THE REBIRTH ON RUINS

The construction sector and the real estate market in Azerbaijan are gradually overcoming the crisis caused by the devaluation of manat, banking crisis and the drop of budget financing for capital construction. Although it is too early to report on full restoration of pre-crisis indicators, positive dynamics observed during three quarters of this year testifies that the efforts of the state to stimulate demand contribute positively.

The economic crisis of the past nine years confirmed that the construction sector and the real estate market of Azerbaijan are most exposed to external risks and a significant decline in conditions of unfavorable market conditions. However, unlike in 2008, which did not lead to a long-term drop in oil prices, banking bankruptcies or a sharp decline in the rate of national currency, negative processes observed in the last two years had a significant impact on the domestic construction sector and real estate market.

In particular, a tangible reduction in government spending on capital construction and infrastructure projects caused the current decline in the market, which in the best years accounted for up to a third of the work of the construction sector. The downturn was also observed in the segment of housing construction, primarily due to a decrease in the effective demand of the population, largely due to the devaluation of manat and a reduction in bank mortgage lending. The devaluation of manat was also one of the main reasons contributing to the rise in the price of imported construction materials, which in turn contributed to the rise in the cost of construction and demand drop in the primary housing segment market.

All of the above led to a decline in the construction sector by almost 30% in 2016. The last year was remembered by more than 16% decrease in the volume of production of building materials.

Nevertheless, the situation in the construction market (in particular, in the housing segment) partially stabilized in 2017 largely due to incentive measures taken by the government. According to the State Statistics Committee of Azerbaijan, the total area of ​​housing commissioned in Azerbaijan in January-August 2017 was 1 million 117.2 thousand square meters, which is 10.5% more than the same period of the past of the year. Capital investments in housing construction for the first 8 months of this year increased by 36% and amounted to ₼527.1 million. This recovery has had a positive impact on the dynamics of production of construction materials: in January-August of 2017, the volume of production of building materials amounted to ₼360.3 million, which is 32.6% higher than the same period last year. Of course, the volume of construction has not reached pre-crisis levels, but the general trend was positive.

One of the positive factors is that, despite the devaluation of manat, rising costs of construction, construction materials, transportation and other overhead costs, the industry was able to maintain a relatively high level of profitability. According to the latest estimate of experts, the cost of 1 square meter for the construction of a ten-story two-block house, together with the costs for building materials, labor and land for construction companies, averages ₼339, although it is sold for at least ₼600. In the central regions of Baku, these expenses increase to ₼1,200, however, the selling price doubles up to ₼2.5 thousand.

What trends dominate the construction market and what factors can contribute to the recovery of the industry? Undoubtedly, the government projects covering several directions provided substantial support to the construction sector. First, it is worth mentioning that Azerbaijan fully provides itself with the majority of construction materials. As Deputy Economy Minister Niyazi Safarov said at the opening ceremony of the 23^rd Azerbaijan International Construction Exhibition WorldBuild Baku 2017, the majority of Azerbaijani companies are already exporting their products.

In addition, the implementation of large-scale road construction projects in the regions was intensified. In particular, upgrade and construction of highways in the southern and western directions, the Alat-Astara-Iran highway, the remaining section of the Silk Road up to the state border with Georgia, partial reconstruction of the Baku-Shamakhi-Yevlakh highway. In 2017, the government increased the allocations for capital construction of communal and social facilities.

However, the main tool for state support of the construction sector was not infrastructure projects, but the development of the segment of housing construction, primarily in Baku. This support was provided through projects for large-scale reconstruction and redevelopment of the capital's quarters, the demolition of the old and the construction of new housing. "The implementation of government projects, such as the large-scale dismantling of dilapidated housing on Sovetskaya, demolition of five-story buildings in District I, reconstruction in five districts of Baku, and the launch of the State Housing Agency for social housing," said Nusret Ibrahimov, director of consulting company MBA LTD.

Moreover, due to the limited budgetary funds, the state is not so much a customer of construction, but creates favorable conditions for private contractors: it provides land plots on a free basis for the construction of social housing, attracts private developers to the reconstructed districts of the capital. For example, in the implementation of only one project - the construction of a preferential housing complex for 29 multi-apartment buildings on a section of 11.6 hectares in Yasamal district of Baku, more than 20 contracting companies take part in the project with 3,500 workers employed. The second residential complex in Hovsan settlement designed by MIDA LLC (a subdivision of the State Housing Agency) will occupy an area of ​​20 hectares, and 50% more apartments are planned for commission in Yasamal district. Accordingly, an even larger number of construction companies will be involved in this project.

The demolition of dilapidated housing (mainly on the Sovetskaya) and five-story buildings in District I, Sharifzade Street (next to the Inshaatchilar metro station), was an equally important area that stimulated market demand for new housing. 4,300 residential and non-residential buildings, occupying an area of ​​more than 26 hectares, were demolished only in Sovetskaya. The demolition of low-rise buildings in the center of Baku will continue. It is expected that by 2018, houses will be purchased at the upper part of the Tezepir Mosque - between Nariman Narimanov Avenue and Ismail-bey Gutgashenly Street with more than 2 thousand residential and non-residential properties, is gradually cleared.

Meanwhile, preparatory work is under way to demolish the five-story building blocks of Baku. "Currently, the Ministry of Emergency Situations is carrying out preparatory work related to the reconstruction of District I: there are about 20 buildings demolished on this territory." The state granted permission for reconstruction, issued a corresponding resolution and is currently searching for funds and private companies that will build new ones houses in the place to be demolished," said Deputy Prime Minister Abid Sharifov.

Thus, the resettlement of residents of the districts of Baku that fell under the demolition played a catalytic role, stimulating demand in the real estate market, which has been declining for the last two years, coupled with prices. Last year alone, prices on the Baku housing market in dollar terms decreased by 31.5%.

For the first nine months of 2017, the real estate market has shown a significant decline. "In general, the price decline has slowed somewhat, and the rental market has even increased by 0.2% since the beginning of 2017, while the rest of the market showed a decline. Despite the decline in prices of primary and secondary housing market, the dynamics of this process significantly slowed down, 17.4% and 6.29%, while prices on land market declined by 4.2% from the beginning of the year, on the market of commercial properties - by 14.83%," noted the head of MBA LTD N. Ibragimov. According to the expert, the trend of sustainable growth in the real estate market may prevail in the second half of 2018, which can be facilitated by gradual adaptation of the population to the current situation and a new scale of prices, as well as the restoration of the activities of the Azerbaijan Mortgage Fund (AMF).

Recently, the Supervisory Board of AMF increased the maximum amount of commercial mortgage loans issued from ₼100 to ₼150 thousand. The latter is explained by the increase in the cost of housing because of the devaluation.

The maximum amount of social mortgage remained the same - ₼100,000 manat. However, its volumes will increase significantly. According to the drafts state budget for 2018, ₼250 million will be allocated for this purpose versus 2017, when this indicator was ₼150 million. In 2018, a significant amount of funds (₼150 million) will go to construction of social housing. At the same time, under the program of state investments, another ₼100 million may be spent. The infusion of these funds will certainly revitalize the real estate market, as tightening the rules of bank lending and a pause in the AMF's activities in the last period has deprived it of a fair amount of liquidity.

We will see if these processes influence the dynamics of domestic real estate market. However, as confirmed by the experience of the 2008 crisis, the deferred demand factor and the absence of other attractive assets in Azerbaijan for long-term investments will inevitably make the real estate market more attractive.