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Infrastructure Projects in Ukraine Expected to Boost Development of Commercial and Industrial Real Estate in 2018-2019

Infrastructure Projects in Ukraine Expected to Boost Development of Commercial and Industrial Real Estate in 2018-2019

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Many real estate experts and market players are upbeat about the positive trends on the Ukrainian real estate market, which is recovering after a significant downturn in 2013–2015. As the political and economic situation improves and the conflict in the south-west of the country stabilizes, foreign investors, attracted by market opportunities, are showing increasing interest in Ukraine.

At the end of 2017 and the beginning of 2018 the local real estate market recorded an increase in the volume of acquisition in the office, retail, and logistics sectors. This was driven by improved market dynamics and the intention of a number of banks to dispose of foreclosed assets. At the same time, increased tenant activity resulted in an almost 50% reduction of vacancies in the office sector year-on-year to 17%, and to 5% in the retail sector and 3.7% in logistics. Based on recent trends, many experts expect rents to increase in 2018 by 10–15%. The further development of the market, the launch of new development projects, and new acquisitions are also expected during the year.

To support these changes, Ukraine is rolling out a transformative program of infrastructure projects, which should become a driver for further development of the commercial and industrial real estate market. The government intends to renovate existing infrastructure and to build new transport, logistics, agricultural and energy facilities. Ambitious plans for the next several years include the development of a logistics park in the Lviv region, a new metro line in Kyiv, concessions for the USD 45 million modernization of the Kherson Sea Trade Port, the USD 250 million construction of new terminal and berths at Sea Port Olvia, the reconstruction of the Gostomel and Uzhgorod Airports, and the USD 150–300 million construction of a new runway at Boryspil International Airport.

Depending on the goals, type of infrastructure, and complexity, infrastructure projects in Ukraine are usually structured using a mix of general construction contracts, leases of state and municipal property and land, investment and services agreements, and sometimes concessions. 

Currently, most infrastructure projects in Ukraine are financed by the state and implemented on the basis of general construction agreements. Due to the lack of qualified local contractors able to implement such projects at the highest standards, foreign companies are sought after in Ukraine. As an example, a number of Turkish and Chinese companies recently won tenders for the reconstruction of roads and dredging works at the Yuzhny Sea Port. To further attract foreign investment, the government is adopting measures to relax the requirements for foreign companies to register a legal presence in Ukraine and to clarify the terms for construction licensing. The government and Ministry of Infrastructure of Ukraine recommend using FIDIC-based contracts for certain infrastructure projects financed from the state budget. It should be noted, however, that FIDIC contracts in Ukraine should be used with care, as they require significant adaptation to meet the requirements of Ukrainian law. 

When deciding to enter the Ukrainian market, foreign contractors should remember that design and construction activity in Ukraine is subject to licensing and that the form of their legal presence in Ukraine may have different implications when it comes to obtaining construction licenses, taxation, customs procedures, and property management. 

Many of the above-mentioned projects are planned to be structured as concessions. International financial institutions such as the World Bank, the EBRD, the EIB, and the IFC have already confirmed their readiness to provide financing for infrastructure projects. Recently, as a result of close cooperation among the EBRD, businesses, and the Ukrainian government, a new draft “On Concessions” law was adopted by parliament in the first reading. Among other things, the draft law aims to ensure a fair distribution of risks between the state and concessioner, to establish a clear procedure for the selection of concessioners, to enable a pledge of rights under concession agreements, and to make land allocation procedures less complicated. It also simplifies the procedure for obtaining construction permits, provides for the liberalization of the currency control regime for concessioners, and enables the transformation of a state property lease into a concession. 

The adoption of this draft law should give further impulse for concessions in Ukraine, while the implementation of infrastructure projects should have a further positive impact on the country’s economy and create opportunities for foreign contractors and investors to enter the local market and start doing business in Ukraine. 

By Oleg Matiusha, Head of Real Estate, Kinstellar Kyiv

This Article was originally published in Issue 5.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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