ONCE TENANTS, NOW OWNERS

Mortgage is the main financial tool in most developed countries used for the purchase of housing. It covers more than 70% of all operations in residential real estate business. In recent decades, leasing has become an alternative to mortgages - real estate rental with subsequent purchase. In Azerbaijan, where the construction sector and real estate market has left behind the impact of the global crisis, the issuance of soft loans through the Azerbaijan Mortgage and Credit Guarantee Fund is progressing. According to a recent presidential decree, Azerbaijan is going to introduce a new mechanism for leasing residential premises with subsequent purchase.

Leased apartments

House leasing is a relatively new type of financial service, but due to a number of interesting differences from the classical mortgage, it becomes increasingly popular in Europe, North America, Muslim countries, and in recent years in some post-Soviet countries.

According to statistical data, housing leasing is currently in operation in the Czech Republic, Poland, Canada, Cyprus and Spain. In Spain, this mechanism provides for public-private participation.

Muslim states have their own leasing scheme called ijarah: an Islamic bank purchases real estate and enters into a rental contract with a borrower, who then makes certain monthly payments, hence repaying the cost of housing and partly the rental cost.

Although each country uses individual leasing models, in general, the essential difference between leasing an apartment and mortgage is that a tenant does not need to have savings to pay the first instalment to the bank to get a mortgage loan and to become an owner. For example, in Azerbaijan, the first instalment on commercial mortgages is 20%, and in some countries 30% or more. In some countries, when leasing, the contracting client immediately moves into the selected apartment or house without any initial instalment, and can also proceed to repair works, knowing that in the future this property will belong to him. In others, the client moves into an apartment and, paying a certain amount to the rent, can accumulate the necessary 10% (the lessee’s own funds) for two years to pay the initial advance on the total cost of the apartment. In general, of course, the rent in this case is substantially higher than with a mortgage.

Actually, due to the factor of relative high cost of a leasing scheme, its main users in Europe until recently were buyers of commercial residential real estate, since leasing payments for residential real estate are not subject to VAT. Also, the lessee does not pay real estate and land tax until full repayment of the payments, because this property does not belong to him yet.

This is the main difference from buying a mortgage apartment, where the borrower immediately becomes the owner of the apartment and can dispose of it, albeit with some restrictions. The risks of using the leasing scheme also lie in the fact that if the tenant stops paying the fees for one reason or another, then it loses both the right to live in the apartment and the possibility of its redemption. Alas, these circumstances limit the demand for leasing programs among home buyers in the mass budget segment.

Azerbaijani model

Leasing scheme for the purchase of residential real estate has a number of advantages and has been recognised in some post-Soviet states, including Russia, Latvia, and Ukraine.

According to the presidential decree dated January 25, 2019, the government is working on such a mechanism for Azerbaijan. A corresponding procedure has been approved, according to which the Azerbaijan Mortgage and Credit Guarantee Fund (AMCGF) is entitled to acquire a living space for its subsequent lease with the right of purchase. AMCGF can purchase such housing using its own funds and income from issuing bonds. At the same time, the fund will not receive profits from monthly rental payments: only expenses for repayment of borrowed or own funds raised for the purchase of living space, expenses for its maintenance, management and insurance are taken into account.

Leasing of residential premises with purchase option will be possible provided that the tenant is an adult citizen of Azerbaijan with no overdue payments, in particular bank loans, at the time of the appeal. The lease agreement is concluded for a period of 3 to 25 years and is approved by a notary. The market value of the living space will be determined by an independent appraiser, the living space must be insured at an estimated cost.

After the conclusion of the contract, the tenant must pay at least an annual rental value as a prepayment; the full cost of the apartment may be paid no earlier than three years after the conclusion of the contract.

According to the procedure, the fund should provide living space for rent fully repaired and provided with public services. In accordance with the terms of the lease, the address of the living space, the total area and number of rooms are determined by the fund and then offered to public through an electronic system indicating the cost of housing and the amount of monthly payments. These parameters will vary depending on the location of the property. Of course, options will be up to potential buyers. The process of renting will be based upon the order of applications to the fund through the corresponding electronic system (currently in paper form).

According to the approved procedure, in the event of negative decision of AMCGF, the tenant shall be notified about the early termination of the contract within three working days. If the tenant terminates the contract, the fund must be notified of this decision at least 30 days in advance.

The tenants have certain advantages, such as starting from the fourth year of the lease, they can transfer the right to rent the living space to third parties with the consent of the fund. In the event of the sudden death of the tenant (until all payments are paid), the rights under the lease are transferred to his heirs.

Mortgage as alternative

Final version of the housing leasing system in Azerbaijan will become clear in the coming months. President Aliyev has instructed the Cabinet of Ministers, AMCGF and a number of other departments to bring the existing legal and regulatory documents in line with his decree. Therefore, it is not yet clear whether fiscal and other preferences will be granted to participants in the lease of residential areas.

Yet it is difficult to predict how effective and attractive this scheme will be for the citizens of Azerbaijan. Nevertheless, scepticism in this matter is unreasonable, as there is a time-tested alternative in the country - mortgage lending through AMCGF.

By the end of 2018, the volume of mortgage loans issued by the fund amounted to ₼272.5 million, which is 34.2% higher than in 2017. Of this amount, ₼100 million was the share of social mortgage—two times more than in 2017. According to Finance Minister Samir Sharifov, this year the scope of social mortgage coverage will expand even more—₼162 million in the state budget for 2019.

However, the major portion of the funds in AMCGF is made up of working capital and borrowings in the securities market. In 2018, due to the repayment of previously borrowed loans and interests, AMCGF refinanced loans for ₼244.4 million—a record increase of 2.1 times compared with 2017. During the reporting period, the fund attracted ₼200 million from the placement of mortgage bonds.

The effective operations of AMCGF on management of the loan portfolio expands the fund's ability to issue long-term and low-interest housing loans, in particular to support the construction of social housing, such as the large-scale projects for the construction of social housing in the Yasamal and Surakhani districts of Baku implemented by MIDA LLC, a division of the State Housing Agency. At the end of November, the fund provided ₼9.6 million of preferential mortgage loans and ₼450,000 of standard mortgage loans for these purposes.

Undoubtedly, the scale of mortgage lending, including financing the purchase of social housing, will increase in the coming years. As well, the new mechanism for leasing apartments and houses will play an instrumental role as a driver for the dynamic development of the real estate market in Azerbaijan.