Construction is one of Ukrainian economy fields that develop the most dynamically. Construction market has been booming since 2000 and is unlikely to stagnate in the next years. One of the market segment of the highest demand is commercial real estate due to Ukrainian upward economy and growing business as well as foreign trade and logistics operators penetrating to Ukrainian market.

We are going to discuss main tendencies and characteristics of commercial real estate market with Mrs. Marina Dorovskaya, Marketing Director of Engineering Construction Company Karkas.

Marina, what is overall dynamics of commercial real estate market development in Ukraine?

Commercial real estate market includes the following segments: trade, warehouse and production real estate, auto dealerships, sport facilities, administrative and office buildings. We will talk about all segments except for administrative and office buildings since our company is not dealing with them.

Overall market growth rate is 40-50% annually. In 2007 it was 444 buildings of total space 3 202 thousand sq. m which is 41% of space more than in 2006. The largest segments are trade and warehouse real estate with 50% and 26% market share respectively. However, judging by dynamics of warehouse segment growing 100% annually we can presume that these proportions are going to change soon.

Today one- two-storyed buildings with space of over 3 000 sq. m have the highest demand. So, in 2007 average space of commercial real estate was 7.2 thousand sq. m and it is inclined to grow every year.

Among the construction booming regions are city of Kyiv, Donetsk, Dniepropetrovsk, Lvov, Odesa and Kharkov Regions.

Would you specify the factors making impact on the market development?

Among the underlying factors making impact on commercial real estate construction development are the following:

• State economy development indexes
• Investment climate along with political stability
• Stage of commercial real estate development in the country according to European scale
• Prices of construction materials and works
• Number and experience of major market players, presence of the foreign market players.

Which segments of commercial real estate market develop the most dynamically and why? Size of segments, growth rate, tendencies.

As I’ve already told warehouse segment develops the most dynamically and trade real estate segment is now the most sizable.

Trade segment is the most attractive for investments within the structure of commercial real estate. Primarily, it is caused by rocketing demand for high quality trade facilities and increased purchasing power of people and retail trade turnover (more than 20% annually for the last several years).

Space of trade facilities per 1000 people in Ukraine is still quite small. For example, it is 134 sq. m per 1000 people in Kyiv, 112 sq. m in Odessa, 94 and 92 sq. m in Dniepropetrovsk and Donetsk respectively. To compare with: it is 330 sq. m per 1000 people in Prague and over 500 sq. m in Warsaw.

Size of trade real estate segment was 158 buildings in 2007, 1 589 thousand sq. m which is 25% more than in 2006, over one third of them being constructed of metalwork.

Until saturation of trade facilities in Ukraine is close to European indexes we can talk about sustainable growth of the segment. Among peculiarities of trade real estate development of the next 2-3 years are the following:

• Extending networks due to acquisition of smaller networks and shops
• Competition growth due to foreign operators with world-renowned brands, reputation and experience
• New supermarkets and trade and entertainment centers arising within Ukraine
• Increasing share of hypermarkets and “near-home-shops”
• Developer projects of operators
• Increased investments into retail projects;
• Expansion of the national networks to regional cities with population of 100 thousand and regional operators to towns

Warehouse segment demonstrated substantial growth in quality and size in 2007. 12 warehouses of 840 sq. m were constructed in 2007 which is 114% more than in 2006. This segment has been growing at the rate of 100% for the last 2-3 years.

The most popular technology of warehouse construction is mixed technology; as a rule it is building constructed of metalwork on concrete columns or all concrete structural units with metal sheeting. In 2007 13% and 16% of warehouses belonged to A and B high quality classes respectively, 34% belonged to C class and 37 % to D class.

Since big international manufacturers and logistics operators entered Ukraine we can expect construction of spacious professional warehouse facilities. Currently, the majority of logistic park construction is concentrated in Kyiv Region, however, we may predict warehouse facilities construction booming in the regions in the nearest future. First of all, it will reach Western regions due to their proximity to Europe, Southern regions due to their sea access and Eastern regions due to their proximity to Russia and its transportation infrastructure. Estimatedly, warehouse segment growth rate will amount to 60-70% in the next few years.

Geopolitical and economic indexes of Ukraine provide it with enormous potential for industrial construction development. It is supported with relatively low cost of workforce along with its high qualification, cheap raw materials and energy resources and proximity to promising markets and quite developed transportation infrastructure. Today, market of new capital industrial construction is at the dawn of its development; available industrial buildings are basically outdated and dilapidated. Supply of the new industrial buildings is far beneath demand in our country.

As you know, production real estate segment develops in close relation to trade and warehouse real estate segment. Therefore, many trade and logistic companies which plan to enter Ukrainian market are interested primarily in placing their commodities and establishing their manufacturing in Ukraine. Taking into account these specifics we suppose that production real estate segment will be booming in the nearest future.

Production real estate construction rate was 119 buildings of 699 thousand sq. m in 2007 which is 31% more than in 2006. This segment is expected to boom only in 2010-2011. The most popular construction technology is metalwork and mixed structures.

Among hindrances of production real estate development are lower attractiveness for investments if compared with trade and residential real estate as well as lack of land plots with appropriate location and communications.

What about auto dealership and service station segment?

41 buildings of 65 thousand sq. m were constructed in this segment in 2007. Noteworthy, that average space of these buildings does not grow annually and now it is approximately 1500 sq. m. We estimate further development of this market as 15-20% annually.

How can you assess competition rate on the market of quickly-mounted buildings? Major players of domestic market? Can new companies enter the market?

Market demand exceeds supply therefore quickly-mounted building market can not be characterized as highly competitive. Manufacturers are loaded 100%.

Players of the market of complete metalwork quickly-mounted buildings: Engineering Construction Company Karkas, Llandabhallen, Ruukki, Master-Profi, Lindab, IBT, Sakti Plus, Remko, Frizomat, Metallist (Kharkov), ZVBSU Ukrstalkonstruktsiya (Atlas Vard), KESZ, Time is money.

Suppliers and manufacturers of metalwork for the building: ZOK, Ukrstalkonstruktsiya (Babushkin Factory, Zaporozhskiy ZMK, EMZ Metallist), Metallist (Kharkov), Evroprofil, Kramatorskiy ZMK, Novokonstantinovskiy ZMK,Kamenets-Podolskiy ZMK, Stalcom (Mariupol), Starokonstantinovskiy ZMK, Chervonogradskiy ZMK, Belgorodskiy ZMK, Ruukki, Frizomat, Master-Profi, Dneprostalkonstruktsiya, Konstruktsiya, Blokmaster).

What is your forecast of quickly-mounted building market development for the next years?

Now there is no one definition of “quickly-mounted building market” which causes variations in market assessment of different experts. If we define quickly-mounted building as complete factory-supplied object we can make the following forecast.

Growth of the market will amount to 40% annually in the next 4-5 years. Such vigorous development is related primarily to rapid growth of commercial real estate market due to foreign trade networks and logistic operators coming to Ukraine to build hypermarkets and logistic parks out of city area not only in Kyiv but in the regions. Today technology of quickly-mounted buildings is the most attractive in terms of time-limits.

80 buildings of 780 thousand sq. m are expected to be constructed in 2008. Over 500 buildings of 4.5 million sq. m will be constructed within 2009-2011.

Number of market players is likely to increase since the segment is quite attractive both for domestic and foreign manufacturers. Some foreign manufacturers can move their production to Ukraine and domestic manufacturers of envelope structures will shift to creation of their own systems of quickly-mounted buildings. Along with it, Ukrainian manufacturers will learn experience and technologies of foreign companies.

*Source of figures: Karkas Company’s study