R&D cen­ters in Kyiv are at­trac­tive, but hard to find

Kyiv Post Legal Quarterly - - News - By Aisha Down down@kyiv­post.com

In 2016, when Eric­s­son, the Swedish multi­na­tional telecom­mu­ni­ca­tions com­pany, ac­quired Ericpol, a Pol­ish soft­ware com­pany with a branch in Lviv, they knew that ex­pand­ing their work in Ukraine was a good idea.

Like many other multi­na­tional com­pa­nies, Eric­s­son was at­tracted by Ukraine’s sur­plus of in­for­ma­tion tech­nol­ogy tal­ent, and wanted to set up a re­search and de­vel­op­ment cen­ter. IT is a boom­ing mar­ket, ac­count­ing for

In­for­ma­tion tech­nol­ogy, one of Ukraine's fastest-grow­ing eco­nomic sec­tors, ac­counts for 3.5 per­cent of the na­tion's eco­nomic out­put. IT com­pa­nies are also driv­ing de­mand for mod­ern of­fice com­plexes.

an es­ti­mated $3.2 bil­lion — or 3.3 per­cent — of the na­tion's an­nual eco­nomic out­put.

“Ukraine is an im­por­tant mar­ket for Eric­s­son,” Iryna Shadeyko, Eric­s­son’s communications man­ager, told the Kyiv Post. “Our Lviv engi­neers have a high de­gree of com­pe­tence in soft­ware and prod­uct de­vel­op­ment.”

But, as a Swedish com­pany, Eric­s­son had a list of re- quire­ments. Build­ings needed to meet “Swedish stan­dards of qual­ity,” Olesya Se­merenko, Eric­s­son’s fa­cil­i­ties man­ager, said. That meant meet­ing 83 pages of tech­ni­cal requirements about the build­ing’s light­ing, ven­ti­la­tion and util­i­ties.

Of­fices had to be com­fort­able and sup­port “er­gonomic de­sign.”

That was a tall de­mand for Ukraine’s land­scape of hastily-erected busi­ness cen­ters and molder­ing his­toric build­ings. But one law firm — Al­cor — has made the of­fice needs of in­ter­na­tional R&D cen­ters into a prof­itable en­ter­prise.

With its slo­gan “Your own R&D cen­ter in Ukraine,” the firm now ser­vices in­ter­na­tional busi­nesses who want to set up an IT of­fice in Ukraine — ei­ther for tech sup­port, or as a re­search and prod­uct de­vel­op­ment cen­ter.

De­mand is grow­ing, says Dmitry Ovcharenko, Al­cor’s head, but find­ing qual­ity real es­tate is dif­fi­cult.

Happy IT work­ers

Eric­s­son isn’t Ovcharenko’s client. But, with eight years in the busi­ness of find­ing of­fice real es­tate for IT com­pa­nies, he’s re­ceived his share of very spe­cific re­quests.

“We had one client who in­sisted on an of­fice only in the area of the metro of Lva Tol­stoho. Only in that district. They could pay any kind of money, but only there,” he said.

Another IT client was sure they’d be a “uni­corn” — a startup com­pany val­ued at more than a bil­lion of dol­lars — in a year. They gave Ovcharenko a list of cri­te­ria, he said, and told him if they liked the build­ing enough, they were pre­pared to “push out” all its other res­i­dents.

Over-the-top as these re­quests may seem, Ovcharenko says there’s a rea­son be­hind them.

“IT tal­ent is the only re­source that U.S., North Amer­i­can com­pa­nies are in­ter­ested in in Ukraine,” he says. “They need to fight for it. One of the in­stru­ments of this fight are cozy and com­fort­able of­fices.”

That said, Ovcharenko char­ac­ter­izes most of his client’s de­mands as pretty stan­dard: A-class real es­tate, in a down­town busi­ness cen­ter like Leonardo or Gul­liver.

Af­ford­able prop­erty

In many ways, these of­fices are a good deal for in­ter­na­tional clients, as high-qual­ity real es­tate is rel­a­tively in­ex­pen­sive in Kyiv com­pared to other Euro­pean cap­i­tals.

Data from JLL, a real es­tate ser­vices and in­vest­ment com­pany, puts the av­er­age price of A-class real es­tate at $348 per square me­ter per year — less than a quar­ter of Lon­don’s prices, though slightly more than of­fice space costs in War­saw and Bu­dapest.

Mean­while, land­lords are happy to ac­com­mo­date client de­mands, rent­ing them smaller parts of a floor of a busi­ness cen­ter. They prize in­ter­na­tional clients, says Ovcharenko.

“IT com­pa­nies in Ukraine ex­pe­ri­ence re­ally ag­gres­sive growth,” he said. “They start with 10 peo­ple… but by the end of the cal­en­dar year they might rent the whole floor.” Alexan­dra Globina, head of JLL’S of­fice group, agrees. “Land­lords highly ap­pre­ci­ate for­eign ten­ants, since they are sta­ble and re­li­able part­ners in the long-term per­spec­tive,” she says.

Trou­ble brew­ing

Al­though land­lords are friendly and prices are low, costs are mov­ing up.

The av­er­age rent price — $348 per square me­ter per year — has crept up for the first time in five years, ac­cord­ing to JLL. In the last quar­ter of 2017, the av­er­age price was just $336 per square me­ter per year.

The in­crease, while small, sig­nals a short­age of good real es­tate.

JLL puts of­fice va­cancy in Kyiv at 10.6 per­cent, “a record low in a decade.”

Nick Cot­ton, a part­ner at Cush­man and Wake­field, a real es­tate ser­vices com­pany, says the va­cancy rate is more like 6 to 7 per­cent. For Al­cor, this has meant a ma­jor busi­ness slow­down. “Some years ago, given two or three weeks, we could come up with a few good so­lu­tions,” says Ovcharenko. “Now, it takes us two or three months to se­cure an of­fice. Some­times longer. Four months. Five months, in some cases.”

Limited space

The rea­son, ac­cord­ing to Ovcharenko and Cot­ton, is straight­for­ward: there are few new of­fices be­ing built. With no credit op­tions in Ukraine’s mar­ket, de­vel­op­ers who want to build real es­tate have to fi­nance it en­tirely by them­selves, says Cot­ton.

And with Kyiv’s rent prices at a flat­line for the past three years, that’s not an ap­peal­ing path, says Cot­ton.

Ovcharenko be­lieves that some so­lu­tion is com­ing. He points at UNIT City and Lviv IT district, two large de­vel­op­ments de­signed to house Ukraine’s grow­ing IT in­dus­try.

At 300,000 square me­ters, UNIT city can house hun­dreds of IT com­pa­nies, says Ovcharenko.

But it isn’t enough. Lviv IT City, he says, is al­ready en­tirely pre-leased.

“There’s still a big need for other de­vel­op­ers. We need more real es­tate premises. Not just in Kyiv, but in all big cities,” he says.

With few new de­vel­op­ments, of­fice space is get­ting in­creas­ingly hard to find in down­town Kyiv. (Volodymyr Petrov)

Of­fice space in Kyiv is pre­dom­i­nantly oc­cu­pied by in­for­ma­tion and com­mu­ni­ca­tion tech­nol­ogy com­pa­nies such as Life­cell, Netcracker and Mi­crosoft cov­er­ing al­most half of the mar­ket. Busi­ness ser­vice com­pa­nies like Cre­ative Quar­ter and Cowork­ing Plat­forma make up the se­cond most pop­u­lar sec­tor tak­ing up a 16-per­cent share of the mar­ket.

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