not surprising that there are only a few builders in the market. New developments in major cities are typically dominated by two to three companies, whose management is directly linked to the local authorities. In Kiev, nearly 70% of the new residential buildings are built by companies that belong to the KyivMiskBud holding company, in which the Kyiv City State Administration has a large stake.

Construction spending has plunged

Despite the housing shortage, in 2009 the total value of construction in Ukraine fell 48.2%, to UAH 37.9 billion (US$ 4.78 billion), after a 16% fall in 2008, according to the State Statistics Committee. In Chernivtsi, the center of Western Ukraine, popularly known as Little Vienna, construction volumes plummeted 66.8% in January, compared to the previous year. In Kiev, construction volumes fell 27.4% over the same period.

As a result of the global crisis, developers now face financing problems. As a result, many construction projects are frozen. In addition, the property market is being swamped by properties sold by cash-strapped buyers.

“The state of residential development in Ukraine is very bad. Some 75% of Ukrainians cannot qualify for bank loans and, at the same time, developers cannot secure loans on favorable terms to continue construction,” said Sergiy Maksimov, president of VAB Bank.

The hryvnia carry trade

Why was the housing boom so spectacular?  Supply shortages, and rapid economic growth are part of the story. But another interesting aspect was the hryvnia carry-trade. Transactions in the primary market have long been denominated in Ukrainian hryvnia (UAH) but paid in US dollars, while transactions in the secondary market are quoted and paid in US dollars.

Hence, access to real estate in Ukraine requires access to US dollars. Much of the property speculation involved a ‘carry trade’, i.e. a bet that the hvyrnia peg would continue, and that buyers would be able to arbitrage relatively low US$ interest rates, against out-of-control Ukrainian property price inflation.

For a long time it worked. The hryvnia was introduced in 1996 and initially steeply declined against the US$ (from UAH1.83 per dollar in January 1996 to UAH5.38 per dollar in January 2000).

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However the exchange rate stabilized to around UAH5.35 per dollar before being pegged at UAH 5.05=US$1 (April 21, 2005 until May 21, 2008).

The hryvnia mildly appreciated as economic growth accelerated, and as foreigners invested in Ukraine. The expectation was that the hryvnia would rise, because of the economic growth and foreign investment.  The logical conclusion was – borrow dollars, buy Ukrainian property.  Easy money.

So long as the peg held, it worked fine.

No reform in Ukraine

Despite the boom (2000-2007) rapid GDP growth disguised a lack of reform – wholly corrupt government, small elite, weak judiciary, lack of freedom of expression, etc. The country lived off a massive steel industry (42% of exports).

The country made a severe mistake of pegging its currency. Currency inflows increased the money supply excessively, resulting in inflation. Ukraine experienced double-digit inflation from 2004 onwards, and in May 2008 inflation peaked at 31% y-o-y. As a result, Ukraine priced itself out of export markets, imports grew to be much bigger than exports, and the current account deficit expanded to 7% of GDP in 2008.

When the US dollar weakened against major currencies in mid-2008, the peg was eased. But Ukraine’s deteriorating macroeconomic fundamentals, high inflation, and the current account imbalance, caused the hryvnia to succumb to pressure.

In February 2010, the official exchange rate had fallen to UAH8=US$1. The weakened currency was mainly due to the following:

  • Strong sell-off of the population due to mistrust on the local banking system
  • Delay in the disbursement of the 4th tranche of the IMF bailout
  • Fragile economy, with GDP plunging by 15% in 2009
  • Financial needs in US dollars by Naftogaz, the country’s national energy company

Ukrainian banking crisis

As the contagion from the global crisis spread, the number of bad loans rose sharply in Ukraine. Local banks found it difficult to access overseas loans. The hryvnia lost over 50% of its value against the US dollar in 200, leading to a loss of consumer confidence in banks and mass withdrawals.

Borrowers were struggling to service their loans. Since many loans and mortgages were issued in US dollars while Ukrainians were paid in hryvnia, borrowers had to buy US dollars with the falling value of hryvnia, making them pay much more on the loans than they had expected. In early-2009, Dragon Capital, a Kyiv-based investment bank, estimated the number of foreign exchange loans at about 73% of all loans.

Unnerved by mounting inflation and weakening currency, lines sprouted at banks, with depositors rushing to withdraw their savings.  Because of this, a number of Ukrainian banks collapsed after 2008.

To prevent a further collapse, the government unveiled a bank bailout by allocating about UAH9.6 billion (US$1.2 billion) or 1% of GDP to recapitalize struggling banks like Rodovid Bank, Ukrgazbank, and Bank Kyiv. Prominvestbank, Ukraine’s 6th largest bank, was nationalized in late 2008.

In addition, the National Bank of Ukraine (NBU) imposed limits on lending, early withdrawals of certain deposits, and foreign currency trade starting in the last quarter of 2008 to stabilize the local banking system.

Local price variations

Lypky is the most expensive and prestigious area in the whole of Ukraine. House prices in Lypky dropped 11.5% to UAH 7,530 (US$ 950) per sq. m. in March 2010 from UAH 8,509 (US$ 1,073) per sq. m. in the same period last year. The local housing market in Lypky peaked in September 2008 when prices skyrocketed by 45.9% to UAH11,032 (1,391.2) per sq. m.

InObolonskyi, the administrative district of the capital Kiev, the housing market is also down with house prices falling 13.2% in March 2010 to UAH 2,740 (US$ 345.5) per sq. m. from the previous year. It was a 33.7% drop from a peak of UAH4,130 (US$ 520.8) per sq. m. in October 2008.

In March 2010, house prices in Kiev dropped 40.5% to UAH 2,516 (US$ 317.3) per sq. m. from a peaked in August 2008 of UAH 4,227 (US$ 533) per sq. m.

Small mortgage market

In 2009, the number of individuals who were able to secure mortgage loans for apartments and houses plummeted by 94% to just 11,600 persons, from 180,000 persons in 2008.

By end-2009, about 84% of outstanding housing loans in Ukraine were denominated in US dollars, while 12% were in UAH. This makes the country highly exposed to foreign currency risk.

The Ukrainian mortgage market amounted to 10.82% of GDP in 2009 (National Bank of Ukraine) – but the 117% rise in housing loan values in 2008 was simply due to the collapse of the dollar peg.

High interest rates

The substantial political and economic risks in the country mean banks are only willing to lend at a very high premium.  Interest rates on US$-denominated housing loans averaged 12.7% in 2007, 13.5% in 2008, and 13.3% in 2009. By January 2010, interest rates had risen to 15.2%. Experts warn that the only borrowers willing to pay this high premium are property speculators.

The interest rate on real estate loans denominated in local currency (hryvnia) was even higher at 20.4% in February 2010. Euro-denominated loans have average interest rates of 13.6%.

Interest rates on housing loans in Ukraine are usually fixed for the entire loan term. In 2009, 90% of loans had loan terms of 5 years or more, and 70% ten years or more.

However, housing loans are frequently prepaid before maturity, and it is not uncommon that a 10-20 year loan is paid within 3 – 5 years.

Falling rents

Rental rates have fallen by as much as 50% since the onset of the global crisis. Most rent quotations have switched to the national currency, hryvnia, to protect landlords from currency fluctuations. There are already signs of recovery, but demand is still relatively low.

In Odessa, the Seagate to Ukraine, an apartment rents for about UAH 3,000 (US$ 374) to UAH 6,000 (US$ 747) per month in 2009. In the central area of Nikolaev, a one-bedroom apartment rents for about UAH 2,500 (US$ 311) per month.

In Lviv, which is considered as the capital of Western Ukraine, rental rates for apartments start from UAH 1,300 (US$ 162) per month. In Donetsk, a one-bedroom apartment rents for UAH 1,500 (US$ 187) per month.

One of the most affordable housing was found in Kharkiv, the country’s second largest city, with apartment rents starting from UAH 800 (US$100) to UAH 1,000 (US$125) per month.

Ukraine’s economy is expected to improve

In 2009, Ukraine’s GDP plunged 15%, the deepest decline since 1994 when hyrvnia was introduced. The main reason was a dramatic drop in steel prices and exports. Steel accounts for more than 50% of exports.

In 2010, the Ukrainian economy is expected to grow moderately, with a real GDP growth of 2.5% to 3%  Inflation slowed from 22.3% in 2008, to 12.3% in 2009, and is forecast to be below 10% in 2010.  Unemployment stood at 8.8% in 2009, up from 3% at the end of 2008.

Ukraine’s fiscal deficit was 11% of GDP in 2009, of which 6.5% of GDP was the budget deficit, and 2.5% was budgetary support for Naftogaz Ukrainy, the state-owned natural gas company. The other 2% was financing for bank recapitalization.

Most unusually, the IMF has allowed its lending to be used for budgetary support.

Unsettled political stalemate

In February 2010 the pro-Russian Viktor Yanukovych became President, having seen off Yulia Tymoshenko and Victor Yushchenko.  Yanukovych is in the direct line of successors to the Communist state which began with the 1994 election of Leonid Kuchma who oversaw years of Brezhnev-like stagnation, corruption and press restrictions.

Ukraine is a deeply divided country.  The Russian-speaking Eastern half leans towards Russia, while the Ukrainian speaking

Western half leans toward the West

The country’s tragedy is that the Orange Revolution of 2004, which forced a second Presidential election after protests and resulted in a clear victory for Viktor Yushchenko (with 52% votes) over Yanukovych (with 44% votes), has never born fruit.

Yushchenko instituted no reforms, and proved an ineffective leader. He quarreled deeply with his former ally Tymoshenko, who he sees as corrupt and accuses of being a covert friend of Russia.

In 2006 a parliamentary crisis erupted as a result of inconclusive parliamentary elections, and in August 3, 2006, Yanukovych returned as prime minister. Then in 2008, another political crisis erupted when PM Tymoshenko’s BYuT and the opposition Party of Regions to limit the power of the President.  Yushchenko’s party, Our Ukraine, withdrew from the governing coalition. In October 8, 2008, parliament was dissolved – the 3rd parliamentary elections in just 3 years.

The result of the split in the pro-Western party has been the election of a pro-Russian president.

There has already been a dramatic rapprochement with Russia, strong moves to curtail the freedom of the press, and moves against political opponents, with moves to prosecute Tymoshenko for corruption. Discussion of the terrible famine under Stalin’s collectivization (the Holodomor), in which 7 million Ukrainians died, and the killing by the Soviets of 4/5th of Ukrain’e intellectual elite and ¾ of the Red Army’s high-ranking officers, are no longer welcome. The press is being shackled, reform is on the back burner.  Welcome to the dark ages.

This article has been republished from Global Property Guide. You can also view this article at
Global Property Guide, an international real estate news site.


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