AS SIMPLE AS POSSIBLE

This year Azerbaijan has seen a downward trend in capital construction caused by a decline in the volume of investments in the corporate sector and lower demand on the housing market of the capital. Thus, in the second half of this year, work was partly or completely halted at about a third of the 80 buildings being constructed in Baku.

Meanwhile, measures recently taken to support the construction sector by easing the tax burden may significantly revive the market. The activity of companies at the International Exhibition BakuBuild 2015 held in Baku last week also says that market participants do not lose hope for an early resumption of growth trends in this area.

According to the State Statistics Committee of Azerbaijan, in January-September this year, the country put into operation about 1.33m square metres of housing, which is 9 per cent less than in the same period of 2014. A similar negative trend is being observed in other segments of the construction market. According to the Central Bank of Azerbaijan, during this period companies involved in the construction sector reduced their costs from 1.146bn to 800m manats or by 39 per cent for the year. However, the construction sector of the country is still in the investment phase: its costs, despite a significant cut, exceed the growing incomes by 2.5 times.

The experience of the global turmoil in 2008 showed that the local construction market was able to recover the pre-crisis growth rates only after 2-2.5 years, and this despite the fact that at that time, oil prices were significantly higher than today. Six years ago, local construction, engineering and contracting companies were able to stay afloat largely due to support from the state, which provided them with orders for the construction of infrastructure and social facilities, in particular within the framework of regional development.

This trend is partly being observed today. For example, in the first nine months of this year, by maintaining a high level of public funding, the number of polyclinics and outpatient facilities put into operation increased by 126.8 per cent and pre-school institutions - by 194.8 per cent. The private building of facilities in the service sector also increased by 103.7 per cent, which indicates that demand in the segment of small and medium-sized businesses is continuing. And what is especially gratifying is that Azerbaijan managed to maintain the volume of construction of industrial facilities - the growth rate here was 100.4 per cent in the reporting period.

In what other form can state support be presented to construction companies? Judging by the recent changes to the Tax Code of the Azerbaijan Republic, such support will be provided through the provision of fiscal privileges. Thus, according to the amendments to the Tax Code, which will come into force on 1 January 2016, individuals and legal entities engaged in housing construction will only pay the simplified tax. Until recently, according to the current legislation, the simplified tax was paid for buildings under construction while VAT, income tax and property tax were levied for residential areas put into operation. These payments were mandatory, irrespective of the completion of construction work or the number of apartments sold in the new building.

According to the amendments, those dealing with housing construction will pay a simplified tax of 45 manats (10 manats earlier) for each square metre of the taxable facility using coefficients in the zones of cities and districts of the country. However, developers who do not want to take advantage of the simplified tax are provided with another alternative. They can register as VAT payers, and in this case, the Tax Code allows them to pay taxes after the construction of a residential building, i.e. after the sale of an apartment building, non-residential facility. However, in this case, apart from the VAT, they will be required to pay income tax, property tax and land tax for the year.

As an additional measure of support for the construction sector, the government plans to significantly increase the volume of mortgage lending next year, as well as to implement plans for the demolition of old and damaged houses in the capital and regions of the country. All these measures, together with fiscal privileges, can be a powerful stimulus to support the investment interest of construction companies and contribute to the revival of the market.

It is noteworthy that amid the ongoing downturn in the construction sector, Azerbaijan has seen a steady increase in the production of building materials. According to the State Statistics Committee, in January-September 2015 the country produced construction materials in the amount of 348.8m manats, which is 12.2 per cent higher than last year's figures. This growth is largely supported by domestic demand, primarily in the segment of private construction and renovation of apartments and offices. On the other hand, manufacturers of building materials are increasing exports that notably cheapened after the devaluation of the manat and became more competitive on foreign markets. This same factor contributes to the ousting of imported products by more affordable local analogues.

These trends are most clearly traced at the BakuBuild 2015 international exhibition, which recently opened at the Baku Expo Centre. Participants in the construction forum organized by Iteca Caspian and leading domestic manufacturers of dry mixes and finishing materials have been exporting their products to Kazakhstan, Uzbekistan, Georgia, Ukraine and Russia, as well as Iran and Turkey for many years. More recently, the country began to export elevators, insulation and polymeric materials and plasterboard.

Under the current circumstances, many foreign suppliers of building materials gradually change their strategy for entering our market, expanding distributional channels and changing the logistics supply chain. And over time, some of the foreign companies may decide to start producing building materials directly in Azerbaijan.

The presence of such unprecedented opportunities is proven by the growing interest of foreign companies in the construction market. Together, 535 companies from 30 countries took part in all the thematic areas of BakuBuild 2015, and about 40 per cent of them demonstrate their products at the Baku Expo Centre for the first time. This large-scale exhibition, which has grown by nearly 10 per cent, was represented by leading Azerbaijani building companies, which comprised 49 per cent of all participants. However, the greatest activity was shown by overseas participants. For the first time France was represented at BakuBuild by a broad group of companies - manufacturers of building materials. The Czech Republic and India, represented by 15 companies, were newcomers that organized their collective national expositions. But the largest number - about 80 manufacturers and distributors of building materials - was represented at the national stand of Italy. "Italy is one of the main trading partners of Azerbaijan, and moreover, our country attaches great importance to mutual cooperation in the non-oil sector, in particular the segment of construction and production of building materials," said the Italian ambassador to Azerbaijan, Giampaolo Cutillo, who took part in the opening ceremony. "The interest of our country in cooperation in this area is graphically confirmed by the fact that the number of Italian companies that have arrived to participate in BakuBuild has increased by one third compared with last year."

In short, not only local, but also foreign developers are quite optimistic about the future of the Azerbaijani construction sector. New tax amendments may also be an additional incentive for the recovery of the market.