Retail Property Market in Ukraine – General Trends

Supply
Despite the recognized high retail potential of the country and strengthening demand for retail space, the retail property market throughout Ukraine remains largely underdeveloped in terms of its saturation (Fig.8) and variety of formats in the existing properties (Fig.9). Kyiv, Dnipropetrovsk, Odessa, Kharkiv, Donetsk and Lviv are considered to be major cities of Ukraine and have been attracting a particular interest from major retailers, developers and investors. As of early November 2011, total existing modern retail stock in these six cities exceeded 2.6 million sq m, on average amounting to
325 sq m per 1,000 inhabitants (based on official demographics statistics). This figure accounts for all major retail developments in the cities of or over 5,000 sq m gross lettable area (including multi-tenant retail centres and ‘big box’ single-occupied developments). Kyiv benefited from the largest stock of modern retail space, presently amounting to 1,001,400 sq m (GLA), while the smallest retail stock was registered in Lviv at 206,540 sq m (GLA). Taking into account official statistics on total population in each of major Ukrainian cities, the highest saturation was in Odessa at 379 sq m (GLA), while the lowest figure registered in Kharkiv – at 215 sq m GLA). In terms of quality in Kyiv and other major cities of Ukraine, the existing retail stock is mostly formed by first generation retail developments with true end-destination properties remaining in shortage. Formats such as retail parks and fashion (factory) outlets are yet to appear in the country. The opportunities within the retail property sector, over other sectors, remain of priority interest for most developers and investors active in Ukraine, particularly in the cities with total population over 750,000 inhabitants. Around 75,080 sq m (GLA) of new retail supply was delivered in Kyiv in the first three quarters of 2011, comprised of the second phase of ‘Dream Town’ in Obolon anchored by an aqua park, the hypermarket Novus on Brovarskyi Avenue, as well as four relatively small neighbourhood retail centres (‘inSilver’, ‘Victorio’, ‘Livoberezhnyi’ and ‘Kvadrat’ on Onore de Balzaka Street). Major retail schemes delivered in regional cities of Ukraine in January-November 2011 included the retail centre ‘Passage’ located in the core city centre of Dnipropetrovsk, the second phases of the retail and leisure centres ‘City Mall’ in Zaporizhzhya and ‘Donetsk City’ in Donetsk, the retail and leisure centre ‘Ukraine’ in Mariupol and the retail centre ‘Galaktyka’ in Kremenchuh. During the analysis period, the DIY-stores within the national chain ‘Epicentre’ were opened in Kirovohrad, Chernihiv, Mukachevo (Zakarpattya Oblast) and Kamyanets-Podilskyi (Khmelnytska Oblast). In addition, the wholesale centres in the format ‘METRO Baza’ were delivered by Metro Cash&Carry in Ternopil and Lutsk.

The fourth quarter of 2011 may see delivery of ‘Ave Plaza’ and ‘Magellan’ (phase 1) in Kharkiv, as well as the first phase of ‘Fabrika’ in Kherson. The opening of the retail and leisure centre ‘Gulliver’, presently under construction in the central part of Kyiv and earlier known as ‘Esplanada’ and ‘Continental’, will be postponed until 2012 at the earliest. Delivery of the retail centre ‘Mega-City’ (phase 1), which has been scheduled for completion in Ukraine’s capital in the fourth quarter of
2011, will also most likely be delayed.

Demand
During 2009, due to adverse economic conditions, local and international retailers in Ukraine revised their strategies. Some of them left the Ukrainian retail market or stopped operations, while others seized the moment and continued expansion in the country. As a result, in the Ukrainian cities with total population in the range of 200,000-700,000 inhabitants demand for retail space almost evaporated, while the cities such as Zaporizhzhya, Kryvyi Rih and Mariupol with poorly diversified economic bases and overreliance on a single industrial sector suffered a higher degree of slowdown in retail demand. Conversely, the retail sectors in Kyiv and Odessa have shown relative resilience to the deterioration in general economic conditions. Despite the most negative expectations, however the year 2009 turned out to be positive for many retailers operating in Ukraine, particularly those in food retail, as well as low and middle price categories of fashion retail. During the period from early 2010 until September 2011, DTZ has witnessed a noticeable improvement in general dynamics on the demand side of the retail market across Ukraine with many retailers increasingly seeking for opportunities to expand. The deficit of quality retail properties has remained one of major obstacles for these
plans being realised. Despite slightly deteriorating retailers’ perceptions of the Ukraine’s short-term retail potential, triggered by general dynamics on global markets and political uncertainty in Ukraine, major retailers continued seeking opportunities to expand in the country during the third quarter of the year.
Regardless improved performance of the retail market in Ukraine, the country was not even listed in A. T. Kearney’s Global Retail Development Index in 2010 and 2011, after being ranked the fifth most attractive retail market in 2007 and the seventeenth in 2008-2009. Global Retail Development Index (GRDI), produced by A.T. Kearney, defines the top 30 emerging countries for retail expansion, based on 25 macroeconomic and retail-specific variables. Several new market entries were registered in January- November 2011. GAP, through the franchise-holder Fiba Retail, opened its flagship store on the central Khreshchatyk Street in Kyiv. New Yorker and Oysho stores were opened in both ‘Sky Mall’ in Kyiv and ‘Rivera Shopping City’ in Odessa. The first stores FiNN FLARE and Centro opened in Kyiv. The crisis triggered an increase in M&A activities on the retail market in Ukraine. In early 2011, the Russian retail group L’Etoile reported the acquisition of 100% of shares in the chain Brocard, wellestablished on the Ukrainian retail market, as well as purchased the chain Bonjour, already owned by Brocard.

In Ukraine the first store L’Etoile opened in the second phase of ‘Dream Town’ in Kyiv, followed by the store in ‘Passage’ in Dnipropetrovsk. The international A.S. Watson Group, which in 2006 acquired 65% of shares in the retail chain ‘DЦ’ from the Ukrainian company Asnova Holding, gained 100% ownership in 2010. In March 2011, the stores of the retail chain previously known as ‘DЦ’ were rebranded into ‘Watsons’. In August 2011, the Central and Eastern European company PPF Group completed the acquisition of 100% shares in the Russian retail chain ‘Eldorado’, which also operates the stores in Ukraine. The deal was initiated in 2009, when PPF Group purchased 50%+1 shares of the chain ‘Eldorado’. It was also reported in early November 2011, that the Dnipropetrovsk-based retail chain ‘ATB-market’ has been offered for sale 51% or 100% of its shares. Following the trend established in 2010, several retail chains launched new formats in Ukraine in 2011. The second phase of ‘Dream Town’ in Kyiv accommodated the first in the city supermarket ‘Kosmos’ of the Odessabased retail chain ‘Tavria-V’. In late October 2011, the retail chain ‘Budynok Ihrashok’ specialised in goods for children opened the first store ‘Dytyachyi Svit’ in ‘Riviera Shopping City in Odessa. In the high-fashion segment, the single-brand store Christian Dior was opened in the downtown Kyiv in late October 2011.
The lack of critical mass of quality retail space throughout Ukraine prevents a number of major international retailers from entering the market. DTZ believes that the opening of stores by such brands as H&M, C&A, Debenhams, Deichmann and Peek&Cloppenburg remains unlikely before late 2012 – early 2013.
‘Big box’ retail operators with reliable sourcing of financing continued to demonstrate high activity in the first three quarters of 2011, driven by their development strategies combined with the widely recognised, largely unexploited potential of the Ukrainian market and the availability of development land at comparatively affordable prices. Thus, Metro Cash&Carry, Epicentre and Nova Liniya further expanded across Ukraine. A number of food hypermarket operators including Fozzy Group, Auchan, Novus and Amstor, as well as electronics and home appliance chains Comfy and Technopolis actively considered occupation in retail developments not only in major cities of the country with populations over 750,000 inhabitants, but also in smaller cities. Quality retail operators in Ukraine remain very selective in terms of retail space quality and occupational terms.

Rents
With increasing retailer activity in the country and their improved perception of market potential, 2010 and the first three quarters of 2011 witnessed an increase in prime base rents in quality multi-tenant retail developments in Kyiv, as well as in the few western-standard retail schemes already well-established in other major cities of Ukraine. Similar dynamics was also observed in relation to high street retail rents in Kyiv and other major cities of Ukraine with total population over 750,000 inhabitants. Despite the positive dynamics of an increasing number of new retailers entering the market and the improvement in activity of companies already operating in Ukraine, combined with nominal new supply of quality retail stock, DTZ does not anticipate any major upswing in base rental rates in the fourth quarter of 2011 and during 2012. This is due to the lack of critical mass of new market entries, as well as uncertain further economic dynamics both globally and in Ukraine.
Nevertheless, DTZ anticipates that in the short term, due to the gradually strengthening demand of retail operators and the present lack of quality retail space, base prime rents in well-conceived multi-tenant retail schemes and high street locations in Kyiv and other major cities of Ukraine will be subject to further upward pressure. At the same time, the longer term sustainability of current retail rents will depend on the actual commissioning and quality of new sizeable pipeline retail schemes scheduled for completion in 2012/13, particularly in Kyiv. Quality remains a crucial factor for the success of all existing and new retail developments in Ukraine. Today the majority of developers in Ukraine accept that a wellconsidered approach to selecting an appropriate location, efficient concept and thoughtful phasing of retail schemes with due regard to the number and mix of quality retailers and their planned expansion into the country, will secure long-term financial viability and investment exit.

Secondary investment market
DTZ witnessed a stabilisation of property investor sentiment in Ukraine during the first three quarters of 2011, reflected by a slight decrease in yields still considered to be at high levels compared to other European countries. Quality retail properties together with office schemes remain the most sought-after investment assets in Ukraine. Out of ten investment deals reported to be concluded on the commercial property market in Ukraine during the first three quarters of 2011, five transactions involved purchase of retail schemes or projects. The acquisition of a city centre mixed-use development
project with a significant retail component in central Kyiv by a private European developer was the largest deal in the Ukraine commercial property market since 2008. Prime net initial yield for high-quality retail properties in Kyiv is estimated by DTZ at around 13.5%, while in major regional cities prime retail yields amount to 14.5-16%.
Outlook
The retail segment proved to be the most resilient to the effects of economic crisis in 2008/9 compared to other property sectors in Ukraine. DTZ believes that the retail property market will show further growth in the medium term after global and domestic economic conditions further improve. Despite the remaining signs of the economic crisis and comparatively low incomes of the population, the potential of the retail property market in Ukraine undoubtedly remains high because of its immaturity in terms of quality and formats of existing retail schemes, large country size, high population density, perceived high brand awareness and propensity to spend. The opportunities within the retail property sector, over other sectors, are of priority interest for most developers and investors active in Ukraine, particularly in the cities with total population over 750,000 inhabitants. Works on several sizeable retail projects in Kyiv and the regional cities of Ukraine were recently recommenced, which, if delivered to current schedules, will lead to a considerable increase in retail stock in the country by the end of 2013.
As a result, the Ukrainian market will offer more opportunities for expansion of retail chains, but localised retail rents will be subject to downward pressure, particularly in some poorly conceived first generation retail schemes in light of the strengthening competition within the sector.