The devaluation of hryvnia, the reduction of deposit rates, the lack of clarity on prospects of the economy and when the pandemic will end once again actualized the topic of investment. The bank deposit's profitability no longer manage expectations. Gold, bonds and other financial instruments are often too complicated for understanding and require professional advice and assistance. Thus, our compatriots traditionally choose the investments in real estate. In this article, we tried to gain insight on where it is best for the Ukrainian private investor to invest money, and whether the investment in housing will really be justified in 2020?
Oles Romanyshyn, Managing Partner of ARPA Investments figuratively compares the real estate market for Ukrainians with the stock market for Americans.
"If an American has money, he will rather form a portfolio of shares than buy an apartment. Real estate as an investment is quite complex and expensive product for them. In Ukraine, everything is exactly vice versa. To buy an apartment for the purpose of obtaining passive income from rent is our real 'stock market'.
Deposits, gold, bonds
Probably the biggest competitor to real estate is traditionally considered a deposit. There were times when interest rates were really impressive, however, and the risks were quite high. Just last month, the Deposit Insurance Fund reminded depositors of the completion of the liquidation of 45 banks out of 95 that have been placed under its management since 2014. Regardless of the number of deposits, depositors of these banks will be able to recover only 200 thousand hryvnias to the greatest possible extent. But today, risking money like this no longer looks inviting. Interest rates on deposits in both hryvnia and foreign currency show a steady decline.
"According to the Liga.Finance, deposit rates were in the range of 6.15 – 9.56% (in UAH) and 0.55-1.97% (in USD) in June of this year, depending on the deposit period "
Investments in precious metals, bonds and cryptocurrencies are not so popular, but still take place. However, the returns on buying gold largely depends on the methods of investment (current account, coins, production), legislation, exchange rate volatility, storage and spread between buying and selling rates, financial stability of banks, and many other factors that the investor will have to figure out. But, most importantly, the returns on buying gold will not be received immediately. Basically, such investments are recommended for protecting some part of the capital, but not to increase it.
You can't manage without a broker when purchasing of domestic government bonds. But the most important point in this case is the factor of confidence in the emitent, in other words, in the state. But is there one? In addition, this instrument is most vulnerable to a variety of related internal and external factors. Thus, if in 2019 the returns on domestic government bonds showed a good advantage over deposits, this year it has equaled them. And the fact that the world economy has plunged into recession and many experts believe that the stock market is overvalued, creates additional risks for the profitability of this instrument.
As for cryptocurrencies, they do not have a defined legal status in Ukraine. Here, you should keep in mind the exchange rate volatility, the spread, and many other factors, including: the volume of exchange trades, various legislative initiatives and the sensitivity of cryptocurrency rates to news. And the cryptocurrency market itself is highly speculative and reluctant to qualitative modeling and analysis.
Real estate. Is there enough for everyone?
In general, experts agree that the volume of the real estate market of the capital and its agglomeration in 2019 amounted to approximately 6 billion US dollars.
"The volume of the real estate market of the capital and its agglomeration in 2019 amounted to approximately 6 billion US dollars"
Thus, according to the portal Address.ua, 67-72 thousand transactions were concluded in the real estate market of Kyiv and its agglomeration in 2019: 34-36 thousand in the primary and 33-36 thousand in the secondary real estate markets.
If you look at the chart with the number of commissioned apartments in the period of 2010-2019, it can be clearly seen that last year, only in the primary market, significantly more objects were purchased than commissioned. Basically, the demand for new build housing twice exceeded the supply.
The chart with the median price also illustrates the fact that the market has started to revive and prices have started to rise.
According to Denys Halitsyn, the Head of Business Development of the Address.ua: "the current year has made adjustments to the dynamics of the real estate market. Many expected a significant drop in prices due to its glut and uncertainty. However, this did not happen. As can be seen from the charts, the median price per square meter of residential real estate, especially in the primary market, has gone up and is, in fact, catching up with the indicators of 2015. In addition, in 2019, for the first time in the past few years, more apartments were sold than commissioned".
Real estate. Looking for profitability
In a growing market, the most profitable option has traditionally been to buy housing on a primary real estate market at the stage of foundation pit construction and resell the property after it was commissioned. In this case, the return on investment could reach up to 30%. But not everyone was lucky. The most common risks are paused construction and delayed completion dates due to falling market prices. There are enough such cases in Kyiv. Among the last big one – bankruptcy of Ukrbud and the subsequent uncertainty regarding the completion of construction work on its facilities. Ukrbud investors had already lost a lot considering the wasted time and a gradual weakening of hryvnia.
A profit of 30-35% can be obtained by choosing the Flip the House strategy – the purchase of real estate for reconstruction for quick resale. The key point of this strategy is to catch a price that is much lower than the market one. However, often a very low price may be accompanied by legal disputes between previous owners, not quite a clean history, and many other problems that the new owner will have to face with. In addition, it is necessary to remember about the significant time and financial costs to be spent on reconstruction and repair.
Buying property with the aim of renting it out has become the most popular trend of recent years, especially in the capital. It is also clear and familiar as an investment option to the Ukrainian investor. The trigger for this type of investment was the migration of the population from the Eastern regions of the country and the sharply increased demand for rental housing in the capital.
According to Volodymyr Trybrat, Managing Partner of Billion Estate and investment Fund B-Club, "any crisis is favorable for those who have accumulated liquidity. The returns on banking transactions has almost "melted" and real estate will certainly benefit in the coming years. At the same time, the purchase of property with subsequent renting out will bring more advantages, but the risks for investors are much less if they purchase already built housing." In this case, according to the expert, we should think about profitability considering the time period of 5-10 years.
Address.ua analysts decided to analyze 10 residential complexes in the capital, the objects in which meet the most frequent requests to the portal (price, area, class), and calculate what rental yield can be expected and what will be the payback period for such investments?
Thus, the comparative analysis includes apartments with a total area from 24 to 60 square meters in the price range of 29 to 76 thousand US dollars in the following residential complexes: commissioned – Metropolis, Comfort Town, apartment complex "DA!", Standard One, Elyseum; announced for commissioning in 2020 and 2021 – Vlasna kvartyra, Teremky, Nova Anhliia, Nyvky-Park, Syretski Sady.
It turned out that with an expected rental rate of 7500 – 13500 hryvnia per month, the average profitability of apartments in this selection ranges from 7.0% -11.2%, and their payback ranges from 9 to 14.3 years.
We publish the TOP 3 of the top ten, profitability of which is comparable to or higher than the bank deposit.
Residential complex Vlasna kvartyra
4 quarter of 2021
(without furniture and appliances)
Area -24 m2
Price – $ 28.6 thousand.*
Furnishing – $ 5.6 thousand.*
The property yield:
The expected rental rate per month is UAH 7 500.
The lessor's yield per year (gross yield) – UAH 90 000 .
The apartment's payback period is 10, 2 years
Profitability – 9.8 % per annum (excluding the waiting period for commissioning and repair time)
Residential complex Teremky
Commissioning 4 quarter of 2021
(repair, plumbing, but without furniture and appliances)
Area -37 m2
Price – $ 48.1 thousand.*
Furnishing – $ 5.6 thousand* (only furniture and appliances)
The property yield:
The expected rental rate per month is UAH 10 000 .
The lessor's yield per year (gross yield) – UAH 120 000 .
The apartment's payback period is 12,1 years
Profitability – 8,3 % per annum (excluding the waiting period for commissioning and repair time)
The apartment complex "DA!”
Commissioned and equipped with furniture and appliances
Area -29.9 m2
Cost – UAH 819 184 .
The property yield:
The expected rental rate per month is UAH 7 615.
The lessor's yield per year (gross yield) – UAH 91 380.
The apartment's payback period is 9 years
Profitability – 11,2%
According to Denys Halitsyn, the analysis of residential complexes demonstrates a clear trend: less area – higher profitability – faster payback. A good profitability of 9.8% and return on investment within 10 years is potentially shown by the Residential Complex Vlasna kvartyra, but on the condition that the complex will be commissioned at the end of 2021. As we can see, a little behind, but also quite competitive to the bank deposit were apartments in the Residential Complex Teremky with profitability of 8.3%. However, you should also wait for commissioning in 2021.
The leader of the rating was the new Apartment Complex "DA!", which offers investors a monthly income of 11.2% with a payback period of 9 years. Its distinctive feature is that the objects here are sold with existing lease agreements and real tenants.
More recently, a serious competitor to long-term rentals was the daily rent, the yield of which could reach 16%. The lockdown, the lack of internal and external tourists and business travelers led to the fact that the daily rent, in fact, failed and its investment cycle in most cases showed lower returns than long-term rentals. In addition, daily rent is still a fully fledged operating business, which needs to involve specialists. It is extremely difficult to deal with it independently.
Market analysts like to advise to keep your savings in different baskets. They are definitely right about this. But while the storm is raging and fewer market participants believe in a rapid economic recovery after the crisis, it would be a good idea to find the most "safe havens" for investment. There are almost no such left in Ukrainian reality. And in this case, residential real estate may be qualified for one of them.
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