Whether the Georgian construction business has problems and what threat there is to the house-building in 2007

Tata Toria

The scale of construction is visibly growing in the Country, especially in Tbilisi.

It is also noteworthy that the Georgian construction market becomes increasingly attractive for foreign investors. Interesting are the appraisals of experts and representatives of the construction companies concerning these positive changes as we as their opinions as to how the level of our companies’ activities complies with the requirements of the international market, weather they have the ability of entering new markets and weather Georgian construction business has problems and what kind of forecast can be made for the future.
In order to discuss the mentioned issues, we got in touch with the Real Estate Manager of public opinion and marketing research center – IPM, Mr. Kote Gabrichidze.
According to Mr. Gabrichidze, appraisal of the current processes in the construction business and making of forecasts for the future requires permanent research of the market. Intensive research of the past activities gives some picture for the future. The research made once in three years and even once in a quarter does not show the trends well and does not give a full picture. It should be also pointed out that the mentioned research will contribute to the development of the construction business taking into account the aspect that Georgian production will become better known to foreign investors. When investors become interested in what is happening in the market, not a single company can actually give a satisfactory reply to them. For example, the question as to how much the sales prices will increase remains unanswered. The reply is usually a general one since they do not operate with concrete parameters. This kind of reply is rather incomprehensible for foreign companies. What is most important, this information is not sufficient for a foreign investment to start construction activities in Georgia. The need complete information about the market in order to make investments in this business. That is why, for about four years IPM has been trying to arouse construction companies’ interest to marketing research. It happens this way in the world: first you familiarize yourself with the processes taking place on the market and then start your activities.
However, the center’s first attempts in this direction did not turn out to be successful. But three years ago, when IPM carried out quite an interesting research, the interest on the companies’ part appeared. Since 2005 this interest has become stronger. The businessmen working in this sphere became interested in receiving information on the competition existing on the market, the players in some particular segment, etc. In 2006 the interest to these activities doubled and IPM consecutively carried out several researches. This research is not the property of some company, it covers the whole industry.
One of the researches had to do with inventory taking of all Tbilisi’s newly-erected buildings. In the process of the research four price segments were singled out: low, medium, high and very high. For example, the prices in the low price segment make up 380-500 USD per 1m2 and it makes up 54% (2 170410 m2) of the total volume of the market. In the medium segment this indicator makes up 510-700 USD per 1m2 and it makes up 27,2% of the total volume of the market. In the high segment the indicator makes up 710-950 USD and it makes up 11,3% of the market. The price in the very high segment exceeds 1000 USD per 1m2. It makes up 6,7% of the market.
The second research carried out by IPM has to do with flexibility of prices. It is necessary for the companies playing on the construction market to have this information since they want to know the factors that have an effect on the prices and buyers, in particular, what are the priority parameters for them when they look for a flat – district, a company’s image, the quality of construction, floor or something else.
However, these two researches are not enough to make a forecast concerning the changes that will take place in this segment. It is necessary to carry out intensive researches for this purpose. It is good that the work in this direction is already underway.
In Mr. Gabrichidze’s opinion, Georgian companies can already afford to carry out weekly researches that show them the situation on the market – has the supply increased or not, will the prices drop or will be constantly growing in relation to the currently fixed level. IPM is starting the mentioned research in December. It is called “index research” and it shows a real picture of business health in coefficient terms. There are five parameters, according to which observation of the market is carried out. They are: price, activity, profitability and market expectations indices. IPM has created this product and currently offers it to the main market players, builders, banks, insurance and brokerage companies, which contributes to increasing of their activity on the market.
After the beginning of the mentioned researches it will already be possible to make some forecasts. According to Mr. Gabrichidze, as to the changes that has taken place in the Georgian construction business and comparison of the current situation with the previous one, there is already a double supply on this market compared to the previous years, which is accompanied by a considerable price increase. If it was possible before to purchase one square meter for 180-200 USD, this year the lowest price makes up 380-400 USD. As to the maximal price, if in the past years it made up about 600 USD, now it ranges between 1500 and 2000 USD, i.e. the market’s development from the viewpoint of both the prices and the volume is obvious. However, that does not mean that all segments of this market are developing in a similar way. There takes place a differentiated growth of the market depending on the district, i.e. the volume of construction is not growing equally in all districts. We can also carry out observation from the viewpoint of the purpose of constructions. From this point of view, we can single out three main types – construction of dwelling, office and commercial spaces. Here indicators differ as well. There is a greater demand for commercial spaces. According to IPM’s appraisal, the demand for business spaces is not being met, but, according to Mr. Gabrichidze, it does not mean that this trend will continue for a long time. For some period even an excessive supply is expected. The prices in Poland and Czechia have dropped because of the excessive supply. These markets did not sustain the excessive supply and a sharp drop in prices. Similar processes did not take place in Moscow, there the demand overcame the excessive supply. It will be possible to make a correct forecast in Georgia after the beginning of index research and carrying out of the market’s dynamic observation.
As to the renting business, IPM has carried out serious researches in this direction. According to Mr. Gabrichidze, the situation in this sphere is quite stable, i.e. here there is no price increase similar to those in sales. Here we should mention the fact, and it is confirmed by all companies, that a rather large share of flats is purchased not for living purposes, but with the purpose of capital investment. Many foreigners or people that left the country see that the prices are actively rising and invest their money in real estate instead of keeping it in banks. It is true that real estate has the same function all over the world, but the ratio of sums invested in it in our country is quite high. In some companies they say that the share of money coming from abroad makes up 20%, in others – 40%. Thus, a large part of the population purchases flats for business interests – with the purpose of their selling or renting. It is interesting to what extent money investment in real estate is more profitable than placing it on a bank deposit. It will be established after carrying out of corresponding researches by one of the index parameters, in particular – the profitability index.
As we have already mentioned, the volume of the construction market has doubled since 2003. Three years ago it was not very attractive to carry out constructions beyond the race track’s territory sine the expenses exceeded the expected profit. Today constructions are being carried out in many districts of Tbilisi. Besides the central districts, the city’s outskirts already represent the priority for construction companies. For example, “Center-Point” company is interested in construction in such districts as Didi Dighomi and Moscow Avenue. It has been a long time since construction exceeded the bounds of Tbilisi and involved mainly resort territories: the Black Sea coast, Likani, as well as winter resorts – Bakuriani, Gudauri. “Center-Point” takes interest in Gori and Kutaisi. In 2003 the total space under construction made up 1 850000 m2, but according to the current data it makes up 2 170410 m2, including office space – 131 694 m2, commercial space – 95 573 m2. The remaining 1 943143 m2 falls on housing construction.
According to IPM’s data, the total turnover makes up 1 200 000 000 USD.
The twenty companies playing on the construction market are as follows:
“Center-Point”, “Arsi”, “Axis”, “Valencia”, “Tbilisi”, “Olimpi”, “Magi Style”, “Kid Architecture”, “Arcstudio”, “Moduli”, “Iberia”, “Tibistarsi”, “Merani”, “Orioni”, “Besko”, “Meridiani”, “7-Sky”, “Award”, “Texi”. They occupy 70% of the whole market.
According to the data of the Statistics Department, on Georgia’s scale the basic capital of construction enterprises makes up 258.7 million GEL. The volume of produce in construction makes up 270.6 million GEL. As to the number of those employed in this sector, as of the first quarter of 2006 it made up 26 775 people, including in Tbilisi – 16 631 people.
In the first quarter of 2005 the share of construction in the GDP made up 4,4%, in the second quarter it rose to 8,1%, while in the second quarter of 2006 it makes up 6,7%. The mentioned data clearly indicates the trend of increasing of the construction business’s scale. This business is really developing, but there are a number of factors that make some problems for it.
According to the Director General of “Kid Architecture” company and the Head of the Chair of Architecture’s History and Theory of the Technical University – Mr. Nika Shavishvili, increasing of construction spaces’ prices has caused some problems in this business. First of all, the implemented changes in Georgia’s policy concerning legalization should be mentioned. Representatives of construction companies positively appraise legalization since, thanks to it, they are given an opportunity to work correctly, with application of civilized methods. However, legalization has become one of the reasons for the price increase. Added to it was a temporary suspension in issuing of construction permits in 2004, which increased the demand on the market and, correspondingly – the products’ prices. The rate of the sales prices’ growth comparatively strengthened in 2006. The prospect of increasing of the sales prices still exists, though Mr. Shavishvili emphasizes that the economic climate in the country is improving somehow. In spite of the fact that the supply has become stable and, in some cases, it is excessive, this phenomenon is also accompanied by the increase in the demand. According to Mr. Shavishvili, increasing of the demand on the construction market is conditioned on the fact that the signs of appearance of the working stratums are already evident. It is true that it has not formed as a class yet, but the number of buyers on the market has increased. Among the objective factors of this increase Mr. Shavishvili mentions the new opportunities that are offered to consumers by the builders. During the construction period (2 years) the companies offer payment by installments to buyers. Besides, bank real-estate loan have appeared. Now several banks are already bilaterally financing the construction. One the one hand they grant credits to construction companies so that they should not have difficulties in the construction process, and on the other – they finance consumers that can get a real-estate loan on the basis of their legal monthly incomes (within 300-400 USD). The period of their coverage is much longer than that of the construction period. As a rule, along with stable incomes, banks require other guarantees as well (e.g. pawning of real estate). However, some construction companies have such relations with banks that no additional guarantee is needed. For example, “TBC Bank” can grant consumer real-estate loans to “Kid Architecture’s” clients with the purpose of purchasing of flats that are being built. “Bank of Georgia” has a similar scheme. It is a really new product that, in Mr. Shavishvili’s opinion, contributes to the retention of the clients’ base which keeps pace with the supply rate.
For the time being, Georgian construction companies are not specialized in construction of buildings having other purposes than housing, office and commercial ones. However, it should be pointed out that “Axis” company was given a state order for designing of Makhinjauri railway station, in which “Axis’s” architecture bureau was involved. No other cases of designing or construction are observed in Georgia as yet.
When we speak about the construction business, we cannot but touch upon the issue of quality and reliability of the product created by the Georgian companies.
In connection with the above stated, we asked the Main Specialist of the Architecture-Construction Department of the Supervision Service of Tbilisi City Administration – Mr. Zura Telia to give his comment.
Mr. Telia pointed out that most of the newly-built constructions are much more reliable from the viewpoint of their durability than many buildings built during the soviet period. However, this does not mean that low-grade construction does not take place in our country. From this point of view, the main problem is cement falsification. It is necessary to introduce a strict control over cement import, since falsifiers have made use of certification’s cancellation and started to supply low-grade products. Another problem is that there is no proper quality control at the concrete-mixing plants. Many companies do not have laboratories and they produce concrete of different grades.
The subject of falsified and corrosive armature is also relevant. According to Mr. Telia, only some units have laboratory certificates confirming armature’s quality and there are instances of application of corrosive armature. At some units the level of construction process is low and works are carried of by means of outdated equipment.
However, as Mr. Telia points out, the Georgian construction business is still gradually developing in spite of the existing problems. The level of construction process is being gradually raised, such companies as “Axis”, “Center-Point”, “Inzhmsheni”, etc have become distinguished on the market. They are equipped with their own laboratories, concrete-mixing plants, necessary equipment and take care for their image. Thus, there is a trend of the Georgian construction business’s approaching to the requirements of the international market.
As to the export, for the time being Georgian construction companies are not oriented for it. However, some of them take interest in this sphere. According to Mr. Nika Shavishvili, there are companies, particularly in Russia, that show interest from this point of view. Georgians’ construction activities in Barcelona are also known. Not long ago the issue of implementation of construction works by “Kid Architecture” company in Azerbaijan’s capital – Baku was considered. A similar proposal was received from Kazakhstan. However, so far the matter has not moved further than conversations and considerations. According to Mr. Shavishvili, in case of a serious proposal they have an ability of investing their own experience. However, there is still a lot of work to be done in Georgia.
There is really a lot of work to be done, but is it is a fact that the Georgian construction business becomes increasingly attractive for foreigners from the viewpoint of both investment and attraction of Georgian companies to the foreign market. According to Mr. Shavishvili, as far as housing construction is concerned, Georgia already represents a part of the international construction market. As the analysis has shown, our rules comply with the international norms. To a certain extent, a part of office and trade spaces complies with the requirements of the international market. In the course of economic development and appearance of new products approaching to these requirements is expected.
Poland represents a serious investment and labor market for the Georgian business. It can be said that there is a construction boom in this country now. However, a disturbing situation has shaped in Polish construction companies, since it becomes increasingly difficult for them to find qualified builders. One of the reasons for that, along with intensive construction works, is migration of builders. Poland hold the first place in labor force export among the new EU member-countries.
The Minister of Construction of Poland Antoni Jaszczak promises profitable capital investment to investors and high wages to Georgian builders. So, their labor market is open for Georgian builders. Now it is necessary that a document between the corresponding ministries of Poland and Georgia should be signed.
Thus, Poland is short of qualified cadres. It is interesting what kind of situation is in our country. According to Mr. Shavishvili, “Kid Architecture” company has highly qualified specialists. People of both old and young generation are employed in the company. Some of them graduated from the Technical University, others – from Academy of Arts, and now they work in the company. They are the backbone of the design organization. Mr. Shavishvili is satisfied not only with his company’s cadres, but also hails utilization of highly qualified construction and architecture cadres by other companies. He particularly distinguishes the activities of “Arsi” company’s architecture group. It is actually the first Georgian construction company and it has been working on the Georgian market for seventeen years. He likes “Axis’s” architecture group and its architectural produce and is satisfied with architecture of “Iberia” company.
Georgian companies really have quite qualified engineering cadres, but as a result of the reforms launched in the education system preparation of cadres will be improved still more and the construction market will get new highly qualified specialists, and the demand for them is really high.
The work in the mentioned direction has began, in particular a draft of the Construction Code has already been elaborated, but is still in the process of perfection. It is planned to consider it at the parliamentary session in spring.
This draft law envisages that construction activities in the whole territory of Georgia as well as legal relations having to do with its implementation will be regulated. It will also provide for construction of safe dwelling houses that are harmless for human health, realization of the proprietary right and will take into account cultural, environmental, economic and public interests.
At the same time, the draft law envisages formulation of the basic principles of state regulation of construction activities, including formation and development of a plot for construction activities, professional regulation of construction activities, protection of third persons’ interests in the process of implementation of construction activities, elaboration of documents for implementation of the mentioned activities, issuance of permissions for construction, implementation of supervision and the basic issues having to do with recognition of constructions and buildings as adequate.
According to the project, the balance between public and private interests will also be secured.
In implementation of construction activities, the following relates to public interests:
– Development of trim settlements, implementation of sustainable and safe construction activities, liquidation of the hazard caused by buildings and constructions, minimizing of the effect on the environment and landscape, care and protection of the environment having historic and cultural importance.
The sphere of private interests includes:
– Interests of physical and legal persons related to construction activities being implemented at a real estate unit being in their property, living in healthy and safe conditions and the issues related to entrepreneurial activities.
According to the draft law, the cities’ competitiveness should be increased with the purpose of investment attraction, employment, and preservation of the population; the settlements should be developed intensively on the basis of equivalent and priority relations; preservation and protection of soil, water, flora, fauna and climate should be secured. Perfection of the settlements’ architectural and artistic-aesthetic appearance should be promoted, while cultural and natural heritage should be considered as one of the foundations of the country’s development.
Thus, the mentioned draft law envisages creation of the necessary environment for our country’s full-fledged integration into the Caucasian, European and world systems and structures with the purpose of provision for competitiveness and economic growth.
At the same time, it should also become a subject for a future discussion that the cases of unfinished housing construction have become more frequent, in other words these are the cases when construction of houses lasts for years. The carcass is built, but the unit is not finished. People that started this flat’s construction suffer double losses – they do not have flats and have to pay the credit. According to some experts, the “facts of selling of air” have become more frequent”, i.e. they fence off the territory and sell the future construction and nobody really knows when it will start and finish; quality is not checked and there are neither general nor internal standards, a builder has no information on the standards, according to which his house will be built.
And finally, we are not supporters of excessive regulation, but if lawyers pass testing and get licenses, why the same should not apply to construction firms and builders? They deal with a peculiar business.
If any bank or credit institution having the rights to receive deposits from the population are regulated by a corresponding regulator that, to a certain extent, is a guarantor of non-losing of this deposit, why the construction business, which also receives the population’s savings, is not regulated? Is not there a threat that in the near future we may see cheated builders and witness a construction crisis at the end of 2007?
We believe that these issues require a reasoned discussion and it will be purposeful to hold a discussion on these problems in the next issue.