One of the most reclaimed construction market segments during the pre-crisis period was commercial real estate, and quickly mounted building technology – the most popular in terms of deadlines. Overall growth of the country’s economics and lack of high-grade buildings for business purposes gave a significant impulse to existing operators of the quickly mounted building market, and invited prospective players due to their force of attraction. Suspension of lending and freezing of investment projects by large businesses during the pre-crisis events caused virtually dead calm in commercial real estate construction.

We are talking to Roman Koziy, General Director of KARKAS Construction and Engineering Company, about the trends of the quickly mounted building market, as well as points of focus for an investor when selecting a contractor.

What was the performance of the QMB market after the first semester?

The beginning of the year was marked by a slack period for the QMB segment, just as for the commercial real estate market in general. Even those investors who had no troubles in terms of funding preferred to outwait this period and began no new projects. Quite possible, some customers watch for further landslide of prices for land, construction operations and material. This year, most of works are performed under projects launched the previous year, where an investor needs to expand the existing business. Some projects are commenced with a view to having a completed object when the crisis ends. Several objects are being constructed very slowly, which is indicative of unstable funding.

Next year, one should anticipate major drop in commercial real estate construction volumes compared to 2008, minimum by 30-40%.

In this regard, is it expected that the number of companies working in this segment will reduce?

Serious “purging” of QMB market operators’ ranks could be an issue if the crisis of Ukrainian and global economics lingers for several years. Unstable companies, as well as those offering only import products are freezing their activities till things go better. We believe that only those companies will survive that offer premium products and services at competitive prices. However, not every company is now able to render a full scope of services in building commercial real estate, as this requires a building supplier company having design and erecting units, as well as possessing a good track record in building such objects.

How do domestic producers and importers divide the market?

Despite the fact that constructability and metal consumption of buildings produced in Europe is now much better than domestic ones, currently the main factor in Ukraine when selecting a building supplier is price.

Main currency exchange rates against UAH have grown considerably, inevitably causing price advance for imported metal structures, while prices for domestic metal did not change greatly. Under these circumstances, advantages of imported structures leveled down due to difference in price. I believe, in the nearest future Ukrainian metal will be of the greatest demand. Understanding that, our company, along with Astron, an imported product used by us for 9 years already, offers its clients buildings using domestic constitutive elements. Thereat, given KARKAS company’s experience in work with imported products, we ensure European quality standards in our products and services.

What should investors focus on when selecting contractors under existing circumstances?

An important factor in selecting a company is its experience in building commercial real estate. Young companies, having no time to approve themselves before the crisis, now may dump prices and offer better financial terms, however a scarce investor would want a contractor to gain experience and learn on its project. Sometimes, in order to get the bid, suppliers do not include inconspicuous yet necessary details in the estimate (fittings, design solutions etc.). These aspects become obvious for customers in the course of construction already, and entail inevitable increase in the overall project cost. Now it is important for a company to offer not only better prices, but also value final for a customer and unchanged during construction.

Besides, customers should pay attention to financial stability of a construction company. It may turn out that winning a bidding, a contractor set minimum prices not only for its services, but also those of its partners, as well as materials, which may grow while the project is implemented. Having no own circulating assets or credit grace period with contractors, such company will have to increase the initial cost estimate or even worse – try saving on materials and structural concepts.

What main reasons of dragging out construction terms can you single out?

If we omit delay in terms due to insufficient funding, the main reason for projects footdragging is non-alignment between project sections, with customer business technology and construction method. Another issue is poor communications between all project participants; that is why there is a recent tendency that customers wish to obtain the full set of commercial real estate construction from one company. We felt this need of clients several years ago and expanded the company’s structure in 2007 by adding two new departments: design and general contract units.

One can also single out contractors’ inability for proper project management. It is a frequent situation that one stage of construction is completed, and the next cannot be started, since the necessary resources for this stage are unplanned or some stages could be performed in parallel, not one by one. Project management that we employ in our work allows seeing a construction cycle for exact days, with all stages and key points, even before commencement of work.

What are the actions of companies selling high-grade solutions under conditions when price becomes the main argument?

Commercial real estate objects are large investments, so their price has always been an important argument for customers. There are things that allow for saving, while others don’t. A contractor’s task is not showing minimum price concealing a number of issues that will inevitably come to light in the course of construction – it’s rather showing a client (expertly and transparently) what it’s paying for at each stage of the project, and what are the benefits of a certain technology. The building and assembly itself takes around 25-30% of the estimated cost of construction, while final project value is affected by design environment and building optimization in accordance with the customer’s business needs. Consequently, companies providing a full set of services of building commercial real estate usually offer the most advantageous terms to the customer for the whole turnkey project. One should also keep in mind the operating expenses for the object that can be incommensurably higher than the benefit of minimum construction cost in case of design deficiencies or faulty assembly work.

Did you reconsider warranty and service terms as a means to cut expenses during crisis?

KARKAS company undertakes warranty obligations for the object’s bearing capacity for the whole term of its operation. This means that given correct operation of the building we guarantee its performance characteristics, envisaged in the project. This is valid for up to 50 years, as buildings made of metal structures are not estimated for greater terms. We also provide 10-year warranty for enclosing structures depending on environment and operational conditions.

Quickly mounted buildings for customers are an object of investments. Therefore, as with any other acquisition, they do not need troubles in the course of the building operation. By all means, high quality warranty services are costly for us, but they are compulsory in terms of safety of building operation and an inherent attribute to ensuring loyalty of existing customers.

Understanding the importance of warranty and service maintenance of buildings, crucial not only for possible financial losses of customers, but also for human life, we made no downward adjustment of our obligations to the clients in this regard recently.

What is your forecast of commercial real estate market development for the upcoming years?

Small warehouse facilities for own production and trading needs will be popular in the short run, with area from several hundred to 5000 sq.m. We are expecting this market (as well as construction industry in general) to revive by mid-2010.

One could assure that deferred demand for objects built based on QMB technology will appear as soon as the country overcomes the crisis, because the commercial real estate market in Ukraine is still far from being saturated.

For example, today investors apprehend launching new commercial real estate construction projects, due to downfall of purchasing power in the country in general and decrease in lease rates for selling space. However, in the long term we anticipate further growth of this market, because selling areas per 1000 residents in Ukraine are still low. For instance, Kyiv shows a figure of 140 sq.m. per 1000 residents, Odessa – 120 sq.m., Dnepropetrovsk and Donetsk – around 100 sq.m. (average value for Ukraine - 48,2 sq.m.). Compare this to Prague: over 330 sq.m. of selling area per 1000 residents, or Warsaw - over 500 sq.m.