FINDING ITS PLACE

Iran 2011 | REAL ESTATE & CONSTRUCTION | REVIEW: REAL ESTATE

The coming of age of the 1980s generation has seen strong demand for housing, and the local construction materials industry is responding to the call.


The real estate market has played an increasingly important role in Iran's economic development over the past decade. At the end of 2008, the real estate market was estimated to make up some 5% of Iranian GDP. Experts suggest that, after the service sector, the main source of non-oil investment comes from the housing sector. Moreover, the housing market consumes about 50% of all final goods produced by the construction material industry.

Between 2004 and 2008, the Iranian housing market witnessed an unprecedented boom, with price inflation galloping. The average house price in Tehran alone grew by 13% year-on-year in June 2010. Experts believe that there are a number of reasons behind this phenomenon: First, the children of the population boom between 1976 and 1986 have come of age and are now marrying and living in their own homes. In addition to this underlying demand, the limited availability of other investment opportunities over that period and the strong returns seen in real estate investments attracted many investors and speculators, including professionals such as banks and holding companies. The strong level of the oil price over much of this period also fed into housing prices, as higher disposable incomes allowed many to jump into the real estate market. According to governmental sources, each year Iran needs to build 1.2 million-1.5 million additional residential units to be able to cover domestic demand.

From early 2008, however, the real estate market entered a lull. Tehran Municipality statistics suggest that in 2Q 2009 construction volumes in Tehran fell by 62.1% compared to 2Q 2008. The market downturn was accompanied by modest price decreases, from 1Q 2008 to 2Q 2009, statistics from the Central Bank of Iran suggest that the house price index declined by 2.2%. Considering the real estate bubbles that occurred in other parts of the Gulf region, Iran fared well. There were several reasons for the slowdown in the real estate market. The first came about because of the decrease in the oil price in 2008, which led to lower levels of liquidity available for real estate investment activity. As oil and gas remain the largest source of revenue for the state, any decline in the price received inevitably has a knock-on effect throughout the economy.

In order to maintain housing affordability for lower income families, the government launched the Mehr Housing Scheme. The scheme allows for constructors to be leased land for the construction of low-cost houses that are then sold on to members of the public (see Parand City focus).

In 2010, the first signs of a strong recovery in the real estate market were apparent, with 5,787 construction permits issued by Tehran municipality in April 2010, an 82% increase over the same period in 2009. Tehran is perceived to be the locomotive of the real estate market in Iran, and growth in the capital is believed to be the bellwether for development in the other urban centers.

Another measure taken by the government to adjust the balance between supply and demand and thus increase the affordability of housing in the market is through the promotion of industrial methods of construction so as to mass-produce affordable housing. This has been a valuable opportunity for foreign companies with track records of mass-produced housing using industrial construction methods to be awarded contracts to build thousands of residential units. So far, companies from Malaysia and South Korea have won development contracts under the Mehr Housing Scheme. In June 2010, the housing ministers of Turkey and Iran signed a memorandum of understanding for the mass construction of 20,000 low-cost houses by Turkish firms in Parand City, a new town being developed 35 kilometers south of Tehran.

It is believed that the ongoing recovery in the real estate market has legs. “If the market cannot produce 1.2 million units a year, the need for the next year compounds to 2.4 million units," says Mohammad Panah, the Managing Director of Iran Aluminium Industrial Company, a producer of windows and doors for residential units. Thus, the severe shortage of Iranian housing stock in the face of stable demand is the main cause of the impressive rate of growth: Business Monitor International forecasts a compound annual growth rate of 12.2% for the 2008-2013 period.

CEMENT INDUSTRY

The market for construction materials in Iran is finely balanced between the needs of rapid urban development and strong economic growth. The cement sector has come under the main focus over the past decade in an effort to transform Iran from being an importer to an exporter. Iran has a number of geographical advantages as a regional cement industry player, being richly endowed with the required raw materials such as limestone, clay, and gypsum, and well sited close to markets that are short on supply.

In 2003, there were 35 firms producing cement in Iran with a total output of about 31 million tons. By 2009, annual production capacity was already 62 million tons per annum. In the same year, 57 million tons was produced in 57 active production units. Iran's Minister of Industries and Mines Ali Akbar Mehrabian says the country ranks fifth in the world when it comes to cement production.

Eighteen of the 57 cement production units are owned by the FKCC/Tamin Cement Holding, which belongs to the Social Security Investment Company. FKCC/Tamin is the leading player with a 35% market share in terms of production capacity. Tehran Cement, with four plants, and Espandar Cement, with four plants, are among the other major players in the market.

As a result of the real estate market boom in the 2000s, the demand for cement surpassed supply and the government implemented policies to ensure that local production was diverted to the needs of the local real estate market. From 2003 to 2008, the government set the price of cement as well as distributed it to developers according to the amounts they needed as detailed in their construction permits. The market was liberalized in 2008, which led to a price increase of 30% almost overnight. In the period up to the liberalization, many cement facilities were built, and these helped ease the supply problems that the country had previously suffered. Yet, as the local real estate market slowed in early 2008, Iranian companies turned to the international marketplace to export their excess supply. In 2009, 5 million tons were exported to neighboring countries, such as Iraq and Azerbaijan, benefitting from the active construction activities going on in these countries. This trend mainly benefitted those companies, such as Behbahan Cement and Ardebil Cement, that had production sites in close geographic proximity to these countries.

As the recovery in the real estate market started, the cement industry is looking to a brighter future. The Managing Director of FKCC/Tamin, Reza Montazeri, told TBY that he expects cement consumption per capita will grow at the rate of about 10% per year for next three years, and this on top of a figure that already stood at 640 kg in 2009. The cement industry is also looking to markets in its near abroad: To be able to satisfy the demand for cement in Iran's neighbor Iraq, the government plans to build a railway to the city of Basra from the Iranian city of Khorramshahr, which will be used for the transportation of cement. The production capacity of Iran's cement sector is expected to reach 89 million tons per year by 2013. This increase in production capacity will need to be accompanied by technology updates at the existing plants, as the removal of energy subsidies by the government may render production in many of them less profitable.

The growing strength of the Iranian cement industry is also beginning to attract the attention of large international cement makers, keen on securing a strategic regional location close to profitable markets. Mr. Montazeri confirmed to TBY that even market heavyweights FKCC/Tamin are currently negotiating with a leading global company to explore export opportunities by establishing a joint-venture company, while other Iranian companies have also benefitted from the technical and financial assistance provided by foreign investors.

GLASS

Another aspect of the construction materials sector that has seen rapid growth over the past decade is the glass making industry. The glass industry is split between producers of flat glass, container glass, and tableware products, with medical vial producers also beginning to find their place. In recent years, the industry has grown at an annualized rate of 4%. In 2008, the total production of the glass industry reached 800,000 tons per year.

Flat glass is the main branch of the glass industry that directly deals with the construction industry. Accompanied by the booming automotive industry, the growth in construction activity led to increased production in the flat glass industry. In 2009, 600,000 tons of flat glass was produced by local glass manufacturers. Ebrahim Askarian, the Managing Director of Kaveh Glass told TBY that some 60% of this was produced by Kaveh Glass, Iran's leading glass manufacturer. Kaveh Glass was also the first producer of float glass in Iran, a higher quality product in the flat glass category for construction. Other leading companies in the sector include Azar Glass and Sahand Jam. As the potential for exports to neighboring countries begins to rise, glass production is expected to break the 1 million ton mark in the near future.