Developers exclude drop in prices on real estate

M. Ghaniashvili

How Georgian building companies fight against financial crisis?

Construction field suffered huge damage from world financial crisis. Nowadays, on a world scale prices on real estate have decreased, the constructions are stopped, bankrupted companies and thousands of jobless people. However, the crisis has not affected world famous and important exhibition held in Munich’s Neue Messe exhibition complex on 12-17 January. When seeing the number of visitors and represented displays one cannot say that the hardest economical crisis is raging in the world. Great interest in construction business remains in the world. This is proved by the fact that 211000 visitors attended BAU-2009 that is record-breaking number over 40 years. 2043 companies from 40 countries exhibited their products. Exhibition was situated on the area of 180000 sq. m. Despite such a huge space, all exhibition places have been reserved long ago. Together with European manufacturers, own stand have placed American, Chinese and Japanese manufacturers. This means that construction field and participants of this segment of market are trying to recover their feet and get rid of consequences of global crisis. Construction field has huge problems all over the world. It is not surprising that one of the priorities of the government is to support this field. This was proved by the statement made by German transportation minister, Wolfgang Tefenze on the opening of the exhibition: “Development of construction industry can play a major role in overcoming economical crisis. German government actively supports construction business within the framework of new economical package”. One of the organizers of the exhibition stated: “BAU-2009 shows that there is no lack of optimism in the construction industry due to economical crisis”.
However, optimism is one and reality other. Nobody believes in Great Britain that government will be able to keep the promise of constructing 2 million new houses by 2016 year. Since 1980, Great Britain has the lowest level of new constructions. During last three months of 2008, construction of dwelling houses decreased by 27 percent in comparison with the third quarter of 2008 and by 58 percent in comparison with previous year’s rate. The number of completed buildings decreased by 19 percents, while demand on commercial spaces reduced by 40 percent. Besides, the federation of dwelling houses’ construction declared that due to existing problems in the construction field 100 000 people became jobless, from 300 000 people who were employed during the boom in this field. According to British experts prognosis the volume of investments in 2009 decreases by 25% that is worst index since 1990. After this, British publishing FT review seems logical when stating that in terms of global crisis developers find it difficult to attract funds and consequently start new constructions. Considering this government hardly fulfils even two third of the plan. The analyses published by competent publishing houses are not comforting for the construction industry either. According to them recession caused by banking crisis will last 2 years, this period for stock markets will be 3-4 years, while the most negative prognosis are for construction business – slump in prices on real estate may last approximately 6 years.
What is going on in Georgian construction business? What steps are made in order to overcome the economical crisis and rescue one of the most important segments in the country? Georgian developers are suffering from huge financial crisis and 80-90 percent is on the verge of bankruptcy. Construction companies have debts of various firms and business organizations, such as concrete plants, construction material producing firms, banks etc.

Up to summer 2008, prices on real estate were growing dynamically. Before the August war, Georgian real estate market was considered as prospective. However, first the war and the global financial crisis afterwards had its genitive effect on this sphere, just like any other fields in the country. August events stopped the development of real estate market that was followed by cutting the hypothecary crediting line in banking system. At the current stage, TBC Bank, Basis Bank, Bank of Republic, Bank of Georgia, Kor Standard Bank, and other banks recommence mortgage debts. However, this was done at the expense of increased interest rates and limited consuming terms that is not a big relief for the consumers. In 2009, experts are predicting price reduction on real estate. Generally, this year will be quite hard for construction companies. However, the current situation is advantageous for the consumers, as despite everything the choice opportunities have raised. The prices on plots in the capital have decreased by 30-40%. Despite such slump in the prices, the volume of sales has reduced significantly, as the demand on it is dramatically decreasing. Starting new constructions and buying land are not in the interests of any Georgian construction company. At the current stage, the price on one sq/m land in Tbilisi and its suburbs is between $15-50. In Dighomi and Didi Dighomi districts, the land is sold for $50 and even less price. Some of the plots are priced 15-20 US Dollars, while some time ago the prices in these areas exceeded $100. Against such trying conditions, it is difficult for Georgian construction companies to orientate. Part of the developers support reduction of the prices, while others strongly object this. Prices on real estate and construction materials are reducing worldwide that is additional stimulus for Georgian building companies to decrease prices on real estate in Georgia. How Georgian building companies are fighting against the difficulties caused by financial crisis? What are their strategy and their accent? We contacted several major building companies, in order to receive answers on these questions.
Public relation manager of the company ARSI – Tinatin Ratiani: “Due to financial crisis, we started active work in several directions that are of special importance for the company. First, this direction is searching for investors. I mean not only major investors but average and small ones also. We have some interesting offers for them that might arouse interest and might develop into visible results from the point of investments. We do not plan to start new projects in 2009. However, negotiations with one of the investors have been successful and we will start a new project in Vake district in March. It is important to force the product development that includes market active monitoring and studying consumer demands. By such activities, we are always ready to improve our market offers. It is especially important to continue constructions without delays. By means of costs savings of any other type, maximal effort is applied on constructions. Nowadays, best advertisement for the company is to continue construction process without delays. This direction is very important both for existing and potential consumers. We are actively working in order to meet our engagements”.
– Is your company planning price reduction or offering any novelties to the consumers?
– Generally, construction value and selling pace determine the real estate market prices. Naturally, due to August events the selling rate of real estate has decreased, nevertheless the growth tendency has been observed in December. Consequently, if the selling pace remains unchanged and the cost of construction does not increase, price reduction might not be anticipated. Nowadays, there is a great expectation that prices on real estate will reduce. Therefore, many people abstain from purchasing houses. “ARSI” offered to its consumers the price reduction insurance scheme, according to it in case of price reduction on real estate products, it will affect already sold out houses too, so the consumers will receive the difference in the prices. We try to satisfy consumer needs maximally. Therefore, we have some novelties in the company, including inner mortgaging up to 15 years.
– What is an average price of square meter in your company?
– Prices vary by districts, projects and by construction stage as well. In the completed units, average price is $950 (full carcass, condition before cosmetic alterations); while in ongoing construction project, the minimal price is $750.
We took interest in the plans of other developers also.
Product development manager Revaz Nijaradze: “The company has elaborated the anti crisis plan that include short term strategies and directions. The company has optimized existing resources. We continue to meet our engagements. Already few years, our company is offering long-term inner mortgaging up to 10 years. This factor ensures guaranteed funds for several months for the company. As regards to price reduction on real estate – real estate market in Georgia was dynamically developing over several years, consequently prices on real estate products were raising, but the value of construction was increasing simultaneously. At present times, difference between the value of construction and its price is quite small. In 2008, increase in selling prices on real estate was insignificant. There are several factors determining real estate price. However, minimal price on square meter in Axis is $700. We stand to the prices of 9 months and exclude drop in the prices. Nevertheless, we offer some other novelties to our consumers, for instance mortgaging flexible system, besides we offer for sale only completed projects and plan to construct such projects that will be offered for sale only after completion.
Another building company “Sasco” is offering inner short-term (3-10 years) mortgaging with low interest rates. In the interview, company’s representative mentioned that at the current stage company has following priorities: implementing of new technologies, decreasing the value of construction, building small-multistoried blocks (5-6 flats) and offering completed houses to the buyers. As Sasco is constructing blocks in the suburbs of the city, company’s representatives reckon that prices are affordable for the grassroots and are much cheaper than the prices of other companies. The price on dwellings fluctuates between $500 and $800.
We addressed for comment several major companies also, including Centre Point and Callas, but they refused to answer the questions.
One thing is obvious that there are serious problems in construction field in Georgia. The main reason is cutting off the hypothecary credits or exacting the terms of crediting. At present, companies are awaiting complete recommencing of hypothecary credits. Managers declare that despite low prices the majority of the population cannot afford to pay the whole sum at once. However, some banks and developers are cooperating and implementing joint projects.
For instance, company Axis and VTB Bank joint project. This project offers alternate type of mortgaging according to which the firms may pay on a monthly basis the sum they would pay for a rent and thus purchase the office. Today the rent price of one square meters office-space is $25, “One can buy office-space by paying on a monthly basis” – declare in Axis. Consequently, every consumer desiring to purchase commercial space will receive credit in VTB Bank with low interest rate.
Another scaled project between bank and building companies is implementing Bank of Georgia. The budget of the project is $28 million and it suggests crediting for several construction companies’ projects and afterwards mortgage lending for the dwellings in terms of this project. The terms of mortgage loan are the following: 30% co-participation, maximum term 10 years. This sum is the part of financing that Bank of Georgia received from OPIC (Overseas Private Investment Corporation). This means that part of the funds received from US government will be spent on construction field also. The cooperation between bank and building companies cover fifteen various projects. Memorandum of agreement has been signed with three companies Iberia Real Estate, Callas and Bagebi City Group. $12 million will be assigned for the mortgage lending and project crediting of these three companies. At the current stage, Bank of Georgia is cooperating only with the mentioned three developers. However, bank is considering other nine projects that are under negotiations yet. Bank of Georgia reckons that these projects will be quite profitable. The elaboration of the project between bank and building companies has been started few months ago. Fifteen projects were presented and nine of them have been approved. The $29 million package covers both direct credits for construction companies and mortgage loans also.
It is difficult to say in what measure these small projects are enough to recover construction field. One thing is obvious that some enchanted circle exists; the echo of global financial crisis reached Georgia and one of the main targets was banking system. Consequently, banks either stopped crediting, including mortgage loans or established strictest terms on it. Therefore, selling of real estate products decreased significantly, as most part of the population is unable to pay the sum at once. Due to low demand on the market, there was no need in starting new constructions. Stopped constructions mean thousands of jobless people, nothing to say about financial problems and difficulties that exist inside developing companies.