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Real estate prices in Baku rise thanks to demand fuelled by economic growth forecasts after pandemic

Author:

15.05.2021

After a prolong decline in sales during the pandemic, the real estate market in Azerbaijan shows the signs of revival. A steady upward trend in prices is observed in the most capitalized segment of the market. It is supported by the increased market demand as compared to the last year, as well as a noticeable decline in supplies from construction companies. Global changes, including the rise in energy prices and increased inflationary expectations, also indirectly contribute to the rise of price tags for apartments.

 

Deferred demand

Past year turned out to be very difficult for the global real estate market. Faced with falling oil prices and the coronavirus pandemic, Azerbaijan also experienced the negative trends. Periodic lockdowns, numerous restrictions on trade and services brought down the market for the sale and rental of commercial real estate. Transition to online education has significantly reduced the student housing market. Among other things, the ban on the activities of real estate companies and appraisers paralysed the real estate market too. All these facts decreased demand for the purchase of apartments, hence collapsing the indicators of the construction sector, which is highly dependent on market conditions. As a result, by the end of 2020, real estate prices decreased by 9-16%, depending on the market segment.

However, as of 1Q2021, combination of external and internal factors contributes to the growth of market activity, pushing the deferred consumer demand up. These positive factors primarily include the rise in prices for Brent crude, which recently approached the landmark level of $70. Stable oil prices have always been a driver for the Azerbaijani economy, strengthened the exchange rate of the national currency, and, most importantly, increased the attractiveness of real estate investments.

On the other hand, the growth of imported inflation since the beginning of 2021 also affects the housing market, as more expensive imported products such as cars and other consumer goods subsequently adjust the apartment prices. Finally, the success of the mass vaccination campaign started in January promises the imminent lifting of lockdown restrictions, resumption of the activity of malls, tourist sector, and the non-oil sector in general. These are the factors that objectively contribute to the increased interest in the real estate market.

 

Decline in construction sector

In January-February 2021, the primary housing market in Baku grew by 4%. Private houses and summer cottages, which are in special demand during the pandemic, increased in price by 8.9% on annual average, while housing in the secondary segment grew by more than 8%. General Director of the consulting company MBA, real estate expert Nusrat Ibrahimov also noted the rise in prices for land plots, as well as a slight increase in the price of commercial properties. Yet the lease of this type of property did not show a significant progress in terms of price.

In general, as of May, the housing market in Baku still shows a tendency for growing prices, which , to a certain extent, can be explained by qualitative changes in the market structure. After the 2014-2016 energy crisis, the volume of unsold apartments in new buildings and the relatively good dynamics of residential construction in Baku showed a significant increase in the supply of new apartments. Situation changed in 2020, when the lockdown paused the operations on construction sites, hence reducing the volume of commissioned housing. Moreover, the trend continued in 2021. According to the State Statistics Committee, the total volume of commissioned housing in January-March 2021 reached 481,800 square metres (46.4% less annually). For comparison, in 1Q2020, this indicator reached 899,600 square metres.

According to experts, the decline in the construction sector is associated not so much with the pandemic factor as with a number of other objective reasons due to the growing construction costs. In particular, in Baku, the number of land plots suitable for construction in the historical centre of the city and in areas close to the down-town has decreased. We can observe excessive overpricing of such sites, not to mention the rise in prices for building materials throughout the year. Situation is further complicated as the State Committee for Urban Planning and Architecture, the regulator overseeing the construction sector, has become more demanding in terms of the standards the construction companies must implement. For example, it is not allowed any more (when the regulator was the Mayor’s Office of Baku) to compact the construction area with non-residential facilities. Now the regulator applies a coefficient of 2.8, which shows how many times the area of housing can exceed the area of the site on which it is constructed. Thus, construction companies may build on average 25,000-30,000 square meters of housing on one hectare of the area compared to 40,000-50,000 square meters previously. This difference increased the cost of housing, which in some cases made construction unprofitable in the down-town area with its excessively expensive land. Moreover, the demand for budget housing has increased significantly, equally pushing the demand for more expensive apartments down.

 

Market saves social housing

Azerbaijan Mortgage and Loan Guarantee Fund (AMLGF) also contributes to easing the difficult situation in the real estate market. Thus, in January-February 2021, AMLGF’s agent banks issued mortgage loans for ₼57.7 million, which is 2.2 times more than the indicator of the same period last year. Public interest in commercial mortgages today is quite low compared to highly demanded social loans.

In fact, thanks to ₼161 million provided by the state budget to finance the social mortgage pool, AMLGF ended the past year positively. The fund could also attract significant funds from the market after issuing bonds providing housing loans for a total of ₼257.5 million.

A significant portion of the AMLGF funds is not focused on the very expensive primary real estate of construction cooperatives or a considerable part of the overvalued secondary market. In addition, the rules regulating social mortgage are limited by the maximum cost of housing. Given the decrease in the number of budget apartments, the market choice has significantly narrowed.

At the same time, the total amount of funds allocated annually for social mortgage depends on the objective capabilities of the state budget. We cannot expect a sharp growth in this area in the future, especially amid significant pressure on the state budget due to the large-scale financing of construction projects in the liberated territories of Garabagh.

As for social housing projects, the scale of construction of budget apartments by MIDA LLC, a subdivision of the State Housing Construction Agency, also does not meet the steady demand of the population for cheap housing. At the beginning of 2021, Finance Minister Samir Sharifov noted that ₼152 million were allocated from the state budget to address the issues of social housing construction. The government also uses extra-budgetary provisions for this purpose. Obviously, the amounts allocated for social housing construction in Azerbaijan are quite high.

MIDA has been a contractor for the construction of residential complexes since 2016. Its operations are quite impressive. For five years, the agency has constructed housing complexes in the Yasamal district and in the village of Hovsan of Baku. Today it is implementing the second phase of Yasamal-2 and Hovsan-2, and is also building multi-storey buildings in Sumgayit and Ganja. Another projected is planned to start in Lankaran.

Nevertheless, only a limited category of citizens, such as young professionals, scientists, civil servants, veterans, etc., has the right to purchase such affordable apartments. At the same time, more than 4,800 apartments (2,200 of them have already been distributed) are claimed by 16,600 beneficiary-citizens.

Obviously, residential buildings constructed by MIDA have a certain impact on the market preventing commercial construction companies from increasing prices. But to make this work an effective factor in balancing supply and demand in the local real estate market, a larger scale of operations is required. For example, the creation of a savings-construction (accumulation) bank based on the post-war German model, which would significantly increase the volume of lending and financing for the construction of mass budget housing. But so far, unfortunately, this is a matter of distant future.



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