THE MICRODISTRICT UPGRADED

Azerbaijan announced the launch of yet another large-scale project to overcome the crisis in construction sector: the reconstruction of the 1st microdistrict in Baku, which is supposed to ensure demolition of panel houses erected in the 1960s and the construction of modern multi-storey residential complexes. The experts believe that these measures will revitalize the entire construction sector suffering from a noticeable decline for the last two years.

We will overcome the crisis

Amidst decreasing revenues in energy exports, the role of the state, which has been the main customer of capital and infrastructure construction in Azerbaijan in the last decade, has significantly decreased. Meanwhile, devaluation of manat spurred the rise in price of imported construction materials and resulted in serious problems in the banking and mortgage sectors. This incurred an overall reduction in effective demand in the real estate market and, accordingly, a decrease in the volume of housing construction.

Thus, according to Fitch Ratings, Azerbaijan’s construction sector recorded a 27.6% decline in 2016. In general, this trend is prevailing this year as well: according to the State Statistics Committee, 107.6 thousand sq.m of housing was commissioned in January 2017 against 133.7 thousand sq.m in January 2016. Comparable decline was observed in the production of building materials.

At the same time, the inflation rate and rising prices for imported building materials, equipment and construction contribute further to higher prices for apartments, despite the low demand and low activity in the real estate market. According to the consulting company MBA Group, the above factors increase the costs of construction: in December 2016, the cost of construction grew by 3.9%, and in January of this year by another 4.1%. As a consequence, in January of this year in Baku, prices on the primary housing market increased by 2.7%, secondary - 2.94%, land - by 3.6%.

The experience of some European, North American and the CIS countries shows that it is possible to overcome such negative trends through the introduction of various public-private schemes of social housing construction. In particular, the implementation of large-scale reconstruction and redevelopment projects in urban areas, as well as the demolition of old and the construction of new apartment buildings can ensure achievement of several goals at once. The most important issue is the improvement of public living conditions and reconstruction and construction of new social facilities such as polyclinics, schools, and kindergartens. At the same time, state programs for the construction of social housing contribute to the revitalization of the construction sector and the production of building materials, and the massive resettlement of residents of demolished quarters has a multiplier effect in a number of related industries - primarily in the production of furniture, accessories, etc. Finally, the commissioning of tangible amounts of new housing inevitably plays a stabilizing role in the real estate market, leveling demand and supply, and also restraining excessive price increases. Indirectly, these measures have a positive impact on banking sphere, increasing the liquidity level due to the growth of borrowing and involvement of mortgage programs.

The first step in this direction was the establishment of mechanisms of mass construction of social housing through the State Agency for Housing Construction created last year and its division, MIDA LLC.

In December 2016, the construction of the first nine-floor residential building and school was started on a plot of 11.6 hectares allocated in Yasamal district of Baku, next to the ring road. This residential complex will consists of 29 houses, which will accommodate about 10 thousand people. Thanks to state support, a school, kindergarten and other social infrastructure facilities will be constructed there as well.

"Dormitory" regions to demolish

The government of Azerbaijan is embarking on an even more promising and ambitious project, which provides for the demolition of prefabricated panel houses in Baku's microdistricts and the construction of modern multi-storey residential complexes instead. "The demolished so-called five-floor Khrushchevkas located in residential districts of Baku will be replaced by residential complexes consisting of 9- and 12-floor apartment buildings, as well as new social facilities including schools, kindergartens and so on. The citizens residing in panel houses will be able to receive housing in these new buildings under the state guarantee," said Deputy Prime Minister Abid Sharifov commenting on the latest decision of the Cabinet of Ministers on measures to restructure the first and other neighborhoods of Baku.

And tenants of demolished panel houses will be provided with living space in multi-storey houses 10% higher than the total area they had in the Khrushchevkas, on the same floors they used to live on. In the courtyards all necessary infrastructure will be created, and under new buildings it is planned to create parking lots with a total area of

To fulfill the plans, contractors will be granted certain privileges for the interest of private construction companies in the implementation of these projects. At the same time, the contractors will be bound by certain conditions for the performance of work in the planned time and with the required quality. The works in the 1st Baku microdistrict will start this year, and they are planned to be completed within three years.

Deputy Chief of the State Agency for Control over Safety in Construction of the Ministry of Emergency Situations, Elkhan Asadov, believes that after the construction of the first multi-storey complexes instead of the demolished five-floor panel buildings at the next stage, construction of 30- and 35-floor buildings is possible in the 1^st micro district of Baku. "In the 1st microdistrict of Baku, according to preliminary estimates, it is planned to relocate 1 729 families from houses intended for demolition. Currently, 29 five-floor, 4 nine-floor four-block and another 16-floor single-block buildings are planned for demolition. The total area of ​​demolished buildings is 29 hectares. This is a pilot project, and if it justifies itself, it will also cover other microdistricts of Baku," said Asadov.

According to the order of the Cabinet of Ministers, the functions of the customer for work and control over construction are assigned to the Ministry of Emergency Situations of Azerbaijan.

Among other things, the Ministry of Emergency Situations has been instructed to organize the attraction of private companies' funds, as well as loans for the forthcoming construction works, and to ensure payment of the necessary amount for temporary rent by residents of demolished houses of other houses for the period of construction of new buildings.

This is only the beginning

The 1^st microdistrict is selected for the implementation of a pilot project because there are many five-floor panel apartment buildings considered as "non-restoratable". Similar buildings were erected at the very beginning of the era of mass construction - in 1959-1963 and had thin outer walls made of lightweight ribbed expanded clay concrete panels with insufficient thermal protection properties. These panel buildings were originally designed for 25 years of commissioning but today there is a 100% wear of certain engineering structures and building elements. Repairs of their water supply system, heating, sewage pipes, balconies is either too expensive or impossible. It is also impossible to solve with the help of repair the problem of bearing structures, walls and foundations. No matter how repaired, the panel buildings will still cause an emergency situation. It is noteworthy that a similar situation develops with the nine-story buildings built in the early 1970s from the same prefabricated panels as the Khrushchevkas.

The technical impossibility of restoration of panel buildings half a century ago is far from being the only argument in favor of rebuilding microdistricts.

Unlike residential towns constructed in Baku, in microdistricts already laid roads and other communications, created a communal and social infrastructure. This is an extremely important circumstance, since the cost of laying a new infrastructure network can often reach from a quarter to one-third of all construction costs. Finally, the territory of the microdistricts is within walking distance from the business part of the capital - commercial, industrial, educational, medical facilities, which makes living here convenient for citizens and, importantly, commercially profitable for developers. The latter can be recognized as an extremely important factor, since in the process of reconstruction of the Baku microdistricts it is planned to apply a mixed form of public-private participation. The fact is that, together with direct government funding for the demolition of panel houses and the construction of modern high-rise buildings will be carried out by attracting the funds of private companies and bank lending.

This scheme is sufficiently elaborated and actively used in Moscow under a large-scale program of replacement of five-floor buildings of the 50-60s. Works on the reconstruction of Moscow neighborhoods were carried out by construction companies on the basis of investment contracts.

It is planned to introduce a similar option in Azerbaijan: the contractor selected for building a high-rise apartment building (12-20 floors) will hand over a certain number of floors to the residents of the demolished Khrushchevkas with the required number of residential premises, while the remaining apartments can be sold at market prices. The advantages of this approach are obvious: the contractor receives a free land plot in the prestigious second and third zone of Baku, and does not bear the costs of utilities because they are available in the neighborhoods.

However, there are a number of "small" issues, which should be taken into account during the implementation of the program of reconstruction. First, unlike previous years, today access to low-interest commercial loans is significantly hampered and many banks risk taking such a step only under a state guarantee.

Secondly, the level of demand for housing a few years ago seriously exceeded the current one, which made it possible to "repulse" the costs of resettling residents of demolished houses by selling the remaining apartments. The observed downturn in the housing market today does not promise developers the rapid sale of the remaining "commercial part" of housing. Therefore, in order to improve the profitability of the construction of skyscrapers in place of demolished five-story buildings, it is necessary to restore the mortgage market on the previous scale or to develop other forms to support the demand of the population for new buildings being built in microdistricts.

In the course of developing a plan for replanning the neighborhood, it is also necessary to prevent a number of other problems. Thus, the construction of high-rise buildings, even with a slight compaction of buildings, will significantly increase the amount of energy consumption in the city and will require the expansion of the power of the distributing substations. The load on public infrastructure (water and gas supply, sewerage), as well as social (schools, kindergartens) and transport facilities will increase severely. Due to the construction of more multi-storey buildings, children's playgrounds, green spaces and other objects of social significance will be designed in the freed territory.

However, even with the challenges listed above, the reconstruction project of the 1^st microdistrict will have a positive effect on real estate market in Baku. "The decree of the Cabinet of Ministers is a legal basis for the start of reconstruction of old buildings. Now it's up to us to find private companies and attract loans to implement this decree," said Nusret Ibrahimov, CEO of MBA Group. Undoubtedly, the start of reconstruction will have a positive impact on the housing market in Baku, as it will promote construction companies, increase orders for construction materials and rental housing and, importantly, increase employment of citizens in the construction sector.

For comparison, during the construction of a multi-lane highway and the Winter Boulevard from the Heydar Aliyev Palace to Fuzuli Square in 2011-2013, as well as the demolition of old low-rise buildings along the ​Narimanov Avenue in 2014-2016, practically no new buildings were constructed. However, the dwellers were paid monetary compensation. This had a considerable effect on the rapid growth of prices in real estate market during 2012-2014. The current project envisages the construction of a larger volume of housing on the site of demolished five-story buildings, which will play a stabilizing role, increase the supply and partly reduce the rate of growth in accommodation prices.