Squaring the Circle
Ukrainian business is moving around the circle and saving money in square meters of new buildings again. After the bankruptcy of banks, businesspersons started active investing in construction in order to save money.
The growth of activity in the construction sector in 2014 was motivated not only by profits but mainly by the preservation of the capital saved during the liquidation of banking institutions. The drivers for this were mainly fugitives from the combat zone. In addition, the gradual reduction of Russian influence forced to look for a liquid economy sector and redirect the financial flows. Numerous construction sites appeared in Kyiv, Lviv, Mykolaiv, Ivano-Frankivsk, and Odesa. About 180 billion USD in total was invested in the industry over the first two years of activity in the construction market.
For example, the supply of real estate in Kyiv has already doubled; it is 130 thousand apartments now. However, not only the capital but also the suburbs began to be actively built up. New quarters appeared in Bucha, Vyshneve, Brovary and even adjoining villages: Sofievska and Petropavlivska Borschahivka, Gorenychi, Gatne, Petrovske, Khodosivka.
Khrushev projects – a predicted boom
Most likely, the construction business will move with jumps. A new activity peak on the smooth growth curve of the housing sector may be caused by rebuilding Khrushev projects.
The start should be expected in 3-4 years and the active phase will take place in 5 years. The forecast stems from the fact that there is already a lack of the land for new construction sites. Despite the great supply, the demand for real estate and housing does not fall but continues to grow. Furthermore, the number of inhabitants of the capital and its suburbs is steadily increasing. The world’s experience shows that Kyiv is transforming into a metropolis. It becomes attractive as a labor market. The number of vacancies is constantly increasing, and salaries here are much higher than regional ones. Young professionals want to stay in a large city after graduating, as there are more chances for the career growth. All these factors will continuously support this demand.
In turn, the investment portfolio of this business will reach several hundred billion in several years of successful sales. It will be enough for a large-scale demolition of Khrushev projects and building modern high-rise buildings.
Another reason why the start is impossible earlier is the corruption-clan component. If the anti-corruption court of Ukraine starts working from December 2018, it will cut a window for such projects. If not, then the project will start the same way this period, as it is time for new presidential and parliamentary elections, coming of a new clan to power and building businesses for themselves.
There is no exact estimate of how many Khrushev projects from around 8000 existing ones need to be renovated. However, they plan to withdraw from the use 7.8 million square meters of housing by 2025 according to a new general plan of Kyiv. This is about 3 thousand buildings. 112 billion UAH are required for implementation of the project. If we divide the task into five years, then annual investments will be around 20-25 billion UAH. The expected profit is 20-40% depending on the buildings’ height.
Since about $25 billion was invested in Kyiv’s construction business in 2017, and the annual growth rate of the sector was 20-30% in recent years, the renovation of old housing in the capital is financially available. Maybe it is available not on the expected scale, but the chain reaction to such renovation will affect other cities. By the way, one job in the construction industry creates additional five jobs in other economic sectors.
Ukrainians are increasing their investments in real estate abroad. This usually happens due to two reasons: the desire to protect the savings or preparing the base for future emigration; or both of these reasons together. At the same time, the investing geography covers the whole world – America, exotic countries, and of course Europe.
A huge number of migrants possess in-depth knowledge of other states. They see how legal systems and the protection of citizens work there. Therefore, the desire to protect funds motivates them to invest in real estate in the host country.
An amount of money equivalent to the cost of an apartment in Kiev can be spent on purchasing of an apartment in Turkey, Bulgaria, Spain, the Czech Republic, Germany, and many other countries. Moreover, people get the opportunity to build a business and gain the benefits of the citizenship of a particular country.
Ukrainians buy real estate in Poland most willingly now. About 2 million of our citizens work there and thousands of students study at universities.
After Ukrainians bought more than 400 apartments in Poland in 2014, they purchased almost 2000 apartments in 2017, being ranked #2 in the corresponding rating after Ukrainians in Germany.
Poor or careful
The state budget for 2018 is 913.6 billion UAH. The population of Ukraine has more than 700 billion UAH: 429 billion on bank accounts and 300 billion outside of the banking system. This huge amount of money could be invested in the Ukrainian economy on condition of eliminating corruption and returning the trust to the authorities. Therefore, it is not correct to explain the low purchasing activity in the real estate market and to justify the slump in prices with the lack of funds.
We can mention China, South Korea and Japan, where foreign direct investment was low. In particular, direct foreign investment in the last two countries was less than 0.5% of GDP until 1997 due to the long-term economic growth. The total investment reached 30-45% of GDP in China, 20-30% in South Korea and 30-35% in Japan. This statistics can be explained by the culture of these countries. There is the traditional respect for the state as an institution and a high degree of credit to the government. The low level of corruption and the strict responsibility of officials contributed to the attraction of domestic investment. This is a confirmation for the Ukrainian authorities of the thesis that reducing corruption and improving the legal field is directly proportional to the investment growth.
Direct foreign investment
Direct foreign investment in the Ukrainian construction industry does not exceed 4%. This is a testimony to the industry’s unattractiveness for foreign businesses. In total, more than 80% of investment in construction is made from funds of legal entities and individual businesspersons of Ukraine. Unfortunately, we have to noted that only 1% of the state budget and only 3.4% of local budgets are allocated to this industry. Perhaps, Ukraine will be forced to repeat the path of the Asian countries – South Korea, China and Japan – and will lift the industry at the expense of domestic investment.
According to our forecasts, the construction industry will continue to grow steadily in the next 10 years. It will jump and experience around 1-3 years of high profits, returning to a smooth line. As rivers flow into the sea, the Ukrainian economy will inevitably join the EU economy, adopting its rules, growth rates and insignificant and stable profitability.
As for the industry prospects, the construction activity curve will sharply skyrocket after the end of the war in eastern Ukraine, when there will be the need to rebuild hundreds of businesses and create new housing. The approach of time “X” – joining the EU – will further encourage industrial and housing construction business.