It's time to earn money reasonably

Irina Svetikova

As it was established throughout the years of the real estate market rapid development in Ukraine, serious companies relied solely on costly projects: A and B class business centers, five and four-star hotels, elite housing. The current crises has changed not only the priorities, but has also made them to think about the feasibility of such a strategy. Mr. Leonid Bogdanov, CEO of UDC Holding Ukraine, told Building Business about why one should build in Ukraine low-cost real estate and one and two-star hotels.

- Let's start from already "traditional" for us question: how has your company's strategy changed in response to the crisis?

- Of course, the crisis has influenced on all of us, including our company. It is impossible not to notice what is happening around. We have significantly reduced plans for further development, formed in previous years. So, we refused from construction of new residential property, however, we are continuing construction of the property which is at the stage of implementation. For example, in Lviv we have a project to build a residential area. At the present, there is a construction of the first stage - 160 000 sq.m. We do not stop this building and we will move forward. The project was expected to further expanding. This year we have planned to begin development of adjoining land. Now, of course, we won't do it. It is clear that sales volumes are lower now, market is practically stopped, and no one will invest money without clear prospects for their return.

- What kind of funds, taking into account difficult funding situation in the market, will you use to finish your projects?

- The point is that we have entered in our residential projects with our own start-up capital and in addition a certain amount of reserve funds to support the project. We already have our investors of the construction financing fund. That's why we don't have the situation when there is no money to finished started objects.

We have also developed a special credit program and give people the opportunity to receive an installment for 5-10 years from us, not from the bank. This program is now in very strong demand.

- For how much have the property sales fallen in the regions, where you are working?

- If earlier we were selling 10-15 apartments per month, now we are selling 2-3. But the apartments are sold, because there is a natural demand and a shortage of residential property is still present. This market is still interesting and sooner or later it will revive.

- That is, residential property remains your priority?

- Residential real estate of economy and business classes in the regions. After all, when we talk about the residential property shortage, we are talking primarily about the economy class residential property. Personally, I believe that we have no shortage of elite real estate property. Besides, the need for it depends on a combination of the factors: economic situation, attitudes, fashion, or something else. And affordable residential property is a natural need of people who created a new family, gave birth to children, changed their place of work. And this demand will never disappear.

As for the regional markets, the advantage lies in their nature - it has never been speculative. Construction of residential objects hasn't brought enormous profits, and profitability ranged from 15 to 30% in average. Therefore, the prices here haven't practically fallen down. And we are sure that this sector will emerge from the crisis earlier than others.

Today we consider a possibility to participate in the program for the construction of residential property for the military and other categories of public service employees. For sure, these programs will be soon in demand. Because financing of the residential property construction is a real way out of the crisis for our country.

- After all, are you expecting government support for the construction sphere?

- I think that next year, regardless of who wins the presidential election, the power will become consolidated and, finally, will take care of the economy. It simply will not have another choice. And I am sure for 100% that the first government investment projects will be in construction sphere. Construction is the best protection against inflation. All products that are used in the construction: from labor to sand, stone, cement - all produced within our country.

This fact raises the whole economy. And we even do not need to invent anything, because all the government programs in the construction sphere have been approved ten years ago. They need only to open funding. I think that the state should understand that funding for the construction industry is a real way out of crisis and protection against inflation in the case of emission processes.

- Recently, your company has started realization of projects in the field of hotel real estate. How do you assess the prospects for this sector?

- While attending different exhibitions and conferences, we have noticed that the investors are deeply interested in the hotel business, because this is a kind of «cash-machine». And even if it brings 30% less money than before; money comes every day - people use hotel services and hotels bring profit. For example, contrary to the office center, where 2-3 tenants had gone and its income became lesser. Number of free rooms in the hotel may increase by one, two, but it will still work and bring profit.

Furthermore, we have chosen the budget hotel sector not without reason. At this market there is no competition. We don't have quality budget hotels at all. You know, everyone felt itself very rich, everybody were going to build only five-star hotels.

It is clear that the developers earn much more on such projects, because the developer's income is measured as a percentage of the project's cost. But do we have today buyers of the five-star hotels? And do we really need the objects of such class in such quantity?

We are, for example, developing the Etap brand, by European standards this is one-star brand, but each room of such hotels has air-conditioning, television, internet (free of charge); there also would be German high quality sanitary ware, quality bed linen. Yes, there is no room service, and you will not have breakfast in your room, the rooms' whole area is 13.5 square meters, and there is no entertainment infrastructure. But even in the five-star hotel 90% of people stay for bed and breakfast only (it's clear that we are not talking about recreational property - it is quite another market segment). Why would they pay $ 300-400 or more per room? We offer rooms for € 30-35. So I think it is a very promising segment.

The decision to hold Euro-2012 Championship in Ukraine is of great importance to the construction process. We receive support and understanding that we are socially important - we are involved in the implementation of public projects. We are moving very fast in our hotel projects. And we are sure that all projects will enter into operation in time.

- And what situation is in the country real estate sector? You seemed to be built a cottage town, and even hotel and recreation complex?

- Letki village near Kiev and «Slavsko» complex are the projects that we construct mainly for domestic use. We have a fairly large financial group, respectively; there is a need for social security. Land plot in Slavsko Village is our property. That is, this is not the land which we bought to do something on it. This is the property, which originally belonged to one plant of the group. And now we are implementing this project for the group.

If we are talking about Letki Village, where we have implemented the first phase of the project - 28 houses, they were already inhabited. We planned the construction of another 14 homes. But it's also for the final customers; homes are bought by our staff, colleagues, friends from other structures.

- Office centers that you build, are they also reserved for the group?

- No. For example, we have built a business park in Lviv and the group occupies at most 15% from the total area. All other space is occupied by tenants. Office Center, which we will build in Kiev, we will sell. And there has been already signed about 30% of preliminary agreements. We always try to predict for whom we are implementing the project. We prefer to just fix, maybe not the highest price, but to be sure that the building project is what is really needed. We do not have a single project, which we built with the idea of «build and sell because the market will grow, and it will be in any case sold». First, we should find the one who need it and then begin construction.

- How have the rent rates changed for office real estate in the regions?

- The regions haven't seen such decrease as Kyiv, because the prices weren't that high. There were, of course, some changes. The rent rates fell for 15-20% in dollar terms. We have traditionally worked with hryvnias. So, naturally, we are carrying out the indexation. But this process is gradual. We understand that everyone has difficulties. And we are always trying to meet the wishes of our tenants; the client is of the ultimate importance for us.

- And for those projects that you are building, have you already adjusted the business plans?

- Business plans are reviewed, especially on rent rates, or rates of sale. We initially drew them up very conservatively. For example, a business center «Symphony», which will be built on Yaroslaviv Val Street, the cost of sales per square meter set at $ 4000. At the present, the market has not yet dropped to such price. Therefore, the business plan hasn't been adjusted yet. Of course, we have calculated the rent rates, but rather for the investor's information and understanding of the potential investments profitability. Taking into account current rent rates, profitability of such object has decreased to 10%. On the other hand, this is a normal rate of return for investments in real estate. With this conservative approach, none of the funds which work with us (neither the international Ukrainian Property Fund, nor our Ukrainian Fund «Universal»), haven't lost. It's simply because the objects, in which they invested, were evaluated and anticipated to be profitable for 25-30% per annum. And these projects are developing.

- What can you say about the attitudes of foreign funds? Has their interest declined in the assets in Ukraine?

- Speaking about our partners, I would say that they, on the contrary, have a great interest, because the Ukrainian real estate market today is the market of depreciated assets. If we talk about projects, today there is no concept of the entrance fee. Now nobody buys projects. If someone wants his plots and experience to offer to investors, he can count, at best, on the joint project realization and division of income with the investor at the end of its implementation. And for serious investors, this is a very positive signal.

- Are you considering the possibility of buying some assets?

- We consider and more than that, we buy. For example, we are ready to enter into projects that need to be finished, but certainly at a very low price. There is a demand for such assistance today. We consider also the various debt objects which the companies need to sell urgently. Recently we have bought some land plots in this way. They were sold at very low cost, and we need them for hotels. We try to buy only what we need for implementation of our plans. The market is very interesting now. And this situation will remain at least till the end of the year. And I think that one can buy cheap all these «expensive» land plots now and next year too. Because it's hardly to imagine that anyone will be able to sell the air in the next few years at a high price.

- When, according to your calculations, will the market growth begin?

- We should wait for 3-5 years. Even if the banks have some funds, the policy regarding the issuance of these funds will be very rigid and conservative. Therefore, there would be no place for speculators, and it is unlikely that someone will be in this play. According to our estimates, the real market can alive in the next year. But this will be a market of the real economy, the market of those who built, bring operation, lease, and earn reasonable money for this. Is that bad? I think it's good ...

Leonid Bogdanov is CEO of UDC Holding, Ukraine. Master's degree in Economics. Since 1991, he is in charge of the IT, financial and construction companies.

UDC Holding (Universal Development & Construction Holding) incorporates several companies that have worked on the real estate market in Ukraine since 1998. Today, it comprises over 20 companies, among them are well-known companies from Lviv as CJSC "GBK Vash Dim", CJSC "Tehnopark LZTA", CJSC "Redan", CJSC "Progrestehbud" and a range of structures in Kiev with the "Universal Development Company" and LLC "Kvartal-bud" in charge. The company's portfolio includes business center "Symphony" (B+ class, Kyiv, total area - 10 000 sq.m.), commercial and office center "Poznyaky" (Kyiv, total area - 7925 sq.m.), cottage village "Letki" (Kyiv Region, Letki Village), hotel and recreation complex "Slavsko", residential area for 7000 inhabitants in Lviv, and also a range of residential and office complexes in the West Ukraine regions (Uzhgorod, Mukachevo, Rovno, Lviv, Ivano-Frankivsk). In 2008 the company signed an agreement with the French company Accor on construction and building of the 25 hotel chain under the Etap Hotel brand. The first phase will consist of the construction of 4 hotels in Kiev, Lviv, Odessa and Kharkiv.