Vacancy in the office market in Kyiv and regional cities has reached a critical minimum. More detailed information provided in the interview of Levon Papoyan, Head of Office Agency and Consultancy in Cushman & Wakefield Ukraine.
In December 2018, market average vacancy dropped to 4,9% being the lowest level recorded since Q1 2009. In the sub-location of the Central Business District vacancy on the office property market was registered at around 2.7%. In our opinion, if the overall business dynamics in Ukraine in the near future doesn’t change for the worse, primary vacancy on the office property market in Kyiv will further decrease, as a majority of new office schemes of decent quality scheduled for delivery during the year are likely to be absorbed by the market relatively quickly, in view of low development activity that cannot meet the demand.
When we talk about vacancy at 4.9%, we need to understand that this is the consolidated figure for Kyiv. In the meantime, it is quite difficult to find vacant premises with an area of 1,000 sq. m and more in class A business centers in Kyiv.
Due to the lack of supply in Kyiv, prime rents continue to increase. The tendency shaped up back in 2016, when the lowest level of rents was recorded. At the beginning of 2019, monthly rents for premises in class A business centers reached the figures of 2014 and were in the range of USD 22-29 per sq m. At the same time, office space in the classes B and C commanded the achievable net monthly rents of USD16-22 and USD 10-14 dollars, respectively (excluding VAT, OPEX and utilities).
Low development activity combined with relatively strong occupier demand continue to put upward pressure on effective rents for office space in Kyiv. Moreover, the office landlords are now less likely to offer rent concessions, such as fit out contributions or extended rent free periods. I would also like to note that due to the critical drop of vacancy levels the price factor is losing priority, especially in relation to the best quality office premises located in the Central Business District of Kyiv.
What class office property prevails in Kiev?
The share of class B office spaces prevails in the structure of the office property market in Kyiv because of the optimal value for money factor. Over the last years, however, more and more tenants in the capital reorient themselves to Class A office property, which is primarily due to an increase in supply in this segment, which in most cases is more attractive for tenants in terms of space efficiency, overall quality and internal comfort. Also, despite a slight increase in rents, the pricing policy in Class A business centers remains customer-oriented.
Remaining sufficiently in demand, class B business centers require gradual modernization to maintain their competitive position — at least the renovation of entrance units, front of the building, engineering equipment and systems.
Does class A property need modernization?
Due to increased demand, the owners do not yet see the need for modernization, although most of the business centers in Kiev, which are positioned in Class A, were built 5-10 years ago according to the requirements that were relevant at that time. But the market is changing, and the owners of these facilities will have to think about modernization in 2-3 years, especially if current plans for the development of new modern business centers and business parks are realized in Kyiv. New Class A properties, which are planned to be delivered in Kyiv in the medium term, in most cases are designed taking into account the most current world trends and will meet high quality standards.
What are tenant’s requirements to the office space?
The standard requirements of office tenants in Kншм relate to the convenient location of a business center, the availability of the necessary office space and the possibility of its expanding / reduction during the lease period, optimal floor layout, modern efficient engineering systems that can be adapted to the specific needs of the tenant, efficient and transparent property and facility management, as well as the availability of amenities in the business center itself or in its immediate surroundings.
Green certification of a business centre in accordance with the international standards BREEAM or LEED does not in itself affect the decision to rent, however, class A properties are expected to be highly energy efficient and to provide internal conviniences, confirming the quality of the building. Today we see the tendency when developers of new office buildings in Kyiv pay special attention to quality and energy efficiency issues, and in most cases consider green certification for their properties.
As an example of resource-saving technologies that are already used in the office property market in Kyiv, we can distinguish the use of heat pumps by many developers, as well as energy-generating facades (for example, in a business center at 4 Korolenkivska Str.).
Are coworkings, open or flexible spaces available on the market?
Coworking operators are not only represented in the market, but also they have been actively developing. We can judge of the extention of the coworking segment by the growing demand from large operators for premises in professional business centers. In this case, demand exceeds supply.
One of the first coworkings that has introduced the people of Kyiv to a new workspace format about 5 years ago was the Chasopys space located on Lva Tolstoho Street. There a visitor got unlimited access to the Internet, tea, coffee and cookies, could work with a laptop or hold an informal meeting for a fixed amount of money. Now Chasopys is also represented at UNIT.City, and created a joint venture with the international coworking operator rent24 last year, receiving an additional incentive for further development.
Regus was the first among international operators to enter the Ukrainian market. The company leases serviced offices, mini-offices and hot desks (unreserved working place) in 120 countries. Today, Regus is represented in 8 business centers in our country and continues to actively expand.
Competition in the segment intensified with the expansion of networks of local players, in particular, such operators as Coworking Platforma Art-Zavod and Coworking Platfoma Leonardo, Creative Quarter, the aforementioned Chasopys, Creative States, as well as with the entry of new foreign operators such as the Hungarian New Work Labs and Estonian Lift99. It is no longer enough to offer workplaces, office furniture, Internet access and a conference room, since there is a need for a qualitative differentiation of the services provided.
The world witnesses a tendency, when many tenants switch out traditional offices for coworkings and flexible offices. Initially coworkings were focused towards small businesses, later they became of interest for large companies that rent workplaces for back office employees or for the period when they enter a new market.
Moreover, the culture of office rental is gradually changing. In order to optimize rental costs and ensure the flexibility of work processes, many companies prefer the shared desk format, which implies a not reserved for a particular employee workplace. A company comprising 300 employees may only have 100-150 workplaces. A schedule for visiting the office is drawn up, in accordance with which 2-3 employees can use one workplace.
What attracts international operators to Ukraine?
Not yet fully filled market niche and a relatively new market that is becoming more clear thanks to the abovementioned operators.
Local tenants start to realize the benefits of coworkings, especially for solving short-term isuues. Even large companies with the need to rent 200-300 sq. m of office space are often ready to consider coworkings, where there is no need for capital investment in repairs, furniture purchases, and where is the possibility of long-term rental of premises with ready-made infrastructure, cleaning and security services. In case with such facilities, rents are calculated not per square meter, as is the case with standard office premises in business centers, but for a fully equipped workplace with an additional package of services.
Are new office spaces located primarily in business centers or does they occupy multifunctional complexes?
As of today, coworking spaces and serviced offices are located mainly in business centers and only in some rare cases have representations in multifunctional complexes, for example, New Work Labs in Globus shopping center.
What are the largest developers on the market?
In 2018, the main business centers were built by Energoinvest, INOR, UDP, KAN Develpment and several other Ukrainian developers. The development of new schemes on the office property market in Kyiv is now mainly carried on by Ukrainian companies.
UDP continues to expand Innovation Park UNIT.City.
NEST that is engaged in the implementation of the business center project at 12 Mykhailivska Str. and used to be one of the largest developers in Kyiv is also back and running developing activity.
Among the projects of INOR are the Dynasty business center, the reconstruction of one of the buildings at 101 Vladimirskaya Street, they also plan to build a new Class A business center on Zhylianska Street. Energoinvest acted was developer of Astarta business center and planns further development of this territory.
When to expect the delivery of new schemes on the market?
As of early 2019, around 90,000 sq m GLA of new office space was under construction in Kyiv and scheduled for completion in 2019, whilst approximately 138,000 sq m GLA of offices may potentially be delivered during 2020. Due to the improvement of the overall economic and business dynamics in Ukraine in 2017-2018, many developers are considering the possibility of building business centers and business parks in Kyiv. If the positive business dynamics continues and no economic and political shock occurs in Ukraine, new high-quality office properties will appear in Kyiv in 2021-2022, that can fundamentally change the market in terms of improving the quality and stabilizing rents.
What class of office space is more profitable to invest in?
Class A objects. The prime cost of building a Class A business center is slightly higher (10-20%) compared with Class B business centers, while the achievable rents are 30-40% higher.
Is there any data on transactions completed last year and since the beginning of this year?
In 2018, take-up on the office property market in Kyiv reached around 153,000 sq.m being 25% and 13% less than the figures in 2017 and 2016 respectively. Lower figures for office take-up and net absorption on the office property market in Kyiv in 2018 are attributable to the fact that demand far exceeded supply. Moreover, a significant number of major office occupiers entered into new lease contracts in 2014-2016 typically for 3-5 years, what will lead to increased tenant activity in 2019-2020.
Are there any new tenants that have recently entered the market?
There are few of them, and these are mainly startups, or representative offices of foreign companies with a small number of personnel, which corresponds to the logic of development when entering a new market, or coworking operators such as Lift99, New Work Labs, Creative States, etc.
How fast and at what stage of construction tenants are usually found?
In the current market conditions, depending on the location and quality of the business center under construction, it is possible to sign pre-lease agreements approximately 6-8 months before the planned delivery date. At the time of delivery, the occupancy rate can reach 80-90%.
What is the average rental area?
On average, we see requests for office units of 1,000 sq m in Kyiv, but there may be requests for 10,000 - 30,000 sq. m as well. In Ukraine, both in Kiev and in the largest regional centers, there are a sufficient number of companies, mainly operating in the IT sector, which have rented premises in office buildings in different locations around the city over the past 3-4 years and today often feel the need for consolidation. In this case, we can expect requests for office units of 10,000 - 40,000 sq. m, depending on the city and the tenant, and we are already working with such requests.
What are the yields and payback periods of the project?
Yields average between 12-15%. For comparison, this figure is less than 10% in Europe. The project payback period for the construction of a business center is 7-8 years, and when investing in the purchase of an existing business center - around 8-10 years.
What are the prospects for market development?
Currently, there is every reason to say that the office property market in Kyiv and other large cities of Ukraine is at the recovery stage: there is demand, there is a lack of quality supply, and this is a favorable situation for investors and developers. But only for those who know the situation from the inside, have accumulated a certain amount of money and want to invest it in the area they understand best. In this context, an important factor is that international banks are not very eager to provide debt financing for the construction of new commercial real estate in Ukraine, and if they do, the interest rate is high.
Nowadays, the office property market in Kyiv is in need of new properties, what is clearly seen when analyzing the figures: in Warsaw, with a population of 1.8 million people, the stock comprises about 5.5 million sq. m of quality office space, in Budapest - 3.6 million sq. m. And there is still witnessed great development activity in the sector in these cities.
In 2018, new supply in office property market in Kyiv amounted to 50, 700 sq.m and at the end of 2018, total office stock in Kyiv was around 1.9 million sq m GLA. Thus, the potential is huge. However, without large international developers and investors entering the Ukrainian market, we cannot predict a steady increase in quality supply in the longer term.
Business community assumes a wait-and-see attitude. International financial institutions and developers continue to monitor the situation in Ukraine. Their entering the market is only possible under the condition of political stability and sustainable economic growth. Thus, it can be possible to predict anything at the end of 2019 after the presidential and parliamentary elections.
Source: magazine Wealth & Property
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