SUMMER OVERHEATING

The so-called construction boom in Azerbaijan seems to have become a thing of the past. However, the price of accommodation in Baku, even if it is not the best, is still quite high and many Bakuvians can only dream of buying a flat. In the opinion of experts, it is not strictly correct to link the presence or absence of a construction boom to the price of housing. Today's prices for residential and non-residential premises do not depend at all on the number and pace of buildings being constructed in the capital. There are many other factors - the increasing pace of inflation in the world, the mortgage crisis in the USA, the global financial crisis and so on. The cost of building materials also plays a significant role in the formation of housing prices. They are apparently rising at the same rate as the cost of housing.

Even bricks are more expensive

According to a public opinion survey by the public union 'Participants in the Real Estate Market', 556 buildings were under construction in Baku at the end of May. They are being built by 217 construction companies. In comparison with April, the average price of flats put on sale in Baku increased from $1,091 to $1,138 per square metre (4.3 per cent). At the same time, the average living space in buildings under construction in Baku shrank from 121.6 to 120.5 (0.9 per cent) square metres.

A monitoring group within the MBA consultancy company is monitoring both the primary and the secondary real estate markets. Company experts are paying special attention to the rise in prices of building materials. For four years in a row they have monitored 114 items in the building materials market.

MBA director-general Nusrat Ibrahimov told R+ that the price of building materials in Baku is growing not just year on year, but also from quarter to quarter. "In 2007 and, especially, in early 2008, we observed a monthly hike in prices for almost all building materials. Prices are increasing especially for the materials most in demand - building stone, building bricks, cement, sand, timber and all wooden materials," said Ibrahimov.

In one year alone - from May 2007 to May 2008, the cost of building stone increased by 75.6 per cent, cement - 28.3 per cent, sand - 28.6 per cent, gravel - 36.4 per cent, timber - 59.4 per cent and planks - 41.2 per cent.

In June, the company monitored the market for building materials in Baku. Local products, as expected, take 41.4 per cent of the market. During the year the company monitored prices and the demand and supply of 105 kinds and 48 items of building materials and noted a hike in prices for 33 kinds, a fall in prices for 45 kinds and stable prices for 27 items.

Over the past month, a rise was noted in the price of bricks - 9.3 per cent, particle boards - 2.5 per cent, metal pipes -3.1 per cent, zinc plates - 2 per cent, roofing - 1.3 per cent, glass - 4.2 per cent and so on.

In comparison with May, prices fell by 1.9 per cent on average. A conclusion was drawn from the monitoring that a steady increase in prices on the world energy market caused a hike in prices for power-intensive building materials. The fall in prices for local building materials is linked mainly to problems with off-season production. In June there was an overall increase in prices of 16.8 per cent in comparison with the beginning of the year. In one year, the average hike in prices in the building materials market totalled 29.8 per cent. In the same period, real estate prices increased by 33.4 per cent. The cost of one square metre of housing on the primary market increased by 23.2 per cent and 13 per cent of this hike was caused by the rise in prices of building material. According to the latest figures, building materials comprise 47 per cent of the cost of one square metre (of living space). The rest is accounted for by wages and other expenses.

"In 2004, the hike in prices in the real estate market amounted to 30.8 per cent, in 2005 - 48.4 per cent, in 2006 - 18.4 per cent and in 2007 - 23.2 per cent. A 20 per cent increase has been observed since the beginning of this year," Ibrahimov pointed out.

In a worst case scenario, the current situation may have most undesirable consequences: the damage caused to the construction industry by the rising cost of building materials will provoke a fall in the volume of construction, in the demand for building materials and a collapse of the construction sector. However, the expert is sure that things will not reach this point. For example, timber prices soared in May and April. Professionals linked this to bad weather conditions in Russia where the wood-processing industry, associated with many exporters, including Azerbaijan, was experiencing a crisis due to prolonged torrential rain. Prices soared due to short supply.

"But the rainy season is over, it is summer now and supply to the market should be higher. We can see already that activity in the market and demand have fallen and, if supply is higher, timber and wood prices will fall. For example, June saw a slight fall in the prices of boards (4.3 per cent), planks (17.6) per cent, particle boards (3.6 per cent) and fibre boards (14.3 per cent). In other words, there are a number of objective factors in the increase in the cost of building materials, apart from the fact that the market itself also regulates prices. It is true that, once, the price of bricks increased by 12-15 per cent, literally in one day, but, the next day it returned to its previous level. This was due to competition on the market," said the company. 

Incidentally, prices for building stone fell by 7.9 per cent in June, sand by 11.8 per cent, gravel - 5.9 per cent, boards - 3.3 per cent, planks - 7.3 per cent, fibre boards - 5.3 per cent, etc. However, our interviewee said that no further fall in prices for metal and metal products is expected. This is related to the rise in energy prices, because the metal industry is quite energy-intensive and the basic cost of metal products is formed by expenditure on energy.

The expert was more optimistic about the future cost of cement, which is becoming more expensive today and not just in Azerbaijan. "The construction of a new cement plant in Azerbaijan will help reduce cement prices. In that case, supply and competition will be greater, and prices will probably fall. Manufacturers linked the recent rise in cement prices to the hike in the cost of cement production, saying that energy comprises about 40 per cent of the cost of cement production. Before the hike in prices, profitability in the cement market was quite high - more than 80 per cent, while today this figure is 60 per cent, which is still regarded as high. As can be seen, there is an opportunity to reduce prices in the cement market," believes Ibrahimov.

For our part, we would add that if cement prices fall, this will cause a fall in the prices of ready-mixed concrete and ferro-concrete construction. The new factory will probably "unfreeze" the situation in the cement market, where there are only one large and two small manufacturers who do not really have a sizeable niche in this sector.

On the basis of the above, we may conclude that if one building material becomes more expensive in Baku, another will also rise in price; hence the general increase in prices of building materials - 29.8 per cent, which seems "unfair" at first sight. However, in comparison with other countries in the world, it is not so horrifying.

Nonetheless, a question arises: how different are the prices of building materials in Azerbaijan from those in other post-Soviet countries? It turns out that in comparison with Central Asia, they are 23-25 per cent higher. There is also a big difference from Armenia and Georgia, which is due to the fast growth in the Azerbaijani economy and the large scale of construction work. But in comparison with Russia and Ukraine, prices here are either at the same level or slightly lower. For example, wood is cheaper in Russia than here, while building bricks, metal products, paint, varnishes and insulating materials are more expensive there. If we compare our country with the Baltic States, Azerbaijan is a real paradise for construction companies. In these three former Soviet republics, the prices of building materials are gradually approaching European levels.

Finally, Azerbaijan imports a great deal of various building materials - mainly from Russia, Ukraine, Turkey and Iran. As long as there are imports, there is also going to be a hike in prices stimulated by world inflation.

Reaching the point

But it is interesting that, according to Ibrahimov, activity in the building materials market is at its lowest right now. Following the events of August 2007 when a multi-storey block of flats collapsed in Baku, activity in the primary housing market, as well as that for building materials, fell by 37 per cent. Even today it is still lower than in August 2007. For example, the term of exposition (sale) in the building materials market has increased by 27 per cent, while supply has also increased, as a result of which the volume of sales has fallen. High prices in the building materials market reduce activity in the market, while the growth in the volume of housing construction stabilizes activity in the market. As a result, activity in the market in comparison with previous months has fallen by 6.9 per cent and in comparison with the same period last year - by 12.8 per cent.

At the same time, in comparison with last year, the cost of construction has doubled. This includes both official (purchase of land, its registration, development, approval of project documents and so on) and unofficial expenses.

The number of buyers in the primary market has been increasing over the last two months. Today it is more profitable to buy flats in the primary market than to build private housing. The reason is the price of building materials - as wholesale buyers; it is a lot cheaper for construction companies to buy large amounts of building materials than for individual buyers. What is more, new high-rises are more comfortable in terms of payment - conditions here are easier than in other segments of the market. So people prefer to buy real estate in the city centre rather than on the outskirts because it can be problematic to buy a plot of land and build a house there.

"For this reason, I think that in the course of time and where possible, the cost of building materials may fall," said the expert.

Logically, we would have thought that the primary market would be flourishing because demand is rising. Does this mean that the construction boom is continuing? Ibrahimov maintains that the first stage of the construction boom in Azerbaijan is now a thing of the past. However, a second stage is just around the corner. It will arrive in three years' time. And this is quite natural.

In the past, Azerbaijan's national leader Heydar Aliyev eliminated all obstacles to the development of the construction market. The head of state gave "the green light" to businessmen in this sector. The market became more active and the number of high-rises reached 700 in Baku alone and about 750 in the rest of the country. The number of jobs increased, people started working more actively in the construction business and average salaries grew. All the economic indicators climbed. Now it is time to pay more attention, not to the quantity, but to the quality of work. For this reason, at the end of 2006, the Baku City Council reduced the number of permits to build high-rise buildings. The authorities began setting tougher requirements for the quality of construction, controlling labour conditions and monitoring safety norms. From 2006 the number of construction companies began to fall. While in 2006 there were about 380 construction companies in Baku alone, their number has now dropped to 226.

"That is to say small players have left the market, and this tendency will continue until 2010 - until all the small players have left the market. No more than five or six major companies will be left in the capital. But, beginning in 2010, the number of players in the market will start growing again, in parallel with growing demand and the lack of competition. Five or six players are not enough to develop the market. For this reason, the state will ease its 'grip' a little. This is when the second stage of the development of the market will start," said Ibrahimov.

A so-called "overheating of the market" may be observed today. There is a generally-accepted correlation between the cost of renting and selling housing. For example, monthly rents should account for one per cent of the value of sales, but in Baku the figure is half that. "This shows that the market is overheated," the expert said.

So an increase in rent is expected, as the buying capacity and solvency of the population grows, because the cost of renting depends directly on people's resources.

According to Ibrahimov, an overall fall in real estate prices is impossible because energy prices and inflation are rising throughout the world. Only small "breaks" are possible. For example, prices in the real estate market usually grow actively for 6-8 years, this is followed by a period of stabilization and a long-awaited fall in prices for two or three years. But again, this fall accounts only for 20 per cent of the previous growth. This means that if your flat becomes 100 per cent more expensive, its price may eventually fall by only 20 per cent.

As can be seen, in the foreseeable future we will all observe a small fall in real estate prices - at least this summer, because summer usually sees a fall in prices. The prices of more expensive housing are already lower on the market - by 8-10 per cent. Cheap housing is a different matter - its price remains persistently high. Even if elite and not so elite housing becomes cheaper this summer, autumn will see corrections anyway. So we will hardly notice the fall in prices for housing and building materials that many Bakuvians expect…