CNBC Business | Playing chicken

Playing chicken

Ukrainian vendors are holding onto their properties, hoping prices  will rise, says Neil Barnett. As a result the market is grinding to halt

Ukraine’s notoriously expensive and awkward residential market is beginning to feel the chill wind of the credit crisis, but bargain hunters may have a long wait in store. The country’s residential property has traditionally been expensive by regional standards, and certainly relative to average incomes. Mid-range Kiev property sells for $2,500–$4,000 (€1,800–€2,900) per m2, which is more than in Berlin, Frankfurt and Budapest, although still less than in London or Paris. And top-end properties can go for a staggering $6,500–$20,000 (€4,700–€14,450). Prices are quoted in US dollars because this is the currency used in Ukrainian real estate transactions in preference to the Ukrainian hryvna. 

Expats report that finding accommodation to rent or buy at a reasonable rate can be one of the major headaches of living in Ukraine. The reason appears to be a mistrust of the banking system, so investors crowd into real estate, which combines with a large amount of grey and black money looking for a home. 

And despite the collapse of the Ukrainian government, the regional tensions following Russia’s attack on Georgia and the credit crisis, the market is stagnating rather than declining. Gerald Bowers of EFG Property Services, a Swiss company active on the local market, says, the market doesn’t really respond to the political situation, since political instability is a way of life. But it is responding to the credit crunch. There’s a cooling, the banks are tightening lending and the level of sales has fallen but prices have not dropped. Nevertheless, in the next six months he sees prices dropping 10%–15%. 

Valeria Logacheva, who handles residential property at DTZ in Kiev, agrees: things are very slow and it’s hard to sell apartments, especially those over €350,000. One factor is the weakening by about 10% of the currency against the dollar. However, unlike Bowers, she sees prices continuing to stagnate rather than falling in the coming months. 

This phenomenon of the market grinding to a near halt and prices stopping dead is not unique to Ukraine, and is often seen in emerging markets; indeed something similar is happening in Romania now. The cause is owners refusing to accept that the market is declining – preferring to sit on an unsold property rather than dropping the asking price or negotiating. This only delays a price correction, since eventually sellers become desperate and revise their expectations.  

So it would be a brave investor who buys now, and if you need a place to live renting might be more sensible. If investment is your aim, then other markets in the vicinity, such as Bulgaria, are already seeing substantial price drops, usually combined with a more predictable political and legal environment. Ukraine’s residential property market, in other words, remains a play only for those with strong nerves and deep pockets.

WHAT YOUR EUROS GET YOU 

€100,000: A village house with two or three bedrooms just outside Kiev. Inside the capital or even secondary cities, this money will not get you very far. 

€200,000: A 60m2-70m2 apartment in a major city like Dnipropetrovsk 

€500,000: A central Kiev apartment of around 80m2, probably in need of renovation. 

€1m: A new-build apartment of 120m2 on Khreschatyk, the broad boulevard at the  heart of Kiev