Ukraine Real Estate Report Q1 2013

The Ukraine real estate report examines the commercial office, retail, industrial and construction sectorsin the country in the context of a property sector where the continued recovery is increasingly underthreat, especially now that the impetus of the FIFA Euro 2012 football tournament has come and gone.

With a focus on the principal cities of Kiev, Kharkov and Dnipropetrovsk the report covers the rentalmarket performance in terms of rates and yields over an 18-month period and examines how best tomaximise returns in the commercial real estate market, while minimising investment risk and exploringthe impact of the Euro 2012 'hangover' on a market that was already losing momentum.

On the back of stagnating exports, rising import bills, a crippled banking sector and our expectations for ahryvnia devaluation, we have downgraded our 2012 real GDP growth estimate for Ukraine to 2.0% (froma previous forecast of 2.5%) and 0.9% in 2013 (from a previous forecast of 3.4%). While the ongoingglobal growth slowdown is largely to blame, domestic economic mismanagement by the government isalso damaging growth prospects. A weakening global growth picture bodes ill for Ukraine's exportdependenteconomy and a faltering domestic demand picture underpins our lower growth estimates for2012, with negative knock-on effects on the demand for real estate. Our latest data collection, coveringmarket performance over the first six months of 2012 has inspired little confidence to the contrary, withonly around 15% of our indicators registering any annualised growth.

Key Points:

We expect the Ukrainian construction industry to suffer from an investment hangover,following a string of projects carried out in preparation for Euro 2012. As such, after a forecast3.6% year-on-year (y-o-y) growth in construction industry value in 2012, we expect the industryto return to recession in 2013, with a 0.7% y-o-y contraction anticipated.

The residential and non-residential construction sector, which accounted for almost 60% of totalconstruction value in 2011 (according to BMI estimates), will prove to be a majordisappointment over the coming years as renewed macroeconomic pressures, coupled with a lackof demand from businesses and foreign buyers, weaken the sector's recovery. As such, weforecast annual average real growth of just 1.5% between 2012 and 2021.

We remain bearish on the European building materials market as conditions for firms continue todeteriorate in light of ongoing eurozone austerity. The sovereign debt crisis, lower domesticdemand from peripheral countries, and tighter financing conditions are constraining ourconstruction outlook for the region, and will continue to limit growth for the foreseeable future.

Overcapacity, increasing production costs, and falling sales volumes have hit the bottom lines ofproducers since 2009, and we see no immediate end to these phenomena. Notable exceptions tothis trend are Russia and, to a lesser extent, Turkey and we expect these outperforming marketsto sustain high levels of demand over the medium term.