Property will be cheaper
However, no spasmodic, abrupt or gradual fall in house prices is expected in Azerbaijan
Author: Ilaha Mammadli Baku
"Real estate can only rise in price, other scenarios are simply impossible," for a long time this notion seemed unshakeable. Even slight falls in price on the domestic market, have been perceived as "irregularities" – see, there is no decline in prices on the market in the US and Western Europe, and everything is going up. The real estate market is one of the most advanced and fastest growing sectors of the economy in Azerbaijan. Although the bulk of investment in real estate in the country still comes from local players, prospects in the residential and commercial real estate markets in Azerbaijan attract foreign investors as well. However, the global crisis has shaken the housing market, even though it had only a slight affect on the Azerbaijani economy as a whole. How noticeable will be the drop in value of houses and apartments in the near future? This may be the issue of most concern to market participants and the people of the country. According to expert forecasts by MBA Group chairman, Nusrat Ibrahimov, no spasmodic, abrupt or gradual fall in apartment prices is expected in Azerbaijan. Factors of decline To begin with, we should note that in 10 months of 2009, the price of secondary housing fell by 14.1 per cent and that of primary housing by 18.5 per cent. Land prices fell by 17.9 per cent compared with the beginning of the year. By the way, of all market segments, the biggest decline in activity was noted on the land market – by 2.2-2.5 times on an annualized basis (for comparison, this figure was 18-20 per cent in the housing market). On the secondary market, the price of one square metre amounted on average to 1,379 dollars over the 10 months, whereas on the primary market, one square metre was worth 890 dollars. And the price of one hundred square metres of land in Baku was, on average, about 17,782 dollars. At present, the market is relatively stable, both in prices and in the number of sales transactions. This situation, according to analysts, will certainly last at least until the second half of 2010. The thing is that price changes on the real estate market are affected on the one hand by global processes and, on the other, by the internal economic and social situation, in particular the level of employment, the amount of money in circulation and the prices of construction materials. All these factors, accompanied by a lack of strict state control in the construction sector (i.e., anyone could carry out construction work on the market), led to a massive inflow of capital into the market in 2002, and to a 2.5-fold increase in activity, in terms of time, and a fourfold increase in the cost of real estate. Today, however, control over the sector is tighter, due to increased quality requirements for new construction projects, for compliance with safety and environmental standards, a strengthening of the tax administration etc. For example, requirements imposed in recent years include a ban on the construction of buildings over 12 storeys, a requirement to suit the facades of new residential buildings to the appearance of the capital, as well as compliance with other architectural rules, the need to maintain the correct distance between houses etc. In addition, in late 2007 the number of buildings under construction was also restricted. Whereas, earlier, permission had been granted for the construction of 250-300 residential buildings in a year, since the end of 2007 construction companies have been able to get permission to build a new house only after completing those already under construction. Only those companies whose quality indicators meet today's requirements can build new buildings. Thus not everyone can enter the market. On the other hand, global processes, in particular the notorious crisis, which affected the amount of cash flowing into the country, led to a reduction in activity and in market prices. For example, while, earlier, the period of exposure during the sale of land in Baku was up to two months, today this period is 5-6 times longer which, in turn, means higher risk. Regarding the volume of funds flowing into the country, reduced remittances from abroad, mainly from Russia and Ukraine, played an important role here. According to experts' estimates, in about 10 regions of the country - Mingacevir, Xacmaz, Quba, Lankaran and others - 70-80 per cent of investments in real estate were from financial resources earned by our compatriots abroad. According to the Central Bank, remittances from individuals into the country declined by 16 per cent in January-September, totalling $845 million dollars. There are also changes in the structure of employment, which is an important factor. Earlier, this figure was very low in the country’s regions and the opposite in Baku, which led to a large influx of people from the regions into the capital. This, in turn, led to an increase in demand for rental housing and in the number of sales transactions. However, work carried out under the state programme for the socioeconomic development of the regions led to the creation of new jobs in the regions and, to some extent, reduced the inflow of people into the capital. Further, as already indicated above, housing prices also vary according to changes in the prices of construction materials; they comprise 45 per cent of the value of housing. Thus, due to the decline in prices of building materials alone, as of 1 November 2009, the annual price of one square metre of housing fell by 6.2-6.3 per cent. By all rules In essence, the real estate market in Azerbaijan is still in a formative stage and, accordingly, the structuring of its participants is not yet complete. While the banking, insurance and evaluation components of this chain have almost taken shape, the formation of real estate companies is still in process; this also affects sales. Indeed, in many respects, real estate brokers - middlemen in the process of buying and selling - also influence the setting of prices and, in general, the presence of a good many incompetent people in this area has negative consequences. "There are about 800 real estate companies with their own offices in our city. In total, we have about 6,000 brokers working individually," says Ibrahimov. The fact is that there is no requirement for realtors to be professionally trained, but, according to Ibrahimov, the situation will change with the adoption of amendments to the law "On valuation activities" and the law "On real estate activity". Thus, according to draft documents: first, realtors should be represented by a regulatory body; second, a three-year career will be a prerequisite and third, they should have an appropriate university degree (economic, legal or engineering). In addition, realtors will be required to attend training courses every three years to obtain a certificate of conformity. In recent years, it has also become important to establish a single base in Azerbaijan for the country’s real estate market. The base will include data on buying, selling and renting real estate in all regions of the republic. All the information will flow to Baku from representatives of the Baku Association of Realtors in the regions. A common information base for the real estate market will assist people in acquiring, selling and renting residential and commercial real estate and land. A special website will provide information on supply and demand on the market, anywhere in Azerbaijan. The base will be used by banks, insurance and construction companies etc. The advantages of the system are obvious, but its execution may be delayed for several years, since it directly depends on market growth and project financing opportunities. The fact that, in Baku today, sellers' demands are almost double their customers' buying capacity adds fuel to the fire. At present, an ordinary buyer can spend up to $700 on the purchase of one square metre of housing. Therefore, to return a potential client to the real estate market, it is necessary either to reduce inflated prices to reasonable levels, or to increase purchasing power by broadening the availability of mortgage loans. As for projections, experts believe that the real property market in Azerbaijan will revive significantly only in 2013 and, in 2010, market activity will remain at current levels.