FALL BY INERTIA

The international real estate market was the sector most severely affected by the economic crisis.  The situation in Azerbaijan this year also leads to disappointing conclusions:  clients in this sector are passive and this naturally influences the offers they make.  It remains unclear what the pace of recovery will be, but growth in the real estate and equities markets has been predicted, or in the worst case, a sideways trend is expected:  some call it stability, others prefer the name stagnation.

Factors in the slump

Let us note from the beginning that in March 2010 alone, prices in Baku's real estate market fell by 1.6%, and activity declined by 1.1% compared to February.  In the words of Nusret Ibrahimov , General Director of the MBA Group consulting company, prices in the existing real estate market fell by 2.6%, and in the land market - by 1.1%.  The price graph took a turn towards growth only in the new homes market - by 1.1%, and in the private houses market - by 3.4%.  Housing rental prices were 5.2% lower, commercial real estate rental prices went down 5.5%, and prices of construction materials fell by 0.9%, - construction materials account for 47% of the cost of housing.

Yet another factor which clarifies the situation is that from the beginning of 2010, housing costing more than $100,000 lost 5% of its price.  Elnur Azadov, executive director of the Association of Realtors of Azerbaijan, cites low customer demand as the reason.  "In this situation, we should not expect greater activity or rising prices in the near future," said Azadov.

As already mentioned, all this has also resulted in dwindling offers.  According to the MBA Group's information, fewer old buildings were demolished in March, and a trend towards an even sharper slowing in the pace of construction was observed.  Generally, facilities of social infrastructure and roads were built, or old roads were widened, to replace demolished buildings.  In March, only three buildings of the 434 under construction were completed.

Let us note that experts are quite unambiguous in their forecasts for the year - the trend towards lower prices and activity will persist.  "Some, if only insignificant, growth in the market can be expected only by the end of this year or early next year," said Mr. Ibrahimov, for example.

Thus experts predict a revival of the real estate market in Azerbaijan by 2013.  In their opinion, 2010 will be a year of stabilization in the market and, in 2011, growth in activity and prices will begin, caused by an expected growth in energy prices.  "Because oil prices are rising and, in mid-2010 or in the first half of 2011, we will also observe rising energy prices, which will cause a rise in prices in the real estate market.  And after the first 'symptoms' of increased real estate prices, people will be trying to buy rather than waiting for further growth in prices; this will stimulate greater activity," Ibrahimov noted.

The process of falling real estate prices is a logical continuation of the trend observed in 2009.  The amount of money transfers from abroad decreased, there were other reasons too.  And besides, despite the fact that the world financial and economic crisis is drawing to an end, many prefer not to take risks, fearing falling real estate prices.

Another expert, President of the Baku Association of Realtors (BRA), Vafadar Axundov, also believes that there will be no major changes in the real estate market in Azerbaijan.  Prices might increase if oil prices rise on the international market.  Real estate prices might also be influenced by greater mortgage loan activity in the country and by the funding of mortgage loans by the state.  "In addition, there is information that many people express a desire to sell their real estate on 10 to 20-year credit terms, which was not the case in the past," Mr. Axundov added.  In his opinion, real estate market prices might increase by a maximum 10%, depending on demand.

Mortgage for deposit

The mortgage "stimulator" of the real estate market is also quite passive today.  Although loans are issued, according to available information, the banks are more cautious about the procedure due to a considerable number of bad debts.  And, therefore, the country's Central Bank continues to look for the most effective way out of the situation, and continues to consider the introduction of the German model of mortgaging, which is based on the existence of dedicated real estate construction banks.

First Deputy Chairman of the Central Bank, Alim Quliyev, said that, at present, the Central Bank is working on the draft law "On real estate construction banks," and when it is passed, customers will be able to get mortgage loans when they open deposit accounts at these banks.  The amount loaned will be much greater than the sum deposited.

Lawyers from the German Bundesbank have helped the Central Bank to develop the draft law.  Real estate construction banks will guarantee the social nature of the mortgage and housing loans.  To accelerate the process of loan issue, registration will take place at the same place, by creating links between registering entities via an electronic system.  The draft law envisages the creation of real estate construction banks as individual institutions.  The prudential requirements of the Central Bank for the banking sector and for these new institutions will be discussed separately.  A decision on the capital requirements for real estate construction banks has also not been made yet.

In addition, Mr. Quliyev said that talks are under way at present with different financial organizations to attract resources to ensure sustainable funding for the Azerbaijani Mortgage Fund (AMF).  "Their involvement will become possible this year.  At the same time, we are planning other ways to stimulate the mortgage loans sector," he said.

Let us note that stabilization of market prices is very important for the financial situation of the banking sector, because real estate serves as collateral for roughly one half of banks' entire credit portfolio.  Greater activity in the real estate market is accompanied by a shortening of the duration of sales and increased liquidity of real estate.

From quantity to quality

In the mean time, yet another important factor in the slowing of activity in the Azerbaijani real estate market, according to the experts, is reduced trust among buyers in the quality of the property on offer and problems with electricity, gas and water supplies to new buildings.  In addition, many potential clients do not like the lack of clarity in paperwork for newly-built apartments.

Apparently, addressing these problems has already become such a pressing issue that several organizations have announced imminent changes in this area lately.  For example, the State Committee for Architecture and Urban Development approved the new national regulation Az.DTN 2.3-1, "Construction in seismic areas," which was developed after consideration of similar documents in CIS countries and experience of construction planning organizations in foreign countries.  The new regulation, which was developed in cooperation with specialists from the State University of Architecture and Construction, construction design institutes of the Ministry for Emergency Situations, and the Centre for Seismological Services of the National Academy of Sciences, came into effect on 1 February.

The new standards are more demanding.  In particular, the coefficients which are used to calculate the values of seismic pressures have been increased by factors of 1.5-2, which will make mobile parts more reliable.  While in the past, the construction of frame-type buildings with up to 12 floors (height up to 39 metres) was permitted, the new standards permit construction of 16-floor buildings (height up to 58 metres).  The concrete must be at least equal to quality class B25.  Taller buildings can be designed only to specifications recommended by specialized research institutions.  "All these changes will lead to increases in the quality of concrete reinforcement steel and concrete, which will increase the cost of construction, but these measures will make it possible to increase the rigidity, service life and safety of residential buildings.  The new standards also envisage seismic reinforcement measures, which have been widely used in neighbouring regions in recent years because they reduce the effects of seismic activity by 1-2 points on the Richter scale," say State Committee officials.

In addition, the Azerbaijani Parliament has ratified amendments to the laws "On the electrical energy sector," "On natural gas supply" and "On water supply and wastewater," which require that new residential buildings in Azerbaijan can be accepted by the State Acceptance Commission for completion permit only if the building is fully connected to utility lines.  Milli Maclis Deputy Speaker Valeh Alasqarov, chairman of the Committee for Natural Resources, Energy and Environment, said that the procedure and payment for connection of residential buildings to the electricity grid will be regulated by the appropriate body of the executive branch of power.

Experts say that addressing the above problems will stimulate the real estate market and bring it back on a track of stable development.