BOOSTING DEMAND

The year-long continuing low oil prices and the devaluation of the Azer-baijani currency in February have had a negative impact on demand on the market, lowering the dynamics of development in a number of sectors in the economy. Just as was the case with the previous global crisis, the real estate market has been among the first to be at risk. In January to June this year the turnover in the housing sector fell by almost one third, and today a number of experts believe that the prospects for reviving the market can only be improved by boosting state-subsidised mortgages.

The decline in the financing of the country's housing market was already a prevailing one last year. "The period of frantic demand for low-cost flats as a result of the demolition of the old, dilapidated houses in a number of districts of the capital, has long been over. From the second half of last year, owing to a tangible drop in oil prices, the investment activity of both the population and business circles has declined, largely in relation to real estate in the capital," - this is how the market situation looked to the director general of the MBA Group Consulting Company, Nusrat Ibrahimov, at the end of last year.

It is noteworthy that similar processes were observed in the housing sector during the crisis years of 2008-2010. At that time, the growth of the capital's property market which had surged in the past slowed in just two years, and property prices dropped by 30 per cent. But, even without focusing on the factors engendered by the crisis, Azerbaijan's housing market, and primarily the sector in the capital, has been exhibiting a surplus over the last few years, which were not objectively backed up by economic figures but largely fuelled by increasing speculation. 

In order to understand the specific nature of the local property market, attention needs to be paid to the part played by the key regulator of the population's investment activity in this sphere over the last two decades, which was more attractive to the population than bank deposits. Moreover, owing to the drop in interest rates on deposits over the last few years, the banking sector has been losing its position as the main driver, sucking in the lion's share of the population's monetary savings.

At the same time, the securities market which had just taken shape in the country could not propose effective tools for the even distribution of the population's investment resources either. Thus, the accumulated group of natural persons was hardly attracted into the stock market at all. In particular, except for individual cases, the turnover of housing certificates for securities' emissions, the nominal cost of which was expressed in units of common living space and in its monetary equivalent, did not become popular either. This tool is extremely widespread in most developed states in the world, and, owing to its transferability and high liquidity, allows supply and demand, as well as property prices, to be regulated productively and comparatively swiftly.

Thus, all the recent years of property investment were almost the only form of stable, capitalisation growth accessible to the wider strata of the population, both as income from rents as well as for the annual index for property prices allowing an owner to make considerable profit when reselling the property. This scheme worked like clockwork, especially when market prices were favourable. There was even a period when supply outstripped demand in 2008-2010, after energising the category of the population who had stable average incomes. The large-scale demolition of the dilapidated housing stock in the centre of Baku contributed its mite to the general frenzy. The compensation provided by the city authorities acted as a catalyst for the demand for low-cost housing.

The Central Bank statistics for the last three years clearly demonstrate the steady trend in frenzied market demand which was tangibly ratcheting up housing prices. Thus, according to Central Bank data, the market turnover in real estate consistently increased, reaching almost 25 per cent in 2012 and 41 per cent in 2013. But it is just as obvious that such growth rates and corresponding increases in prices were not completely in tune with the dynamics of the population's income growth. Nor is it surprising that very soon the actual ability to fund that demand was simply unable to keep up with property prices. 

In the second half of last year this gap began to reduce the interest rate on the market, and this tendency which had long come to a head was only made worse by the exacerbation of the global energy crisis. Thus, throughout 2014 the rise in flat prices in Baku was only 13 per cent, and the subsiding frenzy provided for a comparatively small growth in the market operations' turnover.

This trend has increasingly intensified in the current year. According to Central Bank data, the total turnover on the real estate market from January to June 2015 dropped by 32 per cent, its volumes in cash turnover were just over 1,758bn manats, whereas a year earlier they reached 2,583bn manats. The sale of pre-owned properties where the housing market had been extremely overpriced suffered most; the drop in demand there was 36 per cent. The devaluation of Azerbaijani currency had an indirect impact on these processes. In a desire to compensate for the possible risks of a second devaluation, citizens bumped up the standard prices of a flat in dollars or took the property off the market which did, of course, markedly lower the figures for purchases and sales.

At the same time, a comparative growth in sales of more than 19 per cent was observed in the new-build sector in that period. Prices for new-builds, especially in the capital's third and fourth zones were comparatively lower than those in the second zones, and, after the February devaluation, no marked drop in sales was recorded. Moreover, the switch in demand from the pre-owned property market to the new-build market explains the positive dynamics in turnover against the backdrop of the general drop in prices.

In the view of the MBA Group's Consulting Company's director general Nusrat Ibrahimov, today the real estate market is going through an extremely difficult period. According to him, since the beginning of the year activity in a number of sectors of the housing market has collapsed by 3.8 times, markedly lowering the demand for property and the prices of it. The main reason for the reduction in prices on the market is the decrease in the key investors financing the demand, the drop in oil prices and the decline in domestic activity as a result, as well as the slowing rates in issuing mortgages. "The factors cited are the three main sources of finance for the capital's property market and all of them have nearly dried up," Ibrahimov said. "The only hope for at least a partial revival of the market is the increased issuing of mortgages, which will possibly begin to happen in the next quarter."

If the opposite is the case, the capital's property market will be put under growing pressure, which, in the expert's view, will very soon lead to construction work being suspended. Thus, even today work has been partially or completely suspended on appro ximately one third of the 80 new-build construction sites in Baku. This is largely the result of a drop in demand on the market and the difficulties in obtaining bank loans.

 To all appearances, the country's government and parliament are planning to offer what help they can, by spurring on growing demand on the property market. In particular, quite recently the State Committee for Family, Women and Children Affairs drew up a package of proposals to lower the interest rates on loans and the sums of monthly repayments on mortgages for socially vulnerable categories of the population. The State Committee is also proposing to extend the practice of issuing mortgages beyond the capital and to make it easier for the residents in the regions to access discounted financing. In its turn, according to the proposals put forward by the Committee on Social Policy, Azerbaijani parliament will possibly get the building of social housing going with accessible rents, as well as providing for the building of low-cost lease-hold flats with leases of 20-25 years.

But the most serious changes in the home loans sphere are to be expected from the Ministry of Finance and the country's Central Bank, which have worked out a new mechanism called upon to accelerate and simplify the processes involved in obtaining a mortgage via the Azerbaijan Mortgage Fund (AIF). "A state-private partnership mechanism needs to be developed which can form the long-term basis for resolving citizens' housing problems," Elman Rustamov, the governor of the Central Bank of Azerbaijan, believes.

For example, the state could take upon itself the incentive for building comparatively cheap but comfortable flats, as well as offering support to private structures interested in offering long-term loans to the banks or subsidising the interest on mortgages.

Approaches like this formed the basis, in particular, of the new mortgage strategy worked out by the Central Bank of Azerbaijan and the Azerbaijan Mortgage Fund and fully supported by the Ministry of Finance. One of its principles envisages that discounted mortgages for socially vulnerable strata of the population largely remain the responsibility of the state. On the other hand, it is also proposed that commercial loans should be more freely available and the banks should be in charge of that type of activity. In particular, in creating new ways for banks to offer loans, by granting them the necessary volume of long-term, low-interest financing on account of funding accumulated in pension and insurance funds.

Finally, the Central Bank of Azerbaijan is looking into the possibility of introducing a new type of mortgage, the so-called German, saver model. It needs to be explained that with this type of mortgage the necessary funds are formed from the savings of the population themselves; moreover, a special regulatory structure is set up to monitor this process. The part played by citizens essentially boils down to their involvement in building societies, according to a model which has proved its effectiveness in post-war Germany. This means that, in creating this type of mechanism, the mortgages will automatically be formed, if the citizen has the relevant sum in his or her bank account.

Which of these proposals will form the basis of the new mortgage rules will soon become clear, probably when the state budget for 2016 is discussed. For the moment, the Central Bank of Azerbaijan has already announced volumes of financing agreed with the Ministry of Finance and the changes in the practice of issuing loans according to the Azerbaijan Mortgage Fund guidelines. "Before the end of this year we are planning to allocate 200m manats from the state budget to finance mortgages in the country," Central Bank governor Elman Rustamov stated earlier. "Next year moreover equally significant funds may be allocated to finance mortgages." The Central Bank chief also promised less stringent conditions in the issuing of loans by the Azerbaijan Mortgage Fund: thus, the interest rates will be lowered, both on personal and commercial mortgages. At the same time, it is planned to double the maximum amount that can be obtained on a mortgage which will make it possible to acquire housing not just in the low-cost sector.