BDO in Ukraine prepared an overview of the construction market of Ukraine in 2024

An overview of the state and challenges of the construction industry in Ukraine in the second year of the war from the experts of the Construction and Real Estate industry group of BDO in Ukraine.

In 2023, the second year of Russia’s full-scale invasion, various sectors of the economy faced new challenges. In addition to shelling and other risks associated with the hostilities, businesses had to adapt to changes in regulations, including legislation, as well as to changes in the mood of consumers of goods and services. In particular, the real estate market saw an increase in demand for purchasing their own housing last year.

Data from the State Statistics Service of Ukraine. Data for 2024 are not published in order to comply with the requirements of the Law of Ukraine “On Official Statistics” to ensure the guarantees of state statistics authorities regarding statistical confidentiality.

Data from the State Statistics Service of Ukraine.

The cost of residential real estate in regions remote from the combat zone has increased in price. The exception is the capital, which has minimally decreased average prices since the end of the blackouts in the spring of 2023. This is probably due to migration processes.

Among 1-room apartments, Kyiv lost 3% in price, while the price in Lviv increased by 12%. The record holder for price growth was Ivano-Frankivsk with an indicator of +18% in foreign currency.

Among two-room apartments: Vinnytsia showed an increase in price by 18%, Ivano-Frankivsk – by 17%, Lviv – by 9%, and Kyiv showed a decrease in price by 1%.

Three-room apartments in the capital fell by 6%, in Vinnytsia and Ivano-Frankivsk they increased by 13%, and in Lviv they became more expensive by 8% in currency.

In absolute numbers, among the most popular option among Ukrainians — 1-room apartments, the capital lost the most, where apartments fell by an average of $2,000. Prices increased the most in Lviv (+6,400 dollars), Ivano-Frankivsk (+4,700 dollars) and Chernihiv (+4,000 dollars), which even overtook Uzhhorod (+3,200 dollars).

Kyiv and Lviv traditionally remain the most expensive cities for buying housing, but with the beginning of a full-scale war, Uzhhorod joined them, where you need to fully save the average local salary for a little more than 9 years to buy an apartment.

State programs as a stimulus for demand in the real estate market

After the implementation of the state program “eOselya”, the real estate market experienced a certain revival. The program contributed to the restoration of sales due to affordable lending for certain categories of the population, providing mortgages at 3% per annum for servicemen of the Armed Forces of Ukraine, Security Service of Ukraine, Military Directorate of the Ministry of Defense, doctors, scientists and teachers. In addition, according to UKRFINZHYTLO, since 2023 the state has expanded the housing lending program and added the following categories of the population: war veterans and members of their families, combatants, persons with disabilities as a result of the war, families of deceased war veterans, defined by Article 10 of the Law of Ukraine “On the Status of War Veterans, Guarantees of Their Social Protection”, as well as families of deceased Defenders of Ukraine. The program also helps internally displaced persons and other citizens who do not have housing, or its area is less than 52.5 m2 + 21 m2 for each additional family member additionally.

According to Globus Bank, from October 1, 2022 to August of this year, banks issued 2,898 loans under the e-Housing program for a total amount of over 4 billion hryvnias.

In addition to apartments, e-Housing has also been extended to the purchase of private houses and townhouses. According to information from open information sources, namely: in 1.5 months of the program’s operation with the expansion to private houses, the number of offers on the OLX platform increased by 12%, reviews increased by 38%, the average cost increased slightly – a little more than 1%.

Regarding cottages, the situation is as follows: the number of ads for their sale increased by 6.3%, reviews increased by 37%, the average cost increased by 0.5%.

The number of ads for the sale of townhouses over the 1.5 months of the program’s operation increased by a little more than 6%, the number of reviews from platform users by 37%. At the same time, the average cost increased by 1.5% compared to the end of January 2024.

Ads for the sale of part of the house increased in number by more than 9%, the number of reviews increased by 60%, the average cost by 11.6%.

As of mid-March, the first deals for the purchase of houses through the eOselya program have already been concluded. Currently, the program is actively being rolled out in the regions, and for certain categories there is even an opportunity to issue it at 0%. The development of e-Housing has a positive impact on the demand for houses, townhouses and similar objects, and is one of the factors of the development of the real estate market in general. If financing is stable, the public’s confidence in the program will grow (according to Ukrfinzhitl, last year 5855 housing loans were issued for the amount of 8.85 billion UAH), which will also revitalize the market, increase the number of accredited developers for the program, new residential facilities and create new jobs.

At the same time, the primary market is in a rather difficult situation – demand remains low, and investments are almost absent. Risks for the construction industry, both security and financial, remain significant. Therefore, one should not expect a dynamic recovery of this sector in the near future.

Commercial Real Estate

Office Real Estate

Amidst the hostilities and prolonged economic downturn, the Kyiv office market has demonstrated high resilience and adaptability.

The total volume of competitive office space has remained unchanged at 2.22 million m² since the beginning of the year. The average vacancy rate has stabilized at 25% (-1% since the beginning of the year). The effective rental rate is stable at an average of $20 / m² / month (excluding VAT and OPEX).

Despite the hostilities and prolonged economic downturn, the Kyiv office market in 2023 demonstrated significant resilience and adaptability. Most companies have suspended staff reductions and are actively looking for ways to optimize real estate costs by renegotiating lease agreements or modernizing and optimizing office space through relocation.

Tenant demand showed signs of strengthening, with annual gross take-up reaching approximately 91,000 m², four times higher than in 2022, but still 32% below the pre-war level of 2021. The deal structure was dominated by relocations (55%) and renegotiations of existing contracts (17%), while office expansions were relatively rare (6%). As in the previous year, there was a clear shortage of large deals in 2023, with the maximum deal size ranging from 1,500 to 3,000 m².

The war is making adjustments to everyday life and introducing new trends in the commercial real estate market. Some companies remain in their offices, refusing to move to other locations, as the cost of moving is significant, in addition, companies keep their offices nominally, pay rent and related costs, despite the fact that the actual use of offices by employees remains low: from 15% to 50%.

Demand for business areas shows that the IT and telecommunications sector continues to dominate (51%). However, the pace of development of this segment, which has historically been a key driver of demand and development of business centers, has decreased due to the reduction of the physical presence of employees in offices. At the same time, the market did not see comparable demand for new offices from traditional industries such as pharmaceuticals, business and financial services or the agricultural sector. The public sector, which accounted for 23% of total demand, remained active and is likely to remain active throughout 2024. Also, potential demand growth may be observed from companies in the military-industrial complex, although their current share in the demand structure is insignificant.

Average vacancy rates remained relatively stable throughout 2023, falling by just 1% to 25% at year-end. Favorable lease conditions have allowed companies to move from lower-quality offices to better-quality Class B and A properties at lower rents. The Class B vacancy rate was 27%, which was higher than the Class A vacancy rate of 24.7%, especially in lower-quality buildings. The bulk of the vacancies were concentrated in new developments that have not yet reached high occupancy levels, as well as in lower-quality buildings located mainly outside the central business district.

The average rent rate remained stable at $20 per square meter per month, down 5% year-to-date. Deals at this level of rent remain exceptional. The upper end of the range of asking rents in Class A decreased by 7% on average, ranging from $18 to $24 per square meter per month, while Class B properties experienced a more significant decrease (-11%) and ranged from $8-$16 per square meter per month.

Warehouse Real Estate

The warehouse real estate market remained stable in the first quarter of 2024 without significant changes. Leasing activity remained limited, however, several large tenants conducted market research with the aim of expanding.

The wholesale and retail sector continued to dominate the structure of leasing activity, with a slight increase in the share of the healthcare and pharmaceutical sector. Total quarterly gross absorption amounted to about 23,000 square meters, which corresponds to a decrease of 21% compared to the previous year.

No new properties were added to the market during the first quarter of 2024.

Due to the lack of new supply and the existing shortage of available space, the vacancy rate remained at 1.8% as of the end of the first quarter of 2024.

Rental rates in dollar terms strengthened to $4.9 per square meter per month (excluding VAT and operating costs) for quality warehouse space.

BUSINESS EXPECTATIONS OF CONSTRUCTORS for 2024

Business improved expectations for business activity for the next 12 months. Despite security risks and logistical difficulties, in particular problems with border crossing, respondents predicted a moderate increase in the production of goods and services and positively assessed the development of their enterprises. Inflation expectations continued to improve, while currency expectations deteriorated slightly.

In the second quarter of 2024, the business confidence indicator in construction decreased compared to the first quarter of 2024 by 1.1% and is 40.9%.

According to the State Service of Ukraine, the assessment of the lack of current orders worsened by 3 pp. – to “minus” 53%. Thus, 54% of surveyed companies assessed the current volume of orders as insufficient, 45% – as normal for the season.

Among the main factors that negatively affect the number of workers on construction sites, respondents unanimously single out mobilization. Expectations for changes in the number of workers in April-June 2024: minus 31%.

There is a shortage of workers in almost all specialties. Currently, experienced monolith workers, electricians, plumbers, facade specialists and operators of specialized construction equipment are worth their weight in gold. In Ukraine, mobilization has continued continuously, and it is builders who are often called up for military service.

Private construction companies can reserve workers only if they are engaged in the restoration of housing destroyed by the war or are involved in the construction of critical infrastructure.

The long search for workers slows down construction and, together with higher wages, affects its cost. In addition, prices for building materials are constantly growing. In some categories, the cost has increased from 30 to 200%. I predict that this year, when the labor shortage will become even more acute, developers may delay the commissioning of facilities. Because of this, prices per square meter will increase significantly.

Let’s summarize

In 2024, the construction industry of Ukraine will be focused on the restoration and modernization of infrastructure, the development of residential and industrial construction. Despite economic challenges, the industry has significant potential for growth, especially with the support of the government and international partners. The introduction of innovations and effective resource management will be key factors for the successful development of the construction industry.

Construction companies will face two challenges: a shortage of qualified labor and prices for construction materials, which remain high due to global inflation and supply problems.

All of the above will affect the total cost of construction projects and lead to an increase in the value of real estate and postpone the timing of commissioning of facilities.

If you are interested in more detailed information or have any questions, please contact us – we will be happy to provide the necessary advice.

The material was prepared by specialists of the Construction and Real Estate industry group of BDO in Ukraine