MORTGAGE IN DEMAND

By the end of last year, the Azerbaijan Mortgage Fund (AMF) managed to extend a record amount of housing loans worth nearly 113m manats - for the first time since 2010. This positive trend has been consolidated as the volume of housing loans provided in the first third of the current year is by almost 31 per cent higher than that in the corresponding period last year. Economic recovery of the real estate market speeds up the adoption of a set of measures within the framework of a new programme of social and commercial mortgages, which is being developed by the Central Bank and the AMF.

Since its inception in March 2006, and up till now, the AMF that operates under the Central Bank has granted loans for a total of 587m manats, and the number of people who took out a mortgage to buy housing exceeded 14,800. The peak was in 2010, when lending amounted to 97m manats. In subsequent years, due to a number of objective reasons, mortgages gradually declined reaching just under 75m manats in 2012.

To overcome inertia, a series of measures were adopted last year to simplify mortgage terms. The first step was a February decree of Azerbaijani President Ilham Aliyev, pursuant to which the maximum size of a soft loan under the social mortgage was increased from 35,000 to 50,000 manats, certain loan provision terms were eased and an Electronic Mortgage system was created. These and other measures allowed the AMF to increase mortgage lending by a factor of 1.5. Slightly less than 3,000 people received loans for a total of 112.9m manats. Thus, the peak performance indicator of four years ago was surpassed with a considerable margin.

It is noteworthy that according to projections for 2013, the volume of mortgage lending was expected to be in the range of 100m manats, including 40m manats in state-funded social mortgages.

Similar mortgage lending parameters are stipulated in the State Budget Law for 2014: 40m manats is earmarked to cover social mortgages and another 100m manats is planned to be attracted through commercial mortgages. However, it cannot be excluded that the actual volume of housing loans will again exceed the projected figures, since banks that are AMF agents have extended 42m manats in loans in the first third of the year alone, which is a 30.8 per cent increase on the same period last year.

Growth in mortgage lending also relies on the increasing volume of refinancing, which allowed the AMF to exceed the projected target in 2013. Thus, the amount of funds accumulated due to loan repayment reached 86.9m manats last year and in addition, the AMF raised 57m manats in bonds. A similar trend was observed in the first third of this year: the amount of mortgage refinancing totalled 38m manats and bonds were placed for 20m manats. These extra-budgetary funds allow the AMF to be flexible in responding to market needs and expand lending in the commercial mortgage segment.

Another equally important factor of effective activity of the AMF is a stable market demand for credit. The main stimulus for the economic recovery of construction and real estate companies is the increased activity of the population with a stable income - civil servants and employees of large private companies who are the main users of mortgage loans for buying apartments.

Another category of mortgage loan consumers are owners of houses that are being demolished in connection with a large-scale effort to eliminate dilapidated housing in the centre of Baku, land acquisition for the expansion of roads, the construction of metro stations, parks, shopping centres, etc. Owners of the demolished housing are provided with weighty compensation, and citizens who gained the initial capital often turn to banks-AMF agents for additional mortgage loans to buy better and more spacious accommodations.

The growing demand for housing is corroborated by the statistics of the Central Bank of Azerbaijan (CBA): in 2013, the country's real estate market turnover reached 4bn manats, which is higher by 41 per cent compared to the previous year.

However, the feverish demand for housing observed in the last year and a half, and therefore the rise in prices, is in no way associated with a deficit of apartments or decrease in the volume of construction. Quite the opposite: in 2013, the construction sector supported by consumer demand reached an unprecedented level of housing construction in the entire post-Soviet history. In particular, more than 2.138m sq. m of housing was commissioned last year, which is by 22 per cent higher than in 2012. These figures clearly indicate that the domestic construction industry is able to increase production in spite of negative global trends.

Maintaining the current trends in the housing development and real estate market throughout 2014 and over the next few years will create good conditions for the expansion of activity of the Azerbaijan Mortgage Fund. There are numerous untapped opportunities in this sphere, given that the share of mortgage loans (provided by both the AMF and own bank programmes) is about 5 per cent on average of the total turnover of the real estate market based on the results of the past and current years.

The above statistics clearly demonstrate that the funds currently allocated for mortgage lending are unable to solve the longstanding problem of housing in the short term. The Central Bank believes that mortgage services should not be developed exclusively by increasing the amount of budgetary funds, even less so by siphoning here the oil money accumulated in the state reserve funds. "We need to create a mechanism of public-private partnership that can become a long-term basis for solving housing problems of citizens," Central Bank Chairman Elman Rustamov said. In other words, in the case of adoption of a new scheme the State would take it upon itself to stimulate the construction of relatively cheap but comfortable apartments and provide support to private entities that are interested in supplying long-term money to banks or subsidising mortgage interest.

"Meanwhile, the role of citizens will be reduced to participation in the construction and savings banks after the model of post-war Germany, which has proved its effectiveness. That is, should such a mechanism be created, mortgages will automatically be registered with the appropriate bank deposits," the CBA governor said, adding that such proposals were discussed with the Ministry of Finance and that the international experience in this field was also studied.