MOVING ON UP

Azerbaijan 2016 | CONSTRUCTION & REAL ESTATE | REVIEW: CONSTRUCTION & REAL ESTATE

The increasing purchasing power of Azerbaijanis is driving demand for higher quality housing. And with prices low, the buyers are winning.

CONSTRUCTION

Azerbaijan's construction market has enjoyed rapid growth over the last few years. Figures show strong growth, with the construction industry generating 11.7% of GDP in 2015, and the total volume of construction work in 2013 amounting to $11.1 billion. In 2013, new construction accounted for 66.2% of all implemented construction work in Azerbaijan, and private companies carried out more than four-fifths of all that work.
The construction industry has developed dynamically, spanning the residential, commercial, and retail segments. Widespread road reconstructions and transportation projects have made the industry one of the main drivers of construction projects in recent years. Projects such as railway extensions, expansion of public transit, and a new wing for Heydar Aliyev International Airport in preparation for the 2015 European Games were prioritized and generated a construction boom. For visitors, the ultra modern airport and recently upgraded road system are an impressive sight, especially with the remarkable skyline featuring the iconic Flame Towers, which were completed in 2013, and the curvy SOCAR Tower.
The industry looks primed for further growth, with GDP from the sector expected to be AZN649.56 million by the last quarter of 2016, according to Trading Economics analysts. It also estimated that, in the long term, Azerbaijan's GDP from construction projects will be around AZN1.06 billion by 2020.

THE RIGHT MATERIALS

Azerbaijan produced 1.62 million tons of cement between January and July 2015, a 2.4% decrease compared to the same period in 2014. Yet Azerbaijan plans to double its production of building materials over the next five years. According to a draft plan outlining socio-economic development for 2016-2019, there are plans afoot to increase the quality of Azerbaijan's manufacturing standard to international standards. The overall intention will be to export locally made building materials.

The demand for cement products is expected to grow annually between 4 and 5% from 2016, according to Hasan Yalcinkaya, the CEO of Norm Gizildash Cement, the largest cement plant in the South Caucasus. His company is one of the largest in the market, contributing 1.1. million tons to the 4.4 million that Azerbaijan reportedly produced in 2014. The import of cement from neighbors Turkey, Iran, and Georgia, has gradually reduced over the years, and local production capacity has increased to the point of considering exporting to Russia's southern regions, as well as Kazakhstan and Turkmenistan.

At the time of writing, the government estimates that in 2015 Azerbaijan produced $555 million of construction materials, and that building material production growth increased by 9.3%. It is expected that the first figure will reach $608 million in 2016 and $708 million in 2017. The government is expected to introduce measures to attract additional sources of financing, as well as financing mechanisms for the housing market and expansion of mortgage lending to support the construction sector.

In March 2014 it was announced that Swiss company SIKA had become a resident of the Sumgayit Chemical Industrial Park, 32.5km away from Baku. SIKA has over 150 factories and plants across 80 countries and created a plant for manufacturing concrete mixers. The plant will have an annual production of 5,000 tons and plans to start production in the first quarter of 2017.

The move is seen as a result of the government's measures to create room for foreign investors that can add value to the economy and drive further growth. In order to increase the investment attractiveness of the park, residents are exempt from paying income, land, and property taxes for seven years, and equipment and technology used in the park are exempt from VAT.

MAJOR PROJECTS

Historically, Azerbaijan has had a strong portfolio of factory construction and increasing capacity for construction materials, but the centerpiece of Azerbaijan's construction sector is the development of commercial and residential megaprojects.

Khazar Islands

Khazar Islands is a megaproject of colossal proportions. This $100 billion city, also known as the Caspian Islands, will be situated on 41 manmade islands spread over 3,000ha in the Caspian Sea. This is a mammoth development starting this year and is expected to be completed between 2020 and 2025. As well as demolishing a nearby mountain to make room for the project, it will potentially host the world's tallest building.
The project will boast enough residential space for one million people, as well as 50 hospitals and daycare centers, 150 schools, parks, university campuses, and even a racing circuit capable of staging Formula One events.

One of the trophies of Khazar Islands will be Azerbaijan Tower. When completed, the structure will stand at 1,051m tall, 200m taller than the Burj Khalifa in Dubai and 50m taller than Saudi Arabia's Kingdom Tower, making it the world's tallest building.

The project is the brainchild of project developer and billionaire Ibrahim Ibrahimov, the president of the Avesta Group of Companies. Avesta Group is funding the project, and hopes to reach annual profit margins of 10-15% for investors. According to ABC.AZ, Chine investors have already agreed to invest $12.5 billion in the construction of Azerbaijan's first island city. Representatives of China ZK Investment Group and TSG Global met with Avesta representatives in April 2015.
Transport between the islands to the mainland will be made possible by a network of 150 bridges and a large municipal airport. Ibrahimov has said the finished development will be a “new Venice."
According to Azertag state news agency the first phase of the project will be completed in May 2016. This is the first phase of three and will open with a number of facilities, including beaches, restaurants, bridges, and roads.

White City

White City, in Eastern Baku, is an ongoing megaproject, redeveloping Baku's Black City, which was established in the eastern part of the capital in the late 19th century as the hub of the local oil industry. The redevelopment plan was conceptualized as part of the 2021 strategic plan for Baku.

It is the Caucus region's largest development, covering 221ha of former industrial land. The area is larger than the principality of Monaco, and the master plan was designed by architectural firm Atkins (UK) in collaboration with specialists from Azerbaijan, Fosters + Partners (UK), and the American architectural bureau F+A Architects. The area will be transformed through the development of 10 districts, boasting 48,000 workplaces, 20,000 parking places, and a capacity for 50,000 people. Roughly 75% of the project will be for residential units, creating a new community of 19,700 households.

The rejuvenation of Baku, once known as where half the world's oil was produced, is transforming Baku into a tourist attraction. Baku's skyline has changed dramatically, raising the capital's profile as an international business and tourism destination. The iconic Flame Towers were completed in 2013 to the cost of $350 million and are the tallest trio of skyscrapers in Baku. The tallest is devoted to residencies, another for offices, and the final for the luxury Fairmont Hotel. Visitors will see a new convention center, a new museum in the shape of a rolled up carpet to capture the country's industrial heritage, and the Old City, one of the finest in the world and mostly unknown out of the Caucus.

On a different note, one construction project that will have a stake in the country's future prosperity is the Trans Adriatic Pipeline. Construction will begin in March 2016, with the aim of transporting gas from the Shah Deniz II field in the Caspian Sea, one of the world's largest gas fields, by the end of the decade. A consortium led by BP is exploiting the field, which is to provide gas to Europe through two pipelines, which together cost $45 billion.

On a similar note, Turkey and Azerbaijan are working together on the Trans Anatolian Pipeline (TANAP). The project will also bring natural gas from the Shah Deniz II gas field to Turkey and then onto Europe, as the secondary element of the Southern Gas Corridor. TANAP's 1,850km of pipeline will run from the Turkish border with Georgia, through 20 Turkish provinces and under the Sea of Marmara, and progress is being made following the groundbreaking ceremony in March 2015.

The two countries are also working together on the construction of a railway that will link Europe to Asia. The Baku-Tbilisi-Kars (BTK) line is a priority project for Turkey and Azerbaijan's cargo transport, and is expected to be completed in December 2016. According to a speech by Turkey's president during a joint statement in March 2015, although the decline in world oil prices has slightly affected the trade turnover between the two countries, they both aim to increase trade turnover up to $20 billion over the next five years.

Likewise, following an improvement in bilateral relations between Iran and Azerbaijan, new opportunities and prospects for construction projects have opened up. In 2014 the trade turnover between Iran and Azerbaijan amounted to $186.6 million. It decreased by 55.36% in the first half of 2015, but with sanctions lifted and Azerbaijan looking to push non-oil based trade, figures are expected to rise.

Azerbaijan lacks a railway link with Iran and transports the vast majority of cargo traffic by road. However, the prospect of connecting the railways of Iran and Azerbaijan was discussed during a meeting between Azerbaijan's Economy and Industry Minister Shahin Mustafayev and Iran's Transport Minister Abbas Akhoundi in Tehran in February 2016. The Iranian minister said both countries, as well as Georgia, share a common interest in connecting the Black Sea to the Persian Gulf. The construction of the Iranian part of the North-South railway, a 8.5km rail link connecting the railways of Iran to Azerbaijan, is expected to be completed by the end of 2016. This is a small segment of the whole North-South corridor running from India to Helsinki, a multimodal route for passengers and cargo from St. Petersburg to the Mumbai port designed to carry transit cargo from India, Iran, and other Persian Gulf countries to the Caspian territories and onward to Northern and Western Europe.

Real Estate

Azerbaijan's real estate market has been affected by low oil prices and continues to provide buyers with relatively cheap houses. The low oil prices aggravated a slump in demand that had been plaguing the real estate market since 2014, but growth is not far over the horizon.

Following the construction boom from 2003 to 2006, residential development has consistently led the real estate market. The country recorded rises in prices between 2007 and 2008, but in 2009 prices started to fall and in 2015 real estate prices fell 22.91%. The greatest decline for the year occurred in the commercial property market, where prices fell by almost 34%, and likewise the rental market fell 20.16% over 2015. The exception is the land market, where prices rose by 1.58% between October and November 2015. Low liquidity played a role, as the flow of capital to the real estate market dropped with the oil prices.

However, what is adversity for some provides opportunities for others. The International Real Estate Investment Exhibition opened in Baku in December 2015, illustrating the growing interest of foreign companies keen to enter the Azerbaijani real estate market.

And with the start of 2016 things began to look up. February recorded an increase in almost all segments of the real estate market. Some commentators claim that growth can continue if credit institutions increase their activity in the market, but generally real estate experts forecast a decline in property prices in the summer of 2016, with further decreases until late 2016.

However, this has provided opportunities for the secondary housing market, which increased by 53% in February 2016 compared to the previous month, and in February 2016, the price per square meter in Baku amounted to $1,019.

The average period of an object staying in the real estate market amounted to 180 days in February, 4% less than in January 2016, according to an MBA Group report.

Looking ahead, rental prices are expected to increase by 6% over 2016. This is not as strong as previous years, when rents climbed by 10% and 12% in 2013 and 2014, respectively, according to ABC.AZ. Property prices in Baku currently average $1,612 per square meter, and the highest prices are observed in Sabail ($2,131 per square meter), which, like Yasamal areas, have the highest appreciation potential.

In order to simplify the purchase of housing mortgages for young families the state has proposed to minimize or even call all pre-payments/deposits. In Azerbaijan the maximum amount for mortgage loans provided via the Azerbaijan Mortgage Fund is $31,900 with a rate of 8% and maturity term of 25 years.
The social mortgage loan, however, is issued to the amount of $31,900 with an annual rate of 4% and for a term of 30 years. A 15% down payment is required to receive this type of loan, compared to 20% with a conventional loan.

In Azerbaijan, like many other countries, foreigners can buy real estate but not land, which is reserved for citizens. Most purchases by foreigners tend to be done on a freehold or leasehold basis. The most popular districts for foreigners in the capital are Sabail and Yasamal, which are in the vicinity of Nizami Street, one of the most expensive high streets in the world.

Derek Clarkson
DEREK CLARKSON
Country Manager, AECOM
AECOM’s Azerbaijan operations were established after the company acquired the Russia-based Savant Group.
Ibrahim Alisoy
IBRAHIM ALISOY
General Director, Idea (Azerbaijan)
Currently, we are working on a state contract in Russia. We are producing exclusive benches for the Northern Caucasus resort of Arkhyz.