Odessa in a Void: Investment Pearl of the Black Sea

Despite the turbulent decade that Ukraine has endured, credit rating companies have marked Odessa as the next hot destination for investment.  Why should you avoid buying in Kiev and in the next two years, will Odessa return to the high yields it saw before the crisis?

Einat Shahak

Written in collaboration with the real estate desk.

Since the global crisis in 2008 and the political instability caused by the struggle against Russia over Crimea in 2014, Ukraine has suffered repeated blows to its economy. These blows also affected the real estate market in the country and led to a steep fall in housing prices - partly due to the disruption of trade and tourism ties with Russia.

Ukraine did everything in its power to save its unstable economy. It succeeded in avoiding default, recovering from negative GDP growth and signed deb arrangements and trade agreements with countries of interest, including Israel, as well as with the European Union. Thanks to the Free Trade Agreement with the EU, which came into effect September 2017, Ukraine was forced to align itself with the economic, financial and regulatory policies and standards that bind EU countries. And it is a wonder - that already in the same year Ukraine's economy surged sharply, and its trade turnover with the EU grew by no less than 27%.

But even before this, in 2015, the residential real estate market had already begun to escape the deadlock, partly due to the erosion of the value of the Ukrainian hryvnia against the dollar by some 80% between 2013-2017. In this situation, so as not to lose their capital, the State invested in real estate and created tremendous momentum.

In 2015, there were 200 registered construction projects started in the capital of Kiev - compared with 130 in 2013. The upward trend continued in subsequent years, and in 2018 there were 330 construction projects started in the city. It is estimated that in Lviv, some 250 new buildings were built this year, and in Odessa some 150.

Real estate experts predict that in 2019 prices will rise, partly due to the presidential elections expected to take place this year, which will lead to the release of development budgets for the market, to the removal of barriers and to the influx of investors to the country. With regards to other Eastern European countries, Ukraine has not recovered from its difficult decade, but for the Israeli investor it is an opportunity to enter the market so long as the prices are at a low point and enjoy the expected rise ahead of everyone.

Ghost Capital

The construction boom in the country has led to very rapid growth in the real estate market in Kiev. Some would say that the growth was too fast, as the supply of residential apartments in the country, and in Kiev in particular, exceeds the demand. According to conservative estimates, supply is 10 times higher than demand, and even more extreme estimates speak of a ratio of 18-20 times higher.

As a result, real estate prices in Kiev and the suburbs of the city are at a low - which at face value seems to provide excellent conditions for the arrival of investors, but the profit on new properties may be low. Real estate consultants argue that the best yield in Kiev can be found precisely in the secondary market, namely the purchase and renovation of historic buildings located in prime locations and finally - renting them.

However, while quite a few old apartments in historic buildings need renovation, the catch is that their sales are rare due to difficulties arising from cross-ownership. The prices of these properties have been frozen for nearly two years, and in order to find a profitable deal, one must find a well-versed and well-connected broker in the local market and be ready to close a deal quickly.

With supply exceeding demand, it is difficult to say if and when Kiev real estate prices will rise in the foreseeable future. The tourism sector, which suffered a severe blow following the dispute with Russia, recovered relatively quickly and registered some 14.5 million foreign tourist arrivals in 2017. About 1.5 million of them arrived in Kiev, increasing hotel occupancy to 42% compared to only 26% in 2014 - a significant increase, but still disappointing as a capital city.

A Window to the Black Sea

The city that leads the change in the industry, and consequently also in the real estate market, is actually Odessa. Its strategic location, being the largest port city in the country and its proximity to key cities in Europe turned it into a resort town decades ago, when many tourists from neighboring countries as well as from Ukraine itself came to vacation there.  Even today, despite the crises that hit Ukraine, Odessa is among the first to enjoy the fruits of economic recovery.

In 2015, Odessa ranked first among the recommended business cities according to Forbes Ukraine, and in 2018, credit rating agencies IBI and Credit Rating gave it the highest score, indicating its great attractiveness for investment with a stable outlook. These ratings are based on an extensive economic and financial analysis of the city's data, along with an examination of future development plans and reliance on an impressive 130%-150% increase in revenues over the last three years.

Surprisingly, despite the controversy surrounding Crimea in the east of the country, there was a boom in tourism in the city located on the shores of the Black Sea. In 2017, 2.5 million tourists visited Odessa, who stayed only at 291 hotels and hostels - 1.5 times more than in 2015. The majority of tourists arrive to the Arcadia quarter, located on the seaside, which has become popular holiday destination thanks to its cultural wealth, a bustling beach, magnificent historic buildings and a developed culinary scene.

An Investment that makes waves

"It's important to understand that the EU has an interest in preserving Odessa and developing it," said Oren Gazit, a co-owner of Green Park, which leads entrepreneurship and construction projects in Israel and around the world, including a new prestigious project in Odessa. "The EU is investing a lot of money in Ukraine in general and in Odessa in particular, because the city has one of the largest natural gas pipelines in the world, which supplies most of the gas to Russia and Europe."

Gazit also explained the growing selection of Odessa and its recognition by many as the next hot target for investment: "The indication of a real estate market in full swing is [the number of] cranes. When you walk around Arcadia, the most expensive area in Odessa, you see levers from all sides. There are a lot of construction projects in the city, and right now we are the only project managed by Israelis."

Another characteristic that attracts investors to the Ukrainian real estate market is convenient taxation. "The purchase tax is ridiculous - 2% of the value of the land, which is equivalent to about $200-$300," Gazit said. "Beyond that, since Green Park is a partner in a local management company, the tax reaches 5% per year, and after three years of the data of purchase it resets, and the advantage in Ukraine is that there is no limit to the number of apartments that can be owned by the buyer, so that the purchase tax doesn't change."

Green Park, Odessa 2020 project includes a compound in the Arcadia region with two towers some 300 meters from the sea.  The towers offer apartments ranging from 30-80 square meters across a wide range - from studio apartments to three room apartments. The prestigious project will include health and fitness facilities such as a pool on the 26th floor with a spa complex, as well as a Dead Sea style complex with mineral and sulfur pools, which will also be active in the winter, thereby enabling tourism beyond the summer season.

According to Gazit, "an investor needs some $50,000 to buy an apartment whose real cost is $100,000, so that from the end of construction he is expected to enjoy a yield of 12%-14%. The cost today is very low - $1,800-2,300 per square meter. Before the crisis in 2008, the price stood at $5,000 per square meter.  The potential for price increase is great, and in my opinion, within a year and a half or two, they will return to pre-crisis levels, mainly due to the increase in tourism in Odessa. In the past four years, the number of tourists has been increasing by 300,000-400,000 tourists a year, and this undoubtedly translates into increased demand for real estate."