NEW HOUSING FOR LOWER PRICES

The BakuBuild-2011 Exhibition, which was held in Baku, demonstrated that this annual event firmly holds the position of the largest and leading construction forum in the entire Caspian region. It is no accident that BakuBuild is also called Caspian Construction Week. Also, it is no accident that such a large forum is held in Azerbaijan.

The area of this year's exhibition increased by more than 20 per cent, while the number of participants rose as well - 24 of the 317 companies participated in BakuBuild for the first time. The exhibition is located in three halls of the Baku Expo Centre and on an external site.

Moreover, if a third of the exhibition area was occupied by Azerbaijani companies, more than half of it was allocated to companies from Europe, Turkey, China, Korea, Kuwait, UAE and other countries. About 15 per cent of the exhibition was occupied by firms from CIS countries and so-called near abroad.

The increasing number of participants and the great interest of foreign companies in the construction exhibition in Baku is an indicator of promising prospects for the industry in Azerbaijan.

This is also evidenced by the fact that since last year, there has been a steady growth in housing construction in Azerbaijan. And the construction of new housing is on the increase despite falling prices on the capital's real estate market, which has been going on for three years.

These seemingly conflicting facts are explained by the displacement of effective demand to the periphery, as well as by the implementation of the mortgage programme.

The growth of the global crisis

The world construction market, which is experiencing a slow recovery, has still not returned to the pre-crisis growth rates, while in Azerbaijan, housing construction has been showing a relatively high growth for the second year in a row. According to the State Statistics Committee, last year the country commissioned 1.8 million square metres of housing, which is 32 per cent more than in 2009. Moreover, housing commissioned last year is nearly 250 thousand square metres more than in the relatively prosperous pre-crisis year 2008.

The domestic construction sector, which includes over 1,500 companies and about 63.5 thousand people, managed to maintain this positive momentum in the current year. According to the State Statistics Committee, the volume of construction work in January-September 2011 increased by 24.5 per cent compared to last year. Considering the structure of building work, we can say that three-quarters of total investment accounted for new buildings, reconstruction and expansion of the area in projects that were launched earlier.

There are several reasons for the revival of the Azerbaijani housing sector. In particular, numerous construction sites, where multi-storey buildings were being built before the crisis, were reopened last year. Some of them were put into operation, and that helped improve the statistics. The pent-up demand factor also had an effect - if before the crisis the foundations of about 250 new high-rises were laid in Baku every year, in 2009 this figure dropped to two or three dozen. In the context of the general economic recovery supported by rising oil prices observed since the end of last year, as well as the confidently developing state mortgage programme, the number of solvent citizens has grown, encouraging developers who experienced difficult times to increase the pace of housing construction again. Finally, the most important trend in housing construction was the moving of the market trend to the periphery: against the background of increasingly cheap land plots and construction materials in regions, the volume of low-rise housing built by individual developers has increased. In any case, in the segment of high-rise buildings, the market demands affordable housing, which is why it is not surprising that over the past two years, the number of high-rises built in the fourth zone of the capital and suburban villages of Abseron has nearly doubled. Today, these two areas account for more than two thirds of the country's housing construction.

One more important fact is notable: today the volume of housing built in the capital is increasing against the background of an overall decline in property prices. Since the beginning of this year, the cost of apartments in new buildings in the capital has fallen on average, and only in September and October, was a slight seasonal increase recorded, which is why the average price per square metre is at the level of 837 manats. Buyers' interest in new buildings is ensured by the lingering large gap between the prices on the market of primary and secondary housing. And this difference is clearly not in favour of the latter, where the average price level was in the range of 1,345 dollars per square metre at the end of the third quarter.

More new buildings

According to the NGO Property Market Participants (PMP), at the beginning of the year, 442 new buildings of varying degrees of readiness were put on sale in Baku (work on 81 per cent of buildings was completed). For comparison, at the beginning of October this year, their number fell to 426, which in itself testifies to the low rate of the sale of new housing. High-rises in the capital are being built by 155 construction companies, and the greatest number of high-rises is in the capital's Yasamal, Nasimi, Narimanov and Xatai districts, which accounts for almost 80 per cent of new buildings. The slow rate of new housing supply in the previous two years was due to the over-saturation of the primary real estate market with relatively expensive housing. Prices for new buildings declined slowly, especially compared to the overpriced secondary market.

In three years after the onset of the global economic crisis (October 2008), the price of one square metre in new buildings fell by 30 per cent and to some extent came closer to the real purchasing power in the price range of 650-750 manats per square metre. It is this factor that became the main engine of demand on the primary market from the second half of this year.

The revival of the primary housing market was also furthered by a number of government decisions that facilitated the state acceptance of new buildings, and consequently, accelerated the process of gasification and the provision of public utilities. The procedure for obtaining an extract from the State Register of Property, confirming the property rights of citizens, was noticeably simplified. Finally, in the recent period, construction companies themselves have begun to offer housing in instalments for many years, minimizing the initial payment.

"However, the most effective tool stimulating the real estate market of Azerbaijan is now mortgage lending, which accounts for a sizeable part of transactions for the purchase and sale of housing. In particular, in the total sales of MBA Group, 40-45 per cent of transactions were related to the most inexpensive apartments purchased under the mortgage programme," the general director of the MBA LTD consultancy firm, Nusrat Ibrahimov, said. The strengthening of the real estate market could be furthered by the additional simplification of mortgage lending terms, he said.

Mortgage improved

Actually, these goals will be furthered by comprehensive proposals developed by the Central Bank of Azerbaijan to improve mortgage lending in the country. The matter, in particular, is about the possibility of increasing the size of loans for social and regular mortgages. Several options are being considered for the time being, including a possible increase in the credit limit to 100 thousand manats for regular mortgages and up to 70 thousand for social mortgages. For comparison, the maximum amount of the mortgage, according to the rules of the Azerbaijan Mortgage Fund (AMF), shall not exceed 50 thousand manats, while for regular mortgages it is even lower - 35 thousand manats. That is, within the framework of the social mortgage, it is possible to obtain only the cheapest housing in worn-out Soviet and pre-revolutionary buildings (Khrushchev buildings, the French project, Italian houses) or small-sized budget apartments located outside the city limits.

In addition to the rising limit of loans, the CBA plans to revise the mechanism for determining interest rates for mortgage loans provided by the AMF. It is also planned to expand the circle of potential borrowers by creating a guarantee fund that will provide an opportunity to obtain mortgage loans to citizens whose earnings correspond to the required level of solvency, but who have not accumulated the necessary funds for the initial payment. This category will be able to buy apartments with mortgages with the fund's guarantees. Under the state programme "Azerbaijani Youth - 2015", the possibility of expanding the list of young families entitled to social mortgage loans is also being considered. It is also planned to reduce the interest rate on the social mortgage from four to two per cent.

If the CBA adopts the above changes and increases the credit limit, the new price level will correspond to actual market prices for property in the capital. As a result, all these measures, according to rough estimates, may interest about 100-150 thousand new potential borrowers in the services of the AMF. If we assume that even if a tenth of potential bidders are able to realize their plans to acquire housing with a mortgage, the capital's real estate market will receive a powerful impetus to development. And above all, the primary segment of the real estate market will gain from this, because citizens, who take a mortgage from the AMF, will be able to purchase 2- or 3-room apartments with an area of 75 to 100 square metres in new buildings - the average price of such housing ranges from 70 to 100 thousand manats.

Legalize "illegal 

houses"

Another big impetus to the revitalization of the capital's real estate market may be the government's plans to accelerate the solution to the problem of illegally constructed low-rise housing operated for many decades. The executive authorities of Baku have already drafted regulations and mechanisms of legalizing illegal houses in the capital, and until the end of the year the Milli Maclis is expected to adopt a law "On the legalization of illegal buildings". In the middle of the next year, work on the basic concept of the Plan on the Regional Development of Greater Baku until 2030 will be completed. The plan will require major reconstruction of urban neighbourhoods, and the expansion of roads and other infrastructure, which will require the demolition of dilapidated housing. According to some estimates, today over 40 per cent of low-rise housing in the capital can be classified as illegal buildings whose owners do not have the required set of documents for state registration.

It is noteworthy that it is planned to take a different approach to the issue of legalizing illegal houses. In particular, illegal houses located along the main highways, railways, high-voltage power lines, export gas and oil pipelines, near oil facilities, etc. will not be legalized. However, most of their owners can expect some compensation because depriving a citizen of his only housing is prohibited by the Civil Code.

To understand the magnitude of the problem, we should mention that, according to information from the Ministry of Transport alone, there are more than five thousand illegal objects located along railways and highways. Probably, an even greater number of illegal houses have been built in Suraxani, Binaqadi and Azizbayov districts of the capital on the territory of SOCAR oil fields and foreign investors' contractual areas.

Given these data, it is not difficult to assume how many people will be able to receive compensation in the next few years as part of programmes to demolish illegal housing and how these processes will affect the increasing demand on the capital's real estate market.