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Market prices and capitalization rates for commercial real estate in Ukraine.

Article Excerpt
ABSTRACT

In this article, capitalization rates, based on market price data for commercial real estate transactions from 2006 through the first quarter of 2008, for Kiev and 25 regional cities in Ukraine, were calculated and analyzed to show the ongoing development of the commercial real estate market in this transitional economy. Factors affecting supply and demand, prices, capital flows, and expectations for the future of the commercial real estate market in the country are also discussed.

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Beginning in late 2006 and continuing into early 2008, IRE (Ukraine) LLC, appraised approximately 3,000 parcels of commercial real estate owned by four of Ukraine's largest banks. The purpose of the appraisals was to determine fair value for financial statements as part of the banks' international audits conducted by two of the Big 4 international auditing firms. These real estate parcels are located in a large number of cities and towns throughout Ukraine, but are concentrated in Kiev and 25 regional cities. The assets include general administrative office facilities as well as more specialized facilities required for operating a bank. To determine fair value of each real estate parcel, between 5 and 15 sale and rent comparables were selected and adjusted for factors such as size, location, age, and condition. Each comparable was visited to ensure similarity to the object of appraisal and photos were taken as documentation. By employing a consistent methodology for comparable selection and adjustment, a relatively large and unique database became available for determining capitalization rates for commercial real estate in Ukraine.

Since 2006, real gross domestic product (GDP) growth (1) has been in a range of around 5%-7%, with data through mid-2008 showing growth of around 6%. Capital investment during this period remained very strong, with growth of 19% in 2006, 30% in 2007, and around 10% during the first half of 2008. Most tellingly, retail turnover since 2001, in real terms, has grown between 15% and 30% per year; real wages have also risen between 10% and 20% since 2001. Real wage growth, however, was stagnant during the first half of 2008. Inflation has ranged between 10% and 17% since 2004, but has accelerated to over 20% during 2008.

Since mid-2008, preliminary economic data indicates that the first half of the year may have been a high-water mark for real estate development, price increases and general market activity, and turnover. This indicates that Ukraine's real estate market remained buoyant at least 12-18 months longer than in some other markets that peaked in late 2006 or early 2007. This lag reflects the fact that since 2001, there has been historically high growth in personal income and sales, along with strong GDP growth supported by rising domestic and foreign capital investment (especially in industry, banking, and real estate). Looking past a potential one- or two-year world recession, these past trends bode well...

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