The geopolitical situation in Ukraine and the potential conflict with Russia had a profound effect on the Moldovan real estate market in 2022 and 2023. As tensions escalated in the region, there were notable changes in market dynamics and demand for new developments. Here are some key impacts:
Temporarily Increased Demand for Real Estate from Ukrainian Buyers and Renters: As a result of the unstable situation in Ukraine, many Ukrainians sought refuge and stability in neighboring countries, including Moldova. This led to a significant temporary rise in demand for residential properties as these individuals looked for fast housing solutions. The increased demand also drove up the prices of rental properties in Moldova, particularly in the capital city Chisinau. But in 2023 most of those Ukrainians moved on to other EU countries.
Shift in Foreign Investment: The geopolitical instability in the region made investors and local market participants more cautious about investing in areas with potential exposure to conflict. As a result, some foreign investment that might have been directed towards Moldova was redirected to other safer markets. This led to a slowdown in development projects, particularly in the commercial and industrial sectors.
Infrastructure Development: Due to the potential conflict, there was greater emphasis on improving Moldova’s infrastructure to ensure a reliable connection to the European Union and other neighboring countries. This spurred the development of new transportation and logistics facilities, further influencing the industrial real estate market.
Uncertainty and Market Volatility: While there were some positive impacts, the geopolitical situation also introduced a degree of uncertainty and volatility to the Moldovan real estate market. Investors and developers made more conservative investment decisions to minimize potential risks. This cautious approach may have slowed down some projects or limited the growth of certain market segments.
Adjustments in Down Payments: The uncertainty and market volatility caused by the geopolitical situation prompted changes in down payment requirements for reserving new apartments from real estate developers. In an attempt to maintain interest and investment, developers lowered down payments from 50% to 10-20%. While this strategy helped to keep the market active, it also resulted in cash flow issues for local real estate developers in Moldova. With less upfront capital available, developers faced challenges in financing their projects and ensuring timely completion.
In light of the geopolitical situation in Ukraine and the potential conflict with Russia in 2023, the Moldovan real estate market underwent notable shifts and adaptations. While increased demand for housing from Ukrainian buyers and redirected foreign investment offered positive outcomes, the market also confronted challenges such as infrastructure development, lowered down payments making precise and well-planned financial planning for developers a crucial requirement to avoid possible cash flow issues and difficulties in fulfilling its obligations. Despite these obstacles, the Moldovan real estate market demonstrated resilience and continued growth, as players in the industry navigated the changing landscape and responded to the evolving needs of the market.
Developments with Kirsan projects in Moldova
In 2020, our venture into the Moldovan real estate market coincided with a rapidly evolving industry that showed a strong direction towards integration with the European Union, led by its new Pro-European president and government. This created an opportunity to capitalize on significant growth potential due to the current level of property prices.
Great start and potential for future
During the first two years, the real estate market witnessed impressive growth and numerous projects were completed successfully. The market’s fruitful forecast was similar to Estonia’s surge after joining the European Union in 2004. Property prices increased year-by-year over 25% in those two years indicating a 55-60% increase in absolute numbers, yet compared to other European markets, Moldova’s remained relatively undeveloped, a factor which presents opportunities for further expansion.
Although we believe that the market will continue to develop, we must recognize that Moldova’s general conditions have undergone some unforeseen changes in the past year. The emerging markets generally offer greater returns and profit margins but often come with reduced stability. We aimed to minimize the instability risk by choosing to work with one established developer with a great track record, instead of several smaller developers. We developed a strong partnership and everything was going well, until the escalation of geopolitical crises stunned the whole world.
Changing market conditions and first signs of issues
While there were no direct signs of any real issues in the first half of 2022, the problems started to arise in the second half of the year. The developer was facing cash flow issues, due to the changing market conditions coming from the consumer’s uncertainty. At first there were just small delays and we worked closely with the developer to help them overcome this situation.
Despite the full funding amount released for some projects according to the agreed terms, that were also presented to the investors, they requested more time and additional funding to complete the ongoing projects. Several late stages were refinanced on the platform, to give the developer more time to finalize ongoing projects. We continued negotiating and working out a solution, prioritizing the security of our investors’ capital. We needed the developer to fulfill their part of the agreements to continue in this direction, unfortunately we did not see the expected progress from their side.
Negotiations and the recovery process
We continued to negotiate with the developer, throughout this communication the developer made a lot of promises to start making the late interest payments. The last payment of interests was made in late January for the Green Park project, to cover the October and November interests. It was something that showed intention to fulfill the obligations, but later we understood that the expectation was that we continue funding projects that already were fully funded according to the agreed terms.
Our goal with the negotiations was to find a speedy solution, without extensive legal actions. But at the beginning of 2023 it became less likely that we will achieve a reasonable agreement with the developer. Since then we have been exploring legal options, working closely with law offices in Estonia and Moldova. Throughout this process the lawyers have strictly recommended us to not make those details public yet, as it could potentially harm and extend this process.
Our top priority is to find a speedy solution to this situation, and in terms of timeline, achieving an agreement with the borrower would be the fastest. But, as explained above, we are not waiting for it to happen, but putting a lot of effort and focus on the legal side of things to protect our investors capital and force Kirsan to fulfill their obligations.