Ukraine's Zelensky promises 'no oligarchs!' as its economy and housing market gather pace
Lalaine C. Delmendo | August 02, 2021
“With the exception of 2020, which was an outlier, demand for housing in Ukraine has been rising slowly from year to year,” said the National Bank of Ukraine in its June 2021 Financial Stability Report. “Although prices are actively increasing, housing remains reasonably affordable by historical standards because house prices and household income are growing at comparable rates.”
Even though Ukraine's economy is now recovering – it is expected to grow by an average of 4% over the next 4 years - one must bear in mind the structural obstacles. Nowhere in Emerging Europe, where countries have adopted the Westernising approach, are oligarchs and the associated corruption as dominant as in Ukraine.
In April 2019, television comedian Volodymyr Zelensky won the presidential run-off in a landslide anti-corruption victory, which rather ignored his close friendship with his previous boss and friend, corrupt oligarch Ihor Kolomoisky. Now he is distancing himself from Kolomoisky and encouraging Congress to bring in an “oligarch law”, to block oligarchs from financing political parties, and he promises “There will be no influence on mass media, no influence on politics, no influence on officials.”
We shall see. Ukraine's oligarchs dominate the country's economic and political life, own political parties and television stations, and hold huge influence on judges and other high-ranking government officials.
Still, despite these structural obstacles and the fallout from the recent war, Ukraine seems to be recovering. Existing apartment prices in Kiev rose by 5.3% during the year to Q2 2021 (0.5% in real terms), to an average of US$1,087 per square metre (sq. m.) – its best showing since Q2 2013, according to S&V Development. During the latest quarter, existing apartment prices rose slightly by 0.6% (-1.7% in real terms).
Likewise, newly-built apartment prices in Kiev increased 5.2% y-o-y in Q2 2021 (0.3% in real terms), to US$975 per sq. m., also its biggest annual growth in eight years. On a quarterly basis, newly-built apartment prices rose by 0.5% in Q2 2021 (-1.8% in real terms).
Residential property prices had been falling for more than six years (Q1 2014-Q1 2020), particularly in 2014 (with prices plunging 36.6%) because of the hryvnia's devaluation due to the Russian war.
In Q1 2021, the number of housing purchases was almost one-tenth higher than the first-quarter average for five years, according to the National Bank Ukraine. Last year, purchasing activity had dropped 7.8% from a year earlier due to the pandemic.
Demand is expected to continue rising modestly in coming years. “This growth is being propelled by the gradual revival in mortgage lending and the rapid growth in household income,” said the central bank. “Housing demand is also being whipped up by lower deposit rates, which are encouraging some of those who have significant savings to look for alternative ways to invest.”
In January 2021, the government introduced an affordable mortgage lending program to reduce the cost of mortgage loans and simplify the criteria for borrowers. The program offers an interest rate as low as 7% - significantly lower than the average interest rate for housing loans of 12% in June 2021.
“This program could boost demand for mortgages significantly,” said the central bank. “Since the banks alone bear credit risks under the program, they continue to apply their current approaches to assessing the creditworthiness of borrowers.”
There are no major restrictions on foreigners buying property in Ukraine. All secondary residential transactions (i.e., resales) are in US dollars, while primary sales are quoted in hryvnia, but still paid in dollars.
Ukraine's overall economy is projected to grow by an average of 4% in the next three years, following a 4.2% contraction in 2020.
Yields in Ukraine are excellent
Yields in Kiev range from 7.50% - 10.2%, by Global Property Guide estimates. The average price per square metre (sq. m) of apartments is around €2,930.
Please note however that our yields data for Ukraine is now very old. They were last updated in January 2007, and the recent price rises mean that these figures may no longer be accurate.
Taxes in Ukraine are moderate to high
Rental Income: Gross rental income of nonresident foreigners is generally taxed at a flat rate of 18%. Leasing a property is also subject to 20% VAT.
Capital Gains: Capital gains gains realized by nonresidents from selling real estate property are generally taxed at 18%. The sale of buildings or premises is also subject to 20% VAT.
Inheritance: Inheritance tax is imposed at a flat rate of 30% if the successor is a nonresident and the benefactor of Ukrainian property is also a nonresident.
Residents: Residents are taxed on their worldwide income at a flat rate of 18%.
Buying costs are low in Ukraine
Roundtrip transaction costs, i.e., the total cost of buying and selling a property, are around 5% to 7% of the property value. The agent's commission is around 3% to 5% of the property value. Other costs include pension fund levy (1%), state duty (1%) and registration fees.
Ukraine's tenancy law is pro-landlord
Rent: Rent and rent increases can be freely negotiated. The parties may agree on the procedures for periodic rent increases (i.e. depending on inflation). This must be stipulated in the lease contract.
Tenant Eviction: A landlord can terminate a lease without prior notice and without application to the courts, if the tenant has failed to pay rent for three consecutive months.
Economy to rebound, inflation accelerating againUkraine’s economy contracted by 4.2% during 2020, following annual expansions of 3.2% in 2019 and 3.4% in 2018. This year Ukraine’s economy is set to rebound, with real GDP growth forecast at 4% by the International Monetary Fund (IMF).
“Consumer demand will continue to be its main driver. The gradual revival in investment activity as the global economy recovers and the pandemic subsides will also contribute to economic growth,” said the National Bank of Ukraine.
Though major risks to Ukraine’s return to growth are the country’s slow progress on reform and vaccination, as well as the reimposition of quarantine measures.
Last year the IMF approved an 18-month US$5 billion standby arrangement for Ukraine to help cope with the coronavirus pandemic.
The country is expected to record a current account deficit of 0.4% of GDP this year, mainly driven by increasing domestic demand, improving tourism, and higher dividend payments. The deficit will widen further in the coming years as a result of continued growth in domestic demand.
Nationwide inflation accelerated to 9.5% in June 2021, sharply up from just 2.4% a year earlier, amidst rising global food and petroleum prices, according to the NBU. Inflation slowed to 2.7% last year, from an annual average of 18% from 2014 to 2019.
Rapidly rising consumer prices prompted the central bank to raise its key policy rate to 8% in July 2021, its third rate hike this year, and it has signalled another hike was likely to keep a lid on rising prices.
Unemployment remains high at 10.5% in Q1 2021, up from 10.1% in the previous quarter and 9.9% a year earlier, according to State Statistics Service.