Ready to Buy

Since gaining independence in 1991, Azerbaijan has sought to diversify its economy beyond oil and gas, including through massive redevelopment of the capital, an effort that itself depends on the billions in oil and gas monies that made up 58% of government revenues in 2013. The master plan for Baku 2030, unveiled last year, calls for an integrated network of transport infrastructure—road, rail, and air—and the continued redesign of the old city.

It must be emphasized that Baku is a work in progress, so while it has five-star hotels like the Four Seasons, Hilton, and JW Mariott and trendy galleries like Yanat!, it is still developing the strong tourism flows and affluent youth population. Azerbaijani law allows the ownership of real estate by foreigners, though restricts land use to lease arrangements. According to the Baku Municipality property tax regulations for 2014, nationals and foreigners pay the same rate, which is assessed at 0.1% on the property value above AZN5,000.

While the mortgage market remains nascent, mostly due to low average income and a traditional aversion to debt, the Azerbaijan Mortgage Fund (AMF) in April 2014 announced that mortgage lending for 1Q2014 amounted to 580 loans for a total of $31.86 million, up a significant 23% from the same period a year earlier. Overall bank lending in Azerbaijan increased 28.3% YoY for the period, according to CBAR. Also in April 2014, Azer-Türk Bank launched a preferential commercial mortgage for foreigners living in Azerbaijan, offering a 10-year mortgage with an annual interest rate of between 9% and 12%.

RESIDENTIAL MARKET

Since the country adopted a market-based economy in the 1990s, residential development has led the real estate market in Azerbaijan and continues to do so, now leading the upswing. CBAR reported that the capital’s housing market in 2013 saw prices rise in the secondary housing market by 20% and in the primary market by 28%. The average price for Class A residential real estate at the end of 2013 was $2,469 (AZN1,938) per sqm and for Class B residential, $962 (AZN755). The increase in prices is in part due to the extensive demolition of dilapidated buildings in the capital, as well as a gradual decrease in the construction of affordable housing.

Sporting high-rise residential and commercial buildings, modern plazas, and modern entertainment facilities, today’s Baku is hardly recognizable from the polluted oil town of post-Soviet days. The central government has directed the demolition of more than 4,000 housing units in the old city in recent years, from shanty-town type houses to multi-family buildings from the Soviet era. There has been some public resistance to the use of eminent domain to resume land, but that is diminishing since the government in 2013 raised the buy-out compensation prices by up to 50%, to a uniform $1,911/sqm from the previous rate, which ranged between $1,274 and $1,529.

According to the Asian Development Bank (ADB), Azerbaijan’s services sector grew by 7.2% in 2013, driven mainly by increases in trade, tourism, and catering. Higher consumer demand pushed the retail trade up by 9.6%. The services sector represents about 30% of GDP, and the bump in retail trade has helped lift retail rental and sale prices, particularly in the premium category. The wave of rezoning and rebuilding has lowered the supply of low- and middle-income housing as most builders prefer to focus on the high-margin premium market. Nonetheless, the increase in compensation rates has helped push prices higher in the luxury market as well.

Rental prices have not risen as fast as sale prices, though. The average rental rate for Class A residential property is $13.40 per sqm, though the price can be significantly higher for a luxury development, such as Flame Towers. Class B residential rentals average around $9.50/sqm and decline as one gets more distant from the city center, according to Caspian Real Estate Services, a Baku agency. The overwhelming majority of housing in Baku, about 80%, is flats, with the remainder divided between stand-alone villas and small houses, known locally as cottage-type units. The average monthly rent for a Class A flat in January 2014 was about $1,800.

COMMERCIAL MARKET

One look is enough to tell you that the supply of prime commercial real estate is growing fast in Baku, with huge projects coming online now and even grander projects in the works, such as the world-class Khazar Islands project, which boasts a $100-billion price tag, or the Baku White City project, which will be 10 times the size of the previous settlement and add some 4.5 million sqm to Baku’s commercial and residential stock of real estate. As in cities around the world, office and retail space often go together.

Port Baku Towers is the premium business address in 2014, home to the headquarters of BP, and all 900 luxury flats in the three towers have been sold. The Port Baku Mall features Emporium, newly opened in 2014, which covers 8,500 sqm and ultimately will feature some 300 high-end fashion retailers.

Class A office space rents for between $30 and $50/sqm in the city’s prime spots. The total stock of commercial multi-tenant office buildings stands at 510,000 sqm as of April 2014, of which Class A accounts for 190,000 sqm and Class B 320,000 sqm, according to Azstat. Official statistics do not include standalone, single tenant, or owner-occupied office buildings, which most commonly range between 500 and 3,000 sqm. The supply of Class A commercial office space has been growing twice as fast as that of Class B. Class A retail space sells for an average $7,435/sqm and rents for an average $34/sqm, and the figures for Class B retail space are, respectively, $4,850/sqm and $18/sqm. Industrial space is selling at an average price of $418/sqm and renting at $1.90/sqm, reflecting a less-steep increase than the office and retail sectors. Azerbaijan has a rich and ancient cultural history—it is the easternmost city with European heritage, and has that unique blend of Slavic, Persian, Arabic, and Turkic influences in art and architecture. The newest projects, from Flame Towers and Port Baku Towers to Baku White City, reflect this multiethnic heritage. City planners also hope they reflect and inspire universal investor appeal as the city reaches out to the globe.