Author: Khazar AKHUNDOV
The COVID-19 pandemic and the collapse of oil prices, which plunged the global economy into a long recession, had a very negative effect on the real estate market. Decrease in demand is observed all over the world from Europe and the US to China and the post-Soviet space. Azerbaijan could not ignore these negative processes, where the dynamics of real estate sales has significantly decreased since the beginning of the year, while the lockdown and the falling market demand force construction companies to freeze activities. However, state measures to support mortgage projects and social construction to some extent help reduce the scale of losses.
Statistics on record
The construction sector and the residential real estate market of Azerbaijan are very sensitive to changes in the world oil market. It is not surprising that during the global energy crisis of 2015-2017, budget cuts in capital construction caused a protracted recession in the construction sector. It was not possible to correct the situation in 2018. Then, this segment of economy recorded a decline of 9%. A similar negative trend was also observed during 2019 (more than 5%).
Ultimately, the 2015 crisis affected the housing segment as well, including the effect of a double devaluation of the national currency (manat), which, given the high dollarization of the economy, led to a significant increase in prices in the real estate market and reduced the popular demand.
Although Azerbaijan could not reverse the general slowdown in the construction sector, there have been positive changes in the housing construction in 2018-2019, which is many times ahead of the general development rate of the industry. To a large extent, these processes were due to the stabilisation of mortgage financing and the projects involving the demolition of dilapidated housing and old Soviet-type five-story buildings, the construction of social apartments through MIDA LLC, which helped keep the construction companies afloat.
The presidential decree “On the simplification of issuing permits for the operation of certain multi-apartment buildings”, dated February 19, 2019, played an instrumental role in supporting the housing construction. Thus, according to the decree, multi-apartment residential buildings with all the construction and installation works completed until January 1, 2019 and residents already living in them were granted the right to receive permits for operation. These measures allowed a four-fold increase in statistical indicators for the total area of housing commissioned in 2019 compared to 2018. The effect of this decree can also be seen today, under the conditions of a noticeable decrease in the activity of construction companies. So, the total area of housing commissioned in January-April 2020 exceeded 2.3 million sq.m, which is 3.9 times more than the indicators of the first four months of 2019.
Nevertheless, the statistical data does not reflect the real picture of the industry's development, because most of the commissioned multi-apartment buildings were constructed much earlier. Since then, the buildings were included in the list of ‘frozen’ construction facilities. Therefore, delays in their acceptance by the relevant authority was due to identified drawbacks or other objective reasons. In other words, the statistical data for 2019 and the beginning of 2020 covers the indicators of registration and commissioning of residential buildings built in the past years.
Therefore, the data of the State Statistics Committee provides a more realistic picture of the dynamics of the development in the housing segment. In January-April 2020, capital investments in the housing construction reached ₼406 million (growth by 15.5%). This is a very good indicator in the current conditions, but not comparable to the record levels given above.
Most experts believe that according to the results of 2020, a slowdown is expected in the development of the construction industry, in particular the housing segment, due to persistent negative trends in the real estate market observed in March and early April of the current year. Amid the ongoing oil crisis and the COVID-19 pandemic, the sales of residential and commercial real estate were almost completely discontinued. This was largely due to quarantine restrictions, as it was extremely difficult to buy and sell real estate because the activities of real estate companies and valuation specialists were banned.
The situation partially improved in the second half of April and in May: in the secondary housing market prices rose by 2.5%, in the primary housing market - by 2.76%, in the land market - by 9.12%. After a significant drop in March (6.2%), in April-May, rental prices for apartments in Baku increased by 3%. There is also a relatively high interest in renting cottages and low-rise houses, as well as buying land plots in the suburbs of Baku. Partially, these processes are explained by the approaching vacation season. This traditional interest is also associated with the continuing quarantine restrictions in foreign tourism, which makes vacations on the Absheron peninsula one of the few alternatives.
A slight increase in apartment and land prices, as well as in rental prices for metropolitan housing are mainly due to structural changes in the real estate market. Experts explain this not by an increase in real demand, but by a decrease in supply. According to the general director of the consulting company MBA Group, real estate expert Nusret Ibrahimov, citizens who sell their houses and land plots prefer to take a short pause during the pandemic, hence withdrawing their properties from sale in anticipation of a more favourable market situation. “First of all, this concerns the reduction in the supply of budget housing, thereby increasing the number of expensive apartments in the total portfolio of proposals, which ultimately led to a rise in price in the market,” Mr. Ibrahimov believes.
Interestingly, we cannot see the same trend in the segment of commercial property rental. In April, the segment recorded a decrease of 2.53% due to quarantine restrictions on the activities of catering facilities, malls, tourist offices and a number of other companies, as well as the general slowdown in economic activities amidst a growing recession. According to experts, the number of proposals for renting commercial real estate significantly exceeds demand and, most likely, this trend will continue until the end of the year. To stimulate market demand for commercial real estate and support small tenants, the Ministry of Economy included a clause in the ‘Mechanism of Tax Incentives and Vacations for SMEs Working In Areas Affected by the Pandemic’, which reduces the existing tax rate on individuals renting real estate property from 14% to 7%.
Saving the sector
Normalisation of activities in the residential and commercial real estate market partly depends on the duration of the quarantine regime. According to N. Ibrahimov, if quarantine restrictions last no more than three months, and the volume of the housing portfolio and market activity gradually increase, then in general a significant price adjustment will be avoided. If the negative trends caused by the COVID-19 pandemic continue until the end of the year and beyond, real estate prices may decrease by 20 percent or more. Mr. Ibrahimov believes that it is currently difficult to draw any long-term conclusions, but a decline in the real estate market is inevitable amid the declining household incomes.
An equally important factor affecting the real estate market, according to experts, is the pace of stabilisation of the global oil market, which largely determines Azerbaijan's income and the positive balance of payments. Reduction in foreign exchange earnings from foreign countries due to the decrease in non-oil exports also contributes to the ongoing process negatively. Until recently, along with the development of import substitution projects, this was a driver for the capitalisation of the construction sector. The banking sector is also very passive, with the share of construction and real estate loans in the first quarter of 2020 equal to 3% only (₼468.4 million). Moreover, the Azerbaijani banks provide a minimal number of products in this segment with almost the entire amount of financing involved in the state mortgage system.
The situation is getting worse due to the underdeveloped securities market covering the construction sector, ineffective housing certificate mechanism, limited access to the resources of private mutual investment funds and other financial instruments that can provide low-interest and long-term credit lines for the industry. All these gaps reinforce the dependence of private construction companies on volatile market conditions and deprive them of the flexibility to manoeuvrer in the times of crisis.
Under the circumstances, the state, which implements a number of programs to stimulate the industry, still acts as a guarantor for the construction sector.
For example, the state investment in social construction projects implemented by one of the divisions of the State Agency for Housing Construction, MIDA LLC, has increased. Currently, the agency is implementing two projects in the Yasamal district of Baku and one in the village of Hovsan. Recently, MIDA signed a contract worth ₼7.5 million for the construction of two nine-story two-block houses in Sumgayit on a land plot of 0.76 hectares. In the near future, MIDA will spend about ₼33 million for the construction of power supply systems for nine social houses in the city of Ganja. Today, MIDA acts as the largest state customer in the capital and regional construction markets, whose contracts have provided work for almost a dozen and a half housing and communal services. So, a total of several dozen contracts have been concluded for the construction of schools, kindergartens, roads and high-rise buildings in social housing complexes.
No less important is the state support for the demolition of dilapidated housing and panel five-story buildings in Baku, the modern development of urban neighbourhoods, which ultimately stimulates the activities of housing cooperatives. The program started in 2016 at the height of the energy crisis. Of the more than 3,000 buildings identified as unsuitable for operation, almost 1,200 have already been demolished. Despite the current crisis and the difficult situation on the construction market, in March-May of 2020, the construction of multi-story buildings on the site of demolished five-story buildings continued.
No mortgage but leasing
Azerbaijan Mortgage and Credit Guarantee Fund (AMCGF), which increased its portfolio of housing loans in 1Q2020, plays the most important role in maintaining the tone of the real estate market. Thus, in January-March 2020, AMCGF agent banks issued mortgages in the amount of ₼54.4 million, which is 3.2% more than in the same period of 2019. Despite the insignificant growth rate, this is a positive signal for the market, given that last year the fund observed a decline in mortgage lending by almost a third, not to mention the current problems caused by the COVID-19 pandemic.
Last year, about half of the total lending was state-funded social mortgages, due to a decrease in demand for financing under commercial terms. This negative trend was also observed in 1Q2020: AMCGF refinanced loans in the amount of ₼7.3 million - a decrease of 89.7% compared to the same period in 2019. During the reporting period, the fund also could not raise funds from the placement of bonds.
Despite the difficulties in attracting financing, AMCGF is successfully introducing new mortgage mechanisms with the expectation of increasing market demand in the near future. In particular, the fund is establishing a housing leasing system that provides for the rental of real estate on certain conditions, followed by redemption and registration of ownership.
In order to ensure the successful introduction of the mechanism, the fund specialists completed the development of procedures and internal rules, determined the requirements for tenants and living spaces, completely automated the workflow, and set up a rental housing fund. According to data announced at the beginning of 2020, it was planned to lease 331 apartments at the initial stage with a sale obligation, and by the end of 2020 the number of leasing agreements could increase to 1,600. Monthly payment of apartments offered under the housing rental mechanism will start from ₼411 in Baku, ₼333 in Khirdalan and ₼297 in Sumgayit. By early March, over 5,400 citizens had filed an electronic application for a module for rental housing through the Electronic Mortgage and Credit Guarantee system, and this process continues. Given the economic problems and the pandemic situation, it is difficult to make assumptions on the speed of development of the new AMCGF leasing project, since much depends on maintaining the stability of the monetary situation in the country and the state budget's ability to support the project at the initial stage.
However, there is no doubt that after the coronavirus pandemic and stabilisation in the global oil market, the scale of mortgage lending, together with a new apartment leasing mechanism and social housing construction projects, will increase. So, the measures taken by the government will determine the dynamics of the development of the real estate market in Azerbaijan.