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Wednesday, April 11, 2007

The office real estate: where landlord is the King

The office real estate in Kiev is big boom market now. A growth of rental rates is about 30%, and today they are 35-45% higher than in other capitals in eastern and central Europe.

The reason for this phenomenon is the imbalance of supply and demand, so, the vacancy level for the offices A and B+ class at the end 2006 only 1.7%. In international practice it is assumed that the market is changing for the better conditions for the tenant, with a vacancy at least 10%.

By the end of 2006. total amount of professional office space that leased in Kiev reached 574K sqм., including in the new business centres – 120K sqm. According to the market info, at 2007 a new constructed proposal on the market slightly grow up to 140K sqm. Of course, to date, the investment climate in the market has improved, but tenants will be able to feel changes only after 3-5 years, it is the time required for the implementation of those projects are now in the work.

But it is encouraging investment expectations somewhat flawed by a series of problem constraints. The biggest one is the lack of suitable land at an affordable price. In addition, many foreign investors are considering buying an empty land plot without authorization documents as a significant risk.

According to experts, the lack of vacant land in the central business district of Kiev for the construction of office facilities, force the developers to look out the more remote areas, which means that not only can reduce the rental rates, but also a decrease in the office (and the road flows) in the centre of Kiev. Also, in the near future, may also be expected to grow the real estate business in the most dynamic regions, Dnipropetrovsk, Odessa, Kharkiv. The cap rate for office real estate in Kiev last year for A Class has been at 9,5-11% level, for B Class - 10-12%. The payback period is estimated by developers as 5-7 years. Projects scheduled for completion in 2008-2010 will have much longer payback period, but cap rates are is unlikely to fall, in spite that the demand for professional real estate office in the Kiev continues to grow, and international companies are biggest demand player among class A and B+ offices with 71% share. The structure of transactions on the office real estate market dominated by rent (88%). But most of company would like to buy office spaces as property. There is huge demand for such kind of deals.

In the next few years the share of foreign companies in the structure of the demand for office space in the Kiev is steadily high. Moreover, the cap rates will decreasing due low risks and higher supply in the Kiev office real estate market.