PACING PROJECTS

Azerbaijan 2013 | REAL ESTATE & CONSTRUCTION | REVIEW: REAL ESTATE

While mega-projects remain in the headlines, the proper pacing of large-scale developments will be the name of the game to keep demand and supply at a happy balance.

Following the downturn in the market after the economic crisis, the prospects for the Azerbaijani real estate market are starting to look good again. The turnover in the market grew by 24.86% to almost AZN3 billion, while the income of mediators also more than doubled in 2012. The Central Bank of Azerbaijan (CBAR) stated that overall turnover of residential property had increased from AZN2.27 billion at the start of 2012 to AZN2.82 billion by January 2013. Of this total, the sale and purchase by individuals rose by 31% to AZN1.59 billion from AZN1.2 billion the year before. CBAR also reported that the revenues of mediators—banks, notaries, and realtors—had risen by 2.29 times from AZN162.3 million to AZN371.3 million the year before. These figures are indicators that confidence is returning back to the market after the slowdown that lasted from 2007 to 2010.

RESIDENTIAL

With this increase in demand brings an increase in price, as between June 1, 2011 and June 1, 2012, house prices rose by 12.2% in annual terms, or by 5.2% compared to the beginning of the year. In 2012, there were 32,000 mortgages registered according to the State Committee for Property Affairs. It also reported that there were 150,000 registered property rights in total, with 42,000 primary real estate facilities and 108,000 secondary registrations. As of January 2013, the average price in Baku for a square meter of primary residential housing was $1,520, while it was $882 for the secondary market. Prices of secondary housing had increased by 5.5% while the primary market had increased by 0.9%. The larger increase in the secondary market was largely put down to lower supply in the market.

Another sign of recovery is the fact that the number of real estate licenses has started to rise. Although the number has not risen back to the pre-crisis figure of 1,638 in 2006, it is above the minimum it reached of 1,097 in 2009 to move back up to 1,249 in 2011. The amount of residential space being constructed is also remaining steady at the moment. In 2011, there was a total of 2.03 million sqm of dwellings constructed, compared to 2.04 million sqm the year before.

COMMERCIAL

With the development of Flame Towers and the Khazar Islands projects, there will be a strong supply of high-quality office stock in the years to come. As Baku is being upgraded, huge amounts of money are being spent on redevelopment in all areas of the city. The total investment in all fixed assets rose in 2011 from AZN990 million to AZN1.28 billion, with AZN1.2 billion coming from domestic investment, which accounts for 79.7% of total investment, and AZN260 million in FDI, which accounts for 20.3%. Of that AZN1.2 billion, 71.7% (AZN731 million) of it is being spent on investments in state property and 28.3% (AZN288 million) on non-state property.

Over the past few years, the prices for commercial sites have stabilized. The price for commercial sites did not change from 2011 to 2012, hovering around $3,312 per sqm, and appears to have stabilized over the past few years. However, the rental price for commercial properties showed a slight drop from $21 to $20.15 per sqm, or -0.6%.

As prices have stabilized, and the country has started to show stronger signs of recovery, customers are beginning to demand higher-quality sites. “After the construction boom, deluxe and A-class properties became the main sector of both residential and commercial construction. Those properties are being prepared to serve both the local and expatriate community. Customers today are willing to pay, but they are looking for superior service," Chris Bond, Head of Real Estate of Qaya Emlak, told TBY. This is leading the country to build more and more grade-A buildings in massive mega-projects.

MAJOR PROJECTS

The skyline of Azerbaijan and Baku is almost unrecognizable compared to a decade ago when President Ilham Aliyev took office. The largest project, which will cover both the residential and commercial side of real estate, is the Khazar Islands project. With a total cost of over $100 billion, the new manmade island aims to house 1 million residents, 150 schools, 50 hospitals, as well as universities, cultural centers, and a Formula 1 track. The project will consist of six separate islands, creating a total of 300 hectares of space. Even though the project will not be finished until 2022, as of February 2013, 136 apartments had already been sold. The prices for an apartment are running from between $260 to $460 per square foot, meaning the average apartment of 1,076 square feet would cost around $300,000. The focal point of Khazar Islands will be the Azerbaijan Tower, which will be the tallest building in the world once completed, at 1,050 meters tall. The ground breaking will begin in 2015 on the tower and it will be completed by 2019. The company behind the project is Avesta Concern. Another major project that was recently completed is the Azure complex in Baku. “Azure is a 141,000-sqm facility that includes residential buildings, business and trade centers, and the largest indoor family entertainment center in Europe," Babak Babayev, Founder of Yeni Hayat, told TBY. The company is also building a new entertainment brand called Megafun, which it is hoping to export to the nearby countries of Russia, Turkey, Georgia, and Kazakhstan. Megafun is a 16,889-sqm facility split into sections named after different cities. Each area is then themed after its city with related entertainment activities, such as the Tokyo section featuring the latest cutting-edge gaming technology from Sony. Megafun is currently celebrating its 10th anniversary and Yeni Hayat is currently looking to export this product to other countries.

INTERNATIONAL PURCHASES

As Azerbaijan begins to collect more and more money from the revenues of its oil and gas exploits, the State Oil Fund of Azerbaijan (SOFAZ) is looking to the international real estate market. SOFAZ has $34 billion in total at the moment, and it would like to increase its fixed asset collection. Its plan is to buy real estate in prime locations around the world. In December 2012, it spent $268 million purchasing an office complex in London's West End. Later in the same month, SOFAZ announced it had bought retail property in Paris for $179 million to add to its $133 million project in Moscow. The largest endeavor it has embarked on is a $6.1 billion development of a large derelict area of Sydney's inner harbor. At present, $215 million is being spent on initiating the project, and the rest is expected to be sent in installments over the coming years.

It is a delicate balance between supply and demand that Azerbaijan has to achieve. As major projects start to finish, the massive supply could affect prices in a negative way if demand is not there. However, since most of the projects' finishing dates are spread over several years, the country has time to find the right equilibrium.