real estate market in Kiev: History and issues, The

Real Estate Issues, Summer 2002 by Roseman, Gary

THE MARKET IN KIEV

The real estate markets in the former Soviet republics are evolving. This article reviews some of the background and history of the Ukrainian housing market situation and concludes with some measurements of sizes and prices in the rental and sales markets so that the reader will have some quantifiable characteristics for possible comparisons to other markets. The focus of this article is primarily on the local market properties that affect Ukrainian citizens. The topic is of interest because housing constitutes a significant portion of a typical household's wealth in the Ukraine and other former communist and emerging market countries.

Many studies on East European real estate have focused on various problems that slow the development of these markets, such as the legal uncertainties in land ownership (Kaganova, 1998), the lack of mortgage markets comparable to those in the West and the complete absence of a secondary market' (Kaganova, 1998), and the undeveloped state of the appraisal industry (Levine, 1995). The Ukrainian market faces all of these difficulties.

BACKGROUND ON KIEV

The city of Kiev was home to the first organized eastern Slavic state, which reached prominence under Prince Vladimir in the 10th century. Mongols, Tatars, Poles, and Russians invaded the city in later centuries and while it remained a religious and cultural center, it began its renaissance only in the 17th century with the expansion of Russian power in Ukraine. By the 19th century, Kiev was a prosperous administrative, educational, and industrial center.

The Germans and Austro-Hungarians occupied the city in World War I and stayed there until 1919 when anarchists, Ukrainian nationalists, Bolsheviks, and anti-Bolsheviks all vied for power. The Bolsheviks won and Kiev lost its position as Ukrainian capital to Kharkov until 1934. During World War IL the Germans again occupied the city. Retreating Soviet forces left time-delayed bombs that destroyed buildings on the main thoroughfare, Khreshchatik Street. The Germans retaliated but Kiev gained a respite until November 1943, when Soviet advances and German retreats again destroyed parts of the city.

After the war, the Soviet government poured resources into rebuilding Kiev. These efforts included construction of an extensive subway system. Rising communist Nikita Khrushchev, who was head of the Ukrainian Communist Party, supervised the overall effort. Kiev was the third most populous city in the Soviet Union.

After the Ukrainian declaration of independence in August 1991, Kiev became the capital of Europe's second largest country in land area after Russia. Foreign embassies and representative offices of corporations eager to do business in a country of 52 million arrived. A shortage of suitable office space led these companies and embassies to move into renovated hotel suites, apartments, and offices in institutes. Recognizing that the demand for reasonable office space was growing while the supply was still small, builders embarked on a minor construction boom in the years that followed. Some of the funds for this construction were from local sources, some from Russian and Western sources. There were also Swiss and Cypriot investors who, according to widespread belief, funneled Ukrainian and Russian untaxed profits into real estate projects. The mild spurt, which was not much in comparison to the construction booms in Warsaw, Prague, Budapest, or Moscow, lasted until the Russian default of August 1998.

While the increased construction moderately increased the availability of office space for Western and Ukrainian companies, the residential offerings increased only slightly. There had been a housing shortage in Kiev with its artificially low Soviet rental payments system with the result that several generations of a family often shared the same apartment. Privatization of the housing stock was the first step toward the efficient rationing of housing, but the additional requisite conditions of a functioning banking system and legal support for contracts and property rights were absent. New owners who had no need for a three-room apartment in the center of the city were nevertheless reluctant to part with this asset without money up front. When housing sales did occur, the medium of exchange was often something other than Ukraine's first currency, which was a raffle ticket-- dimensioned and rapidly depreciating coupon for the proposed currency unit, the karbovonets. On September 1, 1996, after some months of stability with the karbovonets at a rate of approximately 176,000 to the dollar, the hryvna became the official currency at 1.76 hryvnas to the dollar. Gradually, with growth in the banking system and some limited recognition of property rights, some construction of apartments began. Still, the sale of existing apartment units remains hampered by the lack of both a foolproof title check system and a market for title insurance.

The municipality owns the common areas of a residential building, unless the whole building is privatized as a cooperative, which is not the usual case. The municipality assesses a fee to apartment owners for maintenance and cleaning of the common areas. The common lines for utilities and water/sewage are also municipal property. Given the state of municipal governments in Ukraine, this means that cleaning, repairs, and maintenance are often lacking.