After the heydays of a real estate boom that peaked in 2006, the Baku real estate market saw major contractions occur following the onset of the global financial crisis. Limited credit availability and excess supply saw average residential prices fall by some 20% over 2008, while the retreat continued over 2009 as the center ground between buyer and seller became an elusive concept. However, the market has begun to shown signs of stabilization, with 2010 seeing a gradual cooling off, while 2011 looks likely to be the launching point for the next upward trend in the real estate cycle. Foreign investors have the right to purchase immovable property in Azerbaijan, although land purchases are conducted along a lease basis.
The residential sector suffered along with the other segments of the real estate market from the price corrections of previous years, though indicators are beginning to show signs of growth. Although the bottleneck seen in the luxury housing segment appears to be on the mend, the picture for the general B-type housing market remains cool, as supply still exceeds demand, while a number of construction projects remain frozen awaiting fresh credit lines and a more buoyant market outlook. Government involvement in the mass housing market, typically restricted to low-income earners, has seen a boost with the state targeting the construction of 1.9 million sqm of housing.
Over 2011, the average per square meter offer price for newly built housing in the Baku region has progressed from $1,299/sqm in January to $1,425/sqm in December. Although these two figures in isolation would indicate the return of a growth trend, the same figure for December 2010 was some $1,401/sqm, according to local real estate intelligence provider Business Market Analysis. Figures on residential sales support the stabilization outlook for the market, indicating that the real estate cycle may well be bouncing off from the bottom of the curve. In terms of type breakdown, some 73.69% were apartment type, another 18.57% were considered single-occupancy dwellings (typically villas), and another 7.74% were classified as “cottage-style.”
Rental prices have shown a modicum of growth in per square meter terms over 2011, advancing from an average of $10/sqm in January 2011 to $11.2/sqm in December of the same year. Rental levels in Grade A housing closer to the city center averaged around $12.5/sqm. Some 11.2% of all houses offered for rent on the market in December 2011 were composed of those asking for $1,000 per month or more, and typically these dwellings are located close to the downtown areas of Baku. Apartments in Grade C locations had an average rent of some $6.5/sqm over the same period, by comparison, and made up 45.5% of all rental offers in the $500/month or less category. Grade B apartments with asking prices ranging from $500-$1,000 per month completed the picture at 43.3%. Room sizes tend to range from the 2- to 3-bedrooms in size, with the average rent recorded at $686 in December 2011 over an area of 64.5 sqm. Average asking prices in terms of rooms ranged from $463/month for 1-bedroom, $668 for 2-bedroom, $794 for 3-bedroom, and $1,531 for 4-bedroom apartments over the same period. Grade-A apartments averaged an asking rental price of $1,630 in December 2011.
Another significant trend in the real estate market has been the launch of compulsory insurance on housing to cover fire and other risks. Premiums collected in 2011 amounted to AZN120.65 million, up 21% on the same figure for 2010. Premiums per square meter are still quite low, and it is unlikely that the compulsory insurance for residential real estate will have any affect on the general market, despite the boon it represents for insurance companies.
Overall, the price dynamics in the Baku market indicate the bottom of the residential cycle may well have been reached, and further economic growth and improved access to credit for home buyers will influence an upward trend on prices. However, key to any market recovery will be the pipeline of new supply on the market, as well as to the market segments it seeks
Access to the mortgage market remains an issue. Two primary routes exist for those seeking mortgages, with those seeking loans under AZN50,000 able to apply to the Azerbaijan Mortgage Fund (AMF). Such loans are 25 years in tenure at a fixed 8% per annum rate, and they are available for first-home buyers only. The AMF upgraded the amount of loans it provided over 2011, with AZN95.54 million being allocated through the banking sector, and it has significantly stepped up its presence in the local bond markets as a primary source of funding, refinancing another AZN77 million in previous loans via the capital markets. Any increase in the maximum loan level may well encourage market activity in the Grade C and especially Grade B residential segments. For those seeking loans above this amount or those looking to upgrade their housing, the banks are beginning to offer more alternatives, though interest costs and minimum deposit levels are considerably higher than the public scheme. Alternatively, many large employers in Azerbaijan also offer special housing schemes for employees. As an example, SOCAR ended its free housing policy for company workers in 2008, and has replaced it with a low-interest mortgage system that seeks to more adequately cover the needs of its workforce and their dependents.
One of the most difficult markets to corner is that of the commercial segment. Although in past years the availability of Grade A office and retail locations was restricted, new developments, such as the Flame Towers project, will see significant amounts of new quality space put onto the market. The upgrading of large sections of the capital has seen the availability issues faced by foreign companies in the past significantly overcome, although the dynamic between supply and demand will be tricky to solve and the construction pipeline will be important in determining future price dynamics.
Sale prices in the commercial sector have shown signs of stabilization over 2011, and an inclination to a cyclical upward trend should market demand return. The offer price per square meter rose from $2,803 in January 2011 to $2,836 by December, conforming to the annual average, according to Business Market Analysis. As a result of excessive supply hanging over from the boom years, elasticity is still considered limited, as the price performance in sales terms is demonstrating. Splitting apart the office from the retail segment provides more interesting trends.
Grade A retail locations had average sale offer rates of $5,980/sqm in December 2011, with Grade B coming in at $4,011/sqm. Average offer rates for sale in the office segment came in at $1,670/sqm, with the industrial segment coming in at $397/sqm. In terms of Grade A office buildings, average asking rental prices range in the $25-$40/sqm scale, with Grade B starting at the $15/sqm mark, according to Caspian Property Services.
All segments are presently witnessing the flow of a significant number of new projects in the commercial segment, indicating that both rent and sale prices will likely maintain a steady price dynamic without additional stimulus provided to the segment through new investment flows. One indicator of the significant new flows of potential office and retail space is the White City project, which will add another 440,000 sqm of office space and 230,000 sqm of retail space to the capital. The proposed Khazar Islands project will also substantially add to supply, and its phasing in order to maintain balance in the property market will be a key consideration for property developers. As in the residential segment, price stability would appear to be the hallmark of the market going forward over 2012, though this may be the plateau from which a new wave of price increases may occur, depending on how the supply/demand balance plays out.
© The Business Year