Recently, I came across a lively discussion on social media about a certain issue, and it went like this: “There is a war in the country, the real estate market is not even operating at half capacity, and prices are rising. Who will buy it?”. I have an answer: they are and will continue to grow, because no one has canceled the laws of the market. Another question is what to do with the limited effective demand. In my opinion, the answers should be sought within the market, not outside, relying solely on reparations or government support. Let’s go through everything in order.
Why prices are rising
The key factor affecting the price of a square meter has been and remains the growth of construction costs and related expenses, primarily influenced by inflationary processes. Let me just remind you that we had almost 27% inflation in annual terms. The price tag is also driven up by contract extensions and sometimes by radical changes in supply chains due to the loss of capacity of certain building materials producers in the southern and eastern regions and the relocation of many businesses. We should also mention the cost of labor, which increased by an average of 37%, and we should not forget about the costs of fuel and lubricants, machinery, and goods and services of 40 related industries involved in housing construction. Hyperinflation and exchange rate fluctuations have hit the market.
For your understanding: last year, the weighted average cost of housing construction increased by at least 45%. In some categories of building materials, we saw growth of 30-70%. Concrete, glass, putty, wood, and iron are the record holders. This directly affects the price of a square meter.
What to do with real demand
At the same time, limited effective demand in the market, and even almost zero sales in some stagnant periods, is a constraint on price growth. In some months, if the company sold 5-10 apartments per month, it was already a success and an indicator that people trust the brand and believe in the product.
All this time, it was necessary to continue building so that people had time to adapt, to make sure that the actions were firm, that they were being built and would be completed, that it was not in words but in actions. Nothing says it better than your product, its format and liquidity, as well as the real construction dynamics on the site.
By the way, the situation with real demand has been improving since the end of winter. And in the spring months, the team managed to return more than a third of the pre-war figures, despite the complexity of the situation.
Why did we succeed? I believe that a combination of factors worked here, which can be scaled up further if desired:
1. We resumed construction in June 2022 and, despite all the difficulties of the first year of the full-scale war, we persevered and commissioned 19 thousand square meters.
2. Investors saw that the company was working and gradually began to pay under installment agreements. As a result, if at the beginning of the full-scale invasion only 10% of installment agreements were paid on time, now this figure reaches 50%.
Exactly half of those who bought real estate from us are not waiting for the war to end and are already fulfilling their obligations. They see that every hryvnia from their pockets is actually spent on the construction of their own home, not just a new pit. We are now working to ensure that by the end of the year the percentage of those who pay under installment agreements will be at the level of 80-90%.
3. We have developed financial instruments to support and stimulate demand.
For example, in October-December, we offered special conditions for debt repayment and early repayment of installment plans. We offered a favorable exchange rate, for example, UAH 33-34/$, and debt restructuring to start making payments. We launched a guaranteed yield program at 10% per annum in dollars, a trade-in program.
Of course, it is too early to dream about the volume of transactions that we had before the war. The market’s recovery and potential will directly depend on the Ukrainian Armed Forces’ counteroffensive, or rather, on its results and timing. We can already see that psychologically, buyers and investors are gradually ready to return to the market if there is a complete coincidence in their expectations in the price-value-construction time axis and real dynamics.
Author: Alexander Nasikovsky, Managing Partner of DIM Group of Companies.
