The global recession reached the Caspian shores in 2008 and resulted in two difficult years for the Azerbaijani real estate market. In just a few months, between September and November 2008, apartment sales in Baku fell by 20%. The following year saw a further average drop in sales of 15% and the rate of construction shrink by 8.2%. The continued loss of momentum in the market throughout 2009 saw an astounding overall market contraction of 40%. However, anti-crisis measures implemented by the government, such as steps to increase liquidity in the local market and an injection of state investment, went some way to easing the country out of the slump. During 2010 signs of a gradual recovery could be seen and it was predicted that the market would stabilize in 2011. Nusret Ibrahimov, General Director of consulting company MBA Group, confirms that this is happening, stating, “Although both growth and fall in prices occurs on individual market segments, as a whole, the market is stable.” For example, the prices of Grade A apartments have fallen by 4% since early 2011, with Grade B and C apartment prices rising by 4%. According to APA Economics, overall real estate prices have recovered at a rate of 29.6% since the crisis period.
Despite signs of recovery, it is undeniable that Baku is in need of an influx of purchasers for the numerous new apartments that have flooded the market. According to industry experts, some 70% to 80% of investments in the real estate market are made up of financial resources earned by Azerbaijani expatriates. The recession resulted in a drop in money flowing into the country, and between January and September 2009 the Central Bank of Azerbaijan reported a 16% decline in remittances. Nusret Ibrahimov believes that the continued recovery of the market will depend significantly on how much Azerbaijani nationals living outside the country begin to re-invest in real estate at home. The president of the Azerbaijan Realtors Association, Vafadar Akhundov, has reported that the investors who were previously buying up newly built luxury apartments in the capital have all but disappeared. “If previously the market activity was being buoyed by major purchasers buying properties for AZN600,000-AZN1 million, today only small deals are being concluded through necessity,” Akhundov said. The majority of property currently being sold belongs to the secondary market. Akhundov asserts that further steps are needed to inject substantial life back into the market, with government measures to activate the mortgage market being seen as a necessary measure.
In recent years Azerbaijan has been receiving the largest amount of FDI in the region, with FDI stock at home and abroad in 2010 reaching $8.92 billion and $6.6 billion, respectively. The government has been encouraging foreign companies to enter the market and the country’s legislation offers protection to foreign investors with certain guarantees and favorable conditions to operate in the market. Foreign entities cannot yet own land independently and may only lease. There are, however, no restrictions preventing foreigners from owning immovable property. Furthermore, the country’s wealth from the substantial hydrocarbon reserves and extensive work opportunities in the oil and gas industry has resulted in a highly educated and inexpensive workforce. Such attractions, along with the construction boom, have lead to increasing numbers of local and international developers, construction, and architectural companies appearing within the sector. Britain is the largest single foreign investor in Azerbaijan, with more than 100 British companies in operation, and accounts for approximately 50% of FDI into the country.
Residential development has led the real estate market in Azerbaijan for more than a decade. The State Statistics Committee states that there are over 200 construction companies registered in Azerbaijan, with more than half being involved in residential development. Construction has been predominantly centered on the capital of Baku, with the Yasamal, Khatai, and Nasimi districts receiving the bulk of attention. During 2010 the total area of residential property put into operation reached 1.49 million square meters, a 30.4% increase from the previous year. A number of upscale primary market properties are currently being developed and are due for completion shortly, including the Absheron JW Marriott Residences, Nizami Residence, Edelweiss Residence, Flame Towers, and Sky Park. Key market players include Akkord, Azkor Group, Mega Holding, and Pasha Group.
The challenge facing the market now is to enable access for a far greater amount of people than is presently possible. The market is heavily dominated by expensive larger apartments, with affordable 1-2 bedroom properties in short supply. Nusret Ibrahimov states that “the deficit of apartments of such kinds leads to reduced activity of the market, as the average category of the population… cannot find an appropriate apartment”. Access to finance is also a considerable obstacle. There are two routes to acquiring a mortgage in Azerbaijan, the most popular of which is run through the Azerbaijan Mortgage Fund (AMF). The AMF provides standard mortgage loans and social mortgage loans through certified banks in Azerbaijan. The maximum standard loan of AZN50,000 can be repaid over a maximum term of 25 years, with an annual interest rate of 8% and a minimum deposit of 20%. Some banks also offer their own individual mortgage schemes, but feature higher interest rates and require larger deposits. The maximum loan threshold invariably puts primary housing out of reach for borrowers. Ibrahimov believes that it is vitally important for the maximum mortgage loan threshold to be increased to create growth in market activity and to improve living conditions for a vast swathe of the population. This would potentially help shift the over supply of newly built 3-4 bedroom apartments in the city center.
Another thorn in the side of full market optimization is the vast amount of property that remains unregistered with the state. Mortgages cannot be secured on unregistered property and currently a majority of primary housing remains unregistered. In order for an apartment to be registered the building it is in must have obtained all necessary construction permits; however, many buildings do not have all of the relevant paperwork. A new Construction Code is being drafted, the implementation of which it is hoped will go some way to improving the current situation. There are also hopes that the introduction of compulsory insurance of real estate will accelerate the process of new-building registration. Commenting on the new regulations, Namig Khalilov, head of the Insurance Supervision Service, said that persons who fail to insure their properties will not receive compensation from the state, even in cases of natural disasters. With property insurance being relatively inexpensive—0.1% of a property’s value—and with Azerbaijan’s positioning in an earthquake zone, this should encourage owners to insure.
Finally, qualified real estate advisors are needed to professionally and accurately appraise property. The Azerbaijan estate agency market is populated with appraisers with little or no real knowledge of the market, leading to inaccurate property valuations. With inadequate commercial guidance, landlords often have unrealistic rental expectations and choose to leave their apartments unoccupied rather than lower the rental price, resulting in properties being left unoccupied for months at a time.
The rapid development of the energy sector has led to a high demand for quality office space due to the large number of local and foreign companies opening new offices. The majority of office complexes currently being developed are Grade A buildings located in the economic center of Azerbaijan, Baku. With little urban planning being implemented around the city there is no specific economic district in the capital,
however, and newly built office complexes tend to be scattered around the city. There are a number of mixed use developments presently being built that will house grade A office space, including Flame Towers, Port Baku, Edelweiss Business Centre, Park Tower Baku, and Luxen office and trade center.
The hotel industry is also receiving a considerable amount of attention. There are currently only a handful of international chains operating in Azerbaijan, notably the Hyatt Regency, Park Hyatt, Radisson Blu, Park Inn, Ramada, Holiday Inn, and Days Inn. A number of new luxury hotels are being built and due to open shortly, including Four Seasons, Hilton, Fairmont, and Marriott. The hotel market in Azerbaijan is heavily dominated by luxury hotels based in Baku, with little or no economy hotels offering budget accommodation at an international standard. As a result there is a demand for the construction of branded budget hotel chains. Outside of the capital in Gusar, the Shahdag Winter-Summer Tourism Complex is being built, which will provide a new summer/winter tourism destination and contain a four-star hotel at international standards. There is in general a need for quality accommodation in the regions and with the ambition for the creation of a viable tourism industry in Azerbaijan, it is envisaged that there will be a greater focus placed on the construction of new hotel chains outside the capital.
A commercial real estate sector currently emerging from the shadows in Azerbaijan is the underdeveloped warehouse sector. The majority of warehouses currently in operation are outdated, Soviet-era structures. If hopes to reinvigorate Azerbaijan’s agricultural and food industries are realized there will be a demand for modern warehouse complexes, particularly for the refrigeration of fresh produce. In 2009 the Azerbaijan National Foundation for Entrepreneurship Support offered loans to build 20 refrigerated warehouse complexes for cereal crops in rural regions. With Baku being the main transport corridor for the country and with very little competition, demand for quality warehousing around the capital is growing.
The Azerbaijani victory in the Eurovision Song Contest will have a considerable impact on the commercial real estate market in 2012, with a new structure being built to house the event as well as numerous projects to construct affordable hotel accommodation for visitors.
According to The State Statistical Committee there are over 35,000 retail enterprises in Azerbaijan, with 64.5% of these being in the food industry and 35.5% in the non-food industry. To date the market has been divided into two main segments: street markets and high-end boutiques, with very little in between. The mid-market, while still under-represented, is growing, and the recently opened Park Bulvar Mall is proving a hit with residents. The $40 million development is the first Western-style mall in Azerbaijan and provides 17,500 square meters of leasable space. Well-known brands such as Debenhams, Mango, Nine West, Coast, Sisley, and Accessorize are just some of the retailers occupying space. The mall also includes a cinema, bowling alley, and large food court, where the capital’s first KFC has now opened.
© The Business Year