Lviv Real Estate - Top 10 Investor Tips
Lviv Real Estate - Top 10 Investor Tips
A thriving IT industry, close links to the EU and an expected international tourism boom make now the ideal time to invest in Ukraine’s fairytale city
While Lviv is only Ukraine’s seventh largest city, it has established itself as the country’s No.2 real estate market. These top 10 tips should provide some insight into the many Lviv-specific factors that make the west Ukrainian capital such an attractive but challenging city for potential investors.
1. Lviv’s Diverse Architecture is a European Treasure
Given the scale of the devastation throughout Ukraine during World War II, it is difficult to comprehend how Lviv’s beautiful Old Town emerged virtually untouched by the ravages of the conflict. Unsurprisingly, Lviv’s pristine historical center features on the UNESCO World Heritage list. This large area encompasses over 300 acres (120 hectares). Here you will find examples of Gothic architecture like the Latin Cathedral, alongside Renaissance pearls such as the Black House on Market Square. Much of Lviv’s Old Town gained its Renaissance style from Italian architects imported to the city following the Great Fire of 1527. There are buildings in Baroque style such as the Peter and Paul Church on Teatralna Street, and of course, numerous highly ornamental Art Nouveau buildings with decorative ironwork, glass, ceramic tiles and brickwork built when Lviv was part of the Austro-Hungarian Empire. There are also buildings dating from the Interwar period (1918 to 1939) such as the wonderful Jonasz Sprecher building on Mitskevych Square. Few cities anywhere in the world can match this ensemble.
2. Older Apartments Present “Historic” Opportunities
While Lviv’s historical architecture was fortunate to escape the destruction of World War II, time and lack of proper maintenance have not necessarily been kind to the apartments in Lviv’s Old Town. Many if not most of them require a complete renovation. If you are considering buying and renovating one of these gems, it is important to engage a professional for a thorough technical audit prior to purchase. You should find a skilled contractor with experience renovating historical buildings. Potential pitfalls include energy inefficiency and old wooden floors that require replacement. Many older apartments in Lviv were once part of larger apartments and as a result can have poor sound isolation and odd layouts. The high ceilings of older apartments can be glorious, but also add to energy inefficiency.
Technically, Lviv has regulations that require owners of apartments in historical buildings to replace their windows only with wooden windows that have the same look as the original windows. However, a quick browse around Lviv’s Old Town will show you that violations of this rule are numerous and enforcement has been incredibly lax. Nevertheless, in recent years there have been anecdotal accounts of increased enforcement, especially for apartments with windows facing Lviv’s Market Square.
The electrical load capacity of most historical buildings in Lviv can be woefully inadequate for modern living unless they have already been subject to thorough reconstruction. You should keep in mind that you need permission and cooperation from the local utilities service to make this upgrade. This can be a particularly important consideration if you are planning to buy space on the first floor of one of these buildings in order to lease it out as commercial space.
The roofs, stairways and entrances of Lviv’s historical buildings can be in terrible condition due to inadequate maintenance. If you are looking to renovate these areas at your own expense, you should be aware that many of your neighbors could be penniless pensioners who will not have the means to share the costs of renovating common areas with you. While your contractor may be able to help you with solutions that do not require replacing the roof, a complete renovation of your building’s roof would definitely upgrade the value of your investment. Moreover, in some cases, the roofs of some older buildings in Lviv’s Old Town have undergone renovation with grants from the Lviv municipal authorities and the German organization GIZ, so you should also investigate if this is possible for a building that you are considering for investment.
Leaky roofs, the ravages of time and, on many occasions, the ill-advised removal of load-bearing walls have all compromised the structural integrity of many of Lviv’s historical buildings, making their rehabilitation a special renovation challenge. The appropriate building technologies and methods exist to mitigate such structural damage, but you should select an accomplished contractor and prepare yourself for the additional expense of doing this properly.
For decades, Lviv residents suffered from water outages due to the city’s “historical” sewage system that included wooden pipes from Austro-Hungarian times. In recent years, the water and sewage systems have undergone renovation. However, the sewage lines inside many of Lviv’s old buildings still require replacement.
In addition to poor sewage lines, many older buildings in Lviv do not have secure entrance areas. If you buy real estate in one in these buildings, you will also want to consider securing the entrance area and rehabilitating the stairway. The original stairways of Lviv’s historical buildings can be quite beautiful, but some of them are wooden and will need more than a cosmetic renovation. Lastly, cobblestone streets add to Lviv’s charm but they can create a lot of noise for residents, particularly for those who live along the routes of trams and bus lines.
3. Look Beyond Lviv’s Historic Heart
Numerous examples of stunning but dilapidated historical architecture, especially Art Nouveau buildings, lie well beyond Lviv’s Market Square and Prospect Svobody – the relatively tiny central area most popular with tourists. Until recently, only these tourist spots were renovation targets, but this situation is changing and gentrification is accelerating outward. For example, the Forum Lviv shopping center and Belgian Village apartments have expedited urban renewal in area about a 12-15 minute walk from Lviv’s Old Town to the north of the Opera House. The facades of older buildings on Pid Dubom Street opposite the mall have received a beautiful facelift. Once completed, the Forum Apartments complex opposite the shopping center will also provide an aesthetic boost to the neighborhood. In the very near future, it is easy to envision that nearby Dzherelna Street (towards Krakiv Market) and Kulisha Street will be prime candidates for investment and gentrification as they lie between the Forum Lviv oasis of development and the Opera House, Prospect Svobody and the heart of Lviv’s Old Town. With Lviv’s relative prosperity and huge inventory of historical buildings, we can expect similar redevelopment to proceed eastwards, westwards and south of Market Square and the city’s inner core.
4. Coming Soon: International Tourism Boom
According to Lviv’s center for tourism, the total amount visitors in 2017 was 2.6 million, which is the same as the 2016 total. However, average spending per visitor per day increased from EUR 49 to EUR 75. In 2017, Ukrainians represented over 41% of tourists in Lviv, while Poles and Belarusians represented about 22% and 8% respectively. Another 7.3% of 2017 visitors to Lviv were Turkish, and combined visitors from Germany, the US and UK accounted for just 7.1%. By comparison, nearby Krakow attracted a record 13 million visitors in 2017. While Lviv does not boast mega tourist attractions such as Krakow’s Auschwitz and the Wieliczka Salt Mine, Lviv’s rich history and huge Old Town mean there is much room for the growth of foreign tourism. The good news is that from October 2018, low-cost carrier Ryanair will begin five routes and fourteen weekly flights to Lviv. Following Ryanair’s announced market entry in Ukraine, existing low-cost carriers like WizzAir have expanded routes from Lviv. Even more low-cost carriers are likely to enter Lviv’s market in 2018 and 2019. This will likely fuel a new wave of tourism industry expansion.
5. Lviv IT Sector Drives Real Estate Demand
Together with tourism, IT forms the other pillar of Lviv’s current economic growth. By many estimates, Lviv’s IT industry currently occupies the No.2 position in Ukraine ahead of much larger Kharkiv, which has a population roughly twice that of Lviv. Lviv’s 30,000+ IT workers form the core of the city’s young middle class and drive demand for real estate in three key sectors: office space, new residential housing, and accommodation for business travelers.
Many of Lviv’s IT companies are growing at a rate of 10-12% per year. To meet the demand for future office space and to support further development of the city’s creative class, Lviv’s IT Cluster is leading a consortium of local companies and universities to build the Innovation District Park that will feature office space for 10,000 workers, a 100-room hotel and an “IT university.”
Lviv’s IT workers also represent the city’s most attractive middle class segment of home buyers and property investors. They overwhelmingly prefer to buy apartments in Lviv’s new buildings. This preference is due to the ability to buy at pre-construction and pre-commissioning prices, along with new infrastructure and parking spaces. By contrast, there is an acute deficit of parking in Lviv’s Old Town. Many residents of these new buildings tend to be twenty-something singles or young families. Unlike Kyiv, it is still possible to find affordable apartments in new buildings fairly close to Lviv’s downtown.
Lviv’s IT industry stimulates business travel to the city. Many IT companies rent several “corporate apartments” per month to host visitors from client companies. In many cases, the renovation quality of these apartments leaves a lot to be desired and almost none of them offer the services and amenities that you would find in a professionally run serviced apartment. Indeed, despite high levels of demand, serviced apartments are currently in extremely short supply on Lviv’s hospitality market.
6. Now is the Time to Buy
While we are not currently witnessing the absurdly low prices of the early 1990s, in 2018 prices of apartments in Lviv’s historical buildings remain well below the peaks reached in 2006-2007. Small fixer-upper apartments in the heart of Lviv’s Old Town are available for USD 900 to USD 1,300 per square meter. It is even possible to find central apartments with partial renovations in unique historical buildings for USD 1,500 to USD 1,800 per square meter. Why are local buyers not snapping up all of these attractive deals? One big reason is that Lviv’s most solvent middle and upper middle-class buyer segment is IT workers, who overwhelmingly prefer to buy property in Lviv’s new apartment developments for living and for investment. Many of these buyers are simply too busy or uninterested in taking on the special challenges of renovating an apartment in an historical building.
7. Expanding Demand for Commercial Space
Despite flat growth in the total visitors to Lviv in 2017, the 2018 market entry of low-cost carrier RyanAir (and others) will bring hundreds of thousands of new foreign visitors to Lviv. The average spend per day of these new guests will be two to three times higher than that of Ukrainian tourists, which will accelerate gentrification outward from Market Square and Prospect Svobody to provide more restaurants, cafes and shops to serve the new arrivals. This will increase demand for quality commercial space in Lviv’s Old Town and further afield.
Typically, the first floor of Lviv’s historical buildings is suitable for commercial space but may require additional investment. If you are planning to invest in a fixer-upper property in one of these older buildings, then you should keep in mind that all of the aforementioned challenges of renovating apartments in historical buildings also apply to commercial properties and there are certain things that require special consideration. For example, if you are planning to open restaurant or cafe, then you will need to increase the electrical load capacity of the property. You may wish to expand or move the entrance of a commercial property to make it more convenient for your clients. However, in most cases this will not be possible as Lviv’s historical buildings are subject to preservation restrictions.
8. Lviv’s Hotel Industry Offers Room for Growth
When analyzing Lviv’s tourism and hospitality market, it is useful to compare Lviv with Krakow - a nearby city across the border in Poland with a slightly larger population, a similar history and an attractive Old Town. In 2017, Lviv had only about 20% of the foreigner visitors that Krakow attracted (2.6 million vs. 13 million) and yet Lviv has around 39% of the total hotel rooms that Krakow has (4,132 rooms compared to 10,710 rooms ). At first glance, it would seem that Lviv has plenty of hotel rooms to support tourism growth in the near-term. However, Lviv has an acute lack of internationally branded hotels. Various plans are in progress but it remains far from certain that the local owners of hotel projects in Lviv will develop them as internationally branded hotels. Thus far, the owners of new hotels in Lviv have been more interested in spending money on luxurious renovations rather than investing in hiring and training personnel to ensure high service quality. For example, on average Europe’s hotels spend 35% of revenue on personnel, but in Lviv this number is 25% or lower at the city’s most expensive hotels. This undersupply of branded hotels in Lviv is a clear opportunity for investors. In the opinion of Lviv hotel consultant Ivan Loun, the first group to develop a large international-branded hotel in Lviv with a good location will quickly claim a large market share and enjoy pricing power over local competitors.
9. Demand for Daily Rentals
Unlike Kyiv, Lviv does not have sizable market demand for premium multi-bedroom long-term rental apartments. Even though Lviv is attracting more foreign investors, the lack of international schools in the city discourages expat managers of foreign companies from relocating to Lviv with their families. Instead, many expat managers who have children often fly home for the weekend and typically sign long-term rental agreements for relatively small apartments or elect to stay in hotels or daily rental apartments for shorter stays. However, the quantity of high-quality hotel rooms in Lviv is quite low and the renovation and service quality of most daily rental and short-stay apartments in Lviv is also far below the needs and expectations of foreign business travelers. According to Lviv’s center for tourism, approximately 28% of visitors to Lviv stayed in rental apartments, but given the size of the black and grey market in Ukraine, it is safe to assume that the real figure is probably much higher. However, most short-stay apartments in Lviv cater to local tourists who have lower budgets and modest expectations. The market entry of Ryanair in 2018 will bring an estimated 250,000 additional visitors to Lviv per year. This should stimulate demand for higher quality daily rental apartments. If you plan to invest in short-stay apartments with Western-style renovations in Lviv, then you should also target the city’s large IT companies, many of whom rent several apartments per month to accommodate clients, who often come for longer stays and would prefer to stay in apartments rather than in hotels.
10. Lviv Oblast Opportunities
The EU-Ukraine Association Agreement provides for increased trade ties and economic integration in a series of gradual steps. It is already paying dividends, with Ukraine’s exports to the EU increasing by 27% in 2017. During Medieval times, Lviv owed much of its prosperity to its fortunate location along trade routes connecting Europe and Asia. Today, history seems to be repeating itself as growing numbers of foreign manufacturers set up operations in Lviv Oblast to take advantage of Ukraine’s EU Association Agreement and gain quick access to EU markets. Downtown Lviv is only about 80km from the EU border, but today there is a shortage of industrial real estate for large production sites inside the Lviv city limits, so manufacturers are looking for sites in the towns of Lviv region, many of which are much closer to Poland. In addition to favorable geography, manufacturing wages in Lviv region are much lower than in neighboring Poland. As international investment expands in Lviv region, real estate investment opportunities will also grow.
Lviv Real Estate: 2018 and Beyond
In 2018, Lviv appears poised for further economic growth based on a combination of positive factors including tourism, IT services and manufacturing. Real estate investment opportunities in Lviv seem plentiful, with the hospitality sector, commercial real estate, and industrial real estate all bearing closer consideration. For investors who are especially captivated by Lviv’s historical architecture, perhaps now is the time to bet on Lviv’s future by buying part of its past.
Special thanks to Ivan Loun (hotel consultant at AstoriaHTL.com), Ihor Tsebriy (real estate investor), Areta Kovalsky (blogger @ Forgotten Galicia), and Aaron Fust and Leon Guerrero (Lion City daily rentals) for their contributions to this article.
About the author: Tim Louzonis ([email protected]) is a co-founder of AIM Realty Kiev and AIM Realty Lviv, real estate agencies that specialize in real estate for foreign investors and expats. Tim is a long-time expat with Ukrainian roots. He first came to Ukraine as an exchange student in 1993 and returned in 2008.