ONE LEVEL UP

According to statistics, the realty market is the third in Azerbaijan after industry and transport in terms of external investments.

Meanwhile these sectors seriously differ from one another as regards the proportion of external investments in total capital investments.

This trend may remain for the medium term future because of stagnation on the housing construction market. Thus for instance investments in real estate transactions account for only 7.8 per cent of total investments in the economy over January-July 2013 with only 7.7 per cent of those funds, or 677.6 million manats, being channelled into housing construction.

Local players provide most investments in Azerbaijan's real estate so far but the market prospects for both housing and commercial properties in this country attract also foreign investors today. In addition, Azerbaijan has no legislation prohibiting foreigners to buy real estate except land that foreigners may only take on lease. Yet how soon is this interest going to grow into practical injections of finance?

Foreigners on the market

Nusrat Ibrahimov, director of a consulting company, holds the opinion that Azerbaijan's pretty large per capita currency reserves show that local investors have great potentials to invest their own funds both in this and other countries. In this context, the expert says, mass admission of foreign investors to the realty market is undesirable at this stage.

More than that, a stratum of domestic investors is emerging in Azerbaijan today. Alongside the domestic market, they are also entering the markets of Russia, Ukraine, Georgia, Moldova, Central Asia and Turkey. N. Ibrahimov thinks it is necessary to create the conditions and a working mechanism for local investors to get established in the realty market during the next three to five years and then the doors can be opened for foreign investors as well. "There are no restrictions to their coming today but at the same time there is no 'incentive' factor either as the case is, say, in Turkey," the expert said.

A research conducted by the State Register for Property at the State Committee for Property Relations of Azerbaijan shows that more than 2,000 properties in this country currently belong to foreign nationals and the process of realty purchase by foreigners has become more active lately. Altogether, they have bought about 1,000 different properties over the past year with flats accounting for 90 per cent of them.

A great part of the investors in realty are nationals of Iran, Turkey, Pakistan, Japan and Korea. The properties bought by them include not only flats in high rises but also single-family houses. It is noteworthy that in choosing a property, foreigners do not confine themselves to the capital of Azerbaijan but also attend to different regions of this country especially those developing tourism. As for Baku, they prefer properties closer to the city centre, in Sabayil, Nasimi, Yasamal and Narimanov districts.

This is happening against the background of high prices for realty in Baku and not only by local estimates but also at the scale of the region. Thus for instance, according to a survey of realty prices in the CIS space, Baku is only behind Moscow, St Petersburg and the capitals of the Baltic states. The prices are relatively similar to those in Kiev, Minsk and Almaty. In general, as regards high cost of living, this country occupies the fifth or sixth place among the CIS states.

One can easily explain why the realty market is so attractive for foreigners. It is because the political and economic situation in the state is stable and there are economic prerequisites for repayment of investments. As for the second part of the question - the growing prices of properties - it should be sorted out.

Growth factors

It is no secret that prices on the realty market are affected by global processes on the one hand and on the other hand by the domestic economic, social and political situation, in particular, the employment rate, the degree of property rights protection, the amount of money in circulation and building materials prices.

Due to all these factors, against the background of loyalty in the construction sector, 2002 saw a mass influx of capital to this market which led to a 2.5-fold increase in its activity and a four-fold rise in realty prices.

Realty prices will continue growing in Baku till the end of the year although at a relatively low pace. As a matter of fact, price growth rates differ depending on the market segments. This trend, in Nusret Ibrahimov's opinion, will last for the next 3-5 years.

"Currently one can see prices growing in the realty markets of many states and this certainly has an effect on Azerbaijan which is a constituent part of the world economy. As regards internal factors, the population's monetary incomes are growing today and so is their paying capacity," N. Ibrahimov said. Among secondary factors attending the housing price growth, the expert mentioned the dismantling of old structures and providing the population with compensations in cash which is flowing into the market to buy new homes.

Apart from this, in N. Ibrahimov's view, the population with medium and above medium income levels have increased their earnings and they prefer to invest part of the their savings in this country's realty market. In addition, the interest is still high among the regions' population in moving to the capital for temporary or permanent residence. This has an impact on the demand and, as a result, the prices keep growing not only for buying but also for renting properties. "It should be pointed out though that efforts taken over the past few years under two state programmes for the social and economic development of the regions have created new production facilities and jobs and thus slowed down the outflow of the population to the capital," N. Ibrahimov added.

Meanwhile the process of realty price growth was accompanied by constraints imposed in the construction sector of Baku in the past few years: a ban on building houses higher than 12 floors; the requirement that new buildings' facades must comply with the capital's style and that other architectural rules should be observed. In addition, restrictions have been imposed since 2007 on the number of buildings under construction. Formerly permissions were issued for the construction of 250-300 residential buildings. Since the beginning of 2007, the capital's executive authorities have demanded that construction companies should first complete earlier started construction projects and issued news permits to those builders whose quality standards complied with today's requirements.

This is why the boom in Azerbaijan's construction market before 2008 when the portfolio of offers exceeded the demand five times was replaced with a decline in 2008-2010. In the new situation, most buyers left the market and the number of offers became excessive. That portfolio has been shrinking since about the end of 2010. The pace of construction has slowed down and additional offers in the housing market have been reduced practically to zero.

Thus according to calculations by a consulting company, the average price of secondary housing in Baku was $1,696 per sq.m. as of 1 August, which is an increase of 16 per cent on the same period last year. The primary market prices have increased by 19 per cent reaching $998 per sq.m. Compared with the housing market, the prices for commercial properties are relatively stable. The prices grew there by about 6 per cent in January-July.

Experts of the Central Bank of Azerbaijan hold the opinion that the continuing issuance of mortgages has had an impact on activity in the market of real estate especially secondary housing. Basing on this, N. Ibrahimov finds it inexpedient to  hange mortgage issuance terms until

there is a stabilization of prices in the market. Thus for instance the Azerbaijani Mortgage Fund issued loans worth a total of 73.69m manats in January-July 2013 which exceeds the volume of funding during the same period in 2012 by 87.65 per cent.

"Considering the fact that there is a stable demand in the housing market every year, the next one or two years will see a shortage on the market which can be noticed already today: it is very difficult to find quality housing to meet potential buyers' needs," N. Ibrahimov said. In his opinion, if the current situation remains, the prices will be growing at an increased pace in the next one of two years as there is not much activity in the construction market and it looks like the stagnation period will last till 2015.