How has war in Ukraine affected its property market?

Russia's full-scale invasion of Ukraine two years ago has had far-reaching consequences for the latter's economy and real-estate market.

A vast number of real estate assets have been damaged and destroyed and almost 5m citizens have been internally displaced and left homeless, while another 6m have emigrated abroad with no certainty of returning. 

Yet the economy continues to operate, and the process of restoring and replacing damaged and destroyed real estate is already under way. 

Unit sales rose significantly from 2017 through 2021, before declining just as significantly in 2022 as a result of the invasion.

During 2022, total sales declined to 355,100 units – less than 40% of the 915,200 units for 2021, according to the Ukrainian Ministry of Justice. 

Since then, territories in the north, east and south-east of Ukraine have become combat zones, resulting in migration from these areas to the EU and other countries, as well as internal migration to the central and western regions of Ukraine. Out of a total population of 40m, around 10m have left Ukraine and 5m have been internally displaced in the past ten years.

For the last two years, all civilian airports have been closed and passenger and cargo traffic has moved to road and rail transport over the western borders with Poland, Slovakia, Hungary, Moldova and Romania. 

The increased flow of freight by road across these borders has led to greater demand for fuel stations and railway service facilities, as well as the construction of dry warehouses for grain exports.

By contrast, warehouses for imported goods near airports and the Black Sea remain almost empty. The opening of a Black Sea grain corridor and temporary routes have increased the demand for export warehouses in the Odesa region, though.

Perhaps most significantly, Ukraine lost almost 35% of its territory in the invasion and when this territory was partially liberated, almost all forms of property there had been damaged or destroyed, often by the retreating invaders. Some cities, such as Severodonetsk and Bakhmut, do not have a single undamaged building left.

As of January 2024, there are 1.328m damaged properties totalling 131.9m² of floorspace, of which 2.8m² has been destroyed and a similar amount damaged. 

The value of damages need to be assessed according to the International Valuation Standards and RICS Valuation – Global standards (Red Book Global Standards), which to date they have not been.

The way location affects value is clearly demonstrated in Table 1. 

At present, capitalisation rates for housing in Kyiv range from 5% to 6%, although before the full scale invasion the range was 10% to 12%.

This decline is due to the following factors:

• most housing purchased is by investors for rent to internally displaced persons
• investors are waiting for the war to end and real-estate prices to rise
• investors are buying higher-quality real estate as well as furnishings; many of these are sold by those who emigrated and do not plan to return
• there are impediments to withdrawing funds abroad for any real estate sold.

In the frontline regions, rents have declined to the cost of utilities, where tenants pay bills but no rent. 

In the central regions, vacancies have reached 50% and rental prices fell to around $10 per m² per month for class A buildings, i.e. modern premises that offer top-notch amenities and facilities, along with advanced infrastructure and a central location. There are very few contracts for sale.

The retail sector has experienced reduced consumer demand for food and other products. Retail rental prices have also decreased, not only in eastern but also central Ukraine. For example, retail lease agreements in Kyiv currently do not exceed $15–$17 per m² per month.

Demand for hotel real estate in the western regions has increased significantly because of the large number of internally displaced people. In Kyiv, five-star hotels are also in demand from foreign journalists, diplomatic delegations and international volunteer organisations. 

Meanwhile, as of June 2022, the Kyiv district (oblast) had suffered the destruction of about 382,000m² of various types of logistics and warehouse space. 

Despite rents for remaining space having declined in Kyiv and Kyiv oblast as tenants continue to move their businesses closer to the western border, demand has also continued to decline significantly in the central regions.

By contrast, prices for manufacturing and warehouses in western Ukraine have increased significantly, particularly in Lviv and Lviv oblast, where sales prices have increased to a range of $1,000–$1,200 per m².