The FINANCIAL -- In line with the fast growing tourism sector of Georgia, its hospitality sector remains a focus point for investors. Currently most of the development pipeline as well as the market supply are positioned within the higher end/luxury segment. The niche of economy and budget hotels remains to be filled and is now becoming of high interest to investors. The commercial real estate sector having found its way back to stable growth in 2015, is expected to continue its strong run.
“In relation to retailers, the sentiments of both local and international have improved in 2016 and expansion plans are back on track. No closures have been recorded in Q1, 2016, as often seen during 2015. With the strengthening retail occupational market vacancy rates have started to fall as a result. On the whole, occupier demand rose, led primarily by food & beverage and fitness brands. Expanding retailers are refocusing on the resort areas, primarily Batumi with the expected strong summer season,” Nino Kipiani, Partner at Cushman & Wakefield | Veritas Brown, told The FINANCIAL.
According to Kipiani, the Tbilisi Office’s market in 2016 stayed relatively stable, supported by the positive economic outlook. “This can also be justified by all pipeline developments having enjoyed successful pre-leasing and finalizing the letting process prior to the project deliveries throughout 2015. Correspondingly, this fact increases competition on what space is available by pushing occupiers into making quicker decisions on acquisitions. Prime rents were largely stable over the first quarter of 2016.”
In her interview with The FINANCIAL, Kipiani provided her assessment of the Georgian real estate market and underlined the most profitable directions for investors.
Q. During 2014-2015 the Georgian construction business attracted one of the highest volumes of investments. Which were the main developments on the real estate market that you witnessed?
A. The size and scale of the real estate market make it an attractive and profitable sector for many investors. There are several major factors that influence real estate investments such as demography population, age, race, gender, income, migration patterns and population growth - these statistics are significant factors that affect how real estate is priced and what types of properties are in demand. Tourism growth and latest activities to mark Georgia as a new destination on the global map have significantly influenced investors’ preferences and we can see the result of it in real estate dynamics.
Demand for real estate in Georgia is strongest from Turkey, Azerbaijan and China with stronger demand seen during 2014 and 2015 from the GCC region and Western European countries.
Georgia, with its simplified company registration procedures, liberalized manufacturing regulations, tax and legislative benefits and overall positive approach to investors, is a great place to invest, which is why we are witnessing the highest volume of investments in the Georgian construction business. Among others I would mention some big mixed use and hospitality projects like the Hilton Batumi; Millennium Hotel Tbilisi; East Point Shopping Village; Hyatt Hotel; Axis Towers; King David; Leonidze Business Center; Abastumani Balneology Resort; Rixos Spa and Hotel, and many others.
Over 80% of the developments take place in Tbilisi and Batumi. In order to accelerate the development of other regions the Government has started to offer some incentives to investors.
Q. How would you summarize the Georgian retail market in 2015 and what were the positive and negative changes that affected the real estate market in 2015?
A. 2015 saw little change in Tbilisi. The overall tone of the retail market was one of caution, with occupiers, developers and investors still wary due to the ongoing currency devaluation and decline. Unlike the trends, occupier demand in 2015 was strongest for larger units in prime high street and shopping centre locations with hypermarket, big box retailers and F&B operators particularly active. Prime, mid-sized high street retail units where absorbed by banks for service centre use. 2015 recorded Bank of Georgia “Solo Lounge” branch openings. Demand for big box stores has been flexible, driven predominantly by Carrefour’s expansion, East Point Shopping Centre, and Wendy’s & Dunkin Donuts continued rollout absorbing high street prime locations.
With the opening of East Point Village, corresponding to 72,000 m2 of new modern quality space added to the capital’s retail offering, the new all time high stock flooded the market, consequently the average occupancy level of Tbilisi retail real estate has increased significantly. On the bright side, this new shopping centre has contributed to stabilizing overall rental rates on the commercial real estate market, previously quite volatile and unpredictable.
By all means the currency depreciation led to renegotiations and rental reviews mainly on high streets and to some extent in shopping centres (apart from the anchor or long term agreements).
Q. What was the impact of the currency shock on the real estate market of Georgia?
A. The impact was different for the housing and commercial (retail & office) markets. Demand for the residential property market decreased, thereby putting pressure on the developers to reduce prices. The incentives and marketing promotions offered by the major market players have limited the general damages.
As for commercial real estate, prices over recent years have been significantly affected by supply demand factors rather than the exchange rates in 2015. The local established brands or non-branded stores have suffered however, but mostly due to the increased competition from new entrants and the strengthening of international retailers taking over the previously non-saturated market. Consequently, the shopping centre rental rates as well as the occupancy were largely stable with minor downward pressure caused mainly by renegotiations. As we often point out, the quality office stock of Georgia is rather low in supply, that being said this segment is usually less affected by currency instability.
From the investment point of view local funds (GCF, Partnership Fund) and international financing institutions (IFC, OPIC, EBRD) have kept active on the market with a number of deals having been concluded, hence, no scarcity on financing hindered the market as much as anticipated due to currency volatility. Noteworthy transactions included the acquisition of the Ministry of Economy building by Hualing Group (USD 9.45 million), the Ministry of Agriculture building sold to Granat Group for USD 7.09 million. Investment deals to be noted include Axis Towers and Galleria Tbilisi by GCF, Hyatt Regency and Best Western (Kutaisi) by Partnership Fund, Wendy’s Dunkin & Dunkin Donuts and Moxy Hotel by OPIC, Intercontinental Tbilisi by EBRD, etc.
Q. Elections are always considered one of the main hampering factors for a country’s economy. Meanwhile, statistical data of Q1 2016 has shown the opposite. What are your expectations of the Georgian real estate market during 2016?
A. Election year rolling around causes market players to ponder the likely impact on the real estate market. Traditionally, an election date is set earlier in summer and that is the duration of the campaign. The date for the 2016 Parliamentary Election having been set earlier this year has raised two schools of thought. Firstly, the prolonged campaign causing caution and hesitancy in the marketplace, secondly, with an election date set so far in advance, the marketplace can absorb the thought of an election campaign much more easily.
In aiming to predict the future, it’s worthwhile looking at the past. History and the experts suggest that the overall market performance (residential and commercial sales and occupier market) will be immune to the political events of the day. But with the economic uncertainty as an additional hamper on the road, it remains to be seen if history is rewritten on this front.
On the other hand, however, we forecast the investment/financing and larger market transactions/acquisitions to take longer with the “wait-and-see” market policy.
Q. For a long time Georgia has been facing a clear deficit of international-standard office space. Have you observed any positive changes in this regard?
A. The growth of cross-border property investment and expansion by global occupiers reinforced the demand for high-level office space developments; step-by-step Georgia is getting closer to international standard building procedures. The deficit is forecast to be absorbed by the current rich development pipeline flagshipped by the Leonidze Business Center, Axis Towers and King David. We would, however, advise the developers to stay cautious as with the demand being mainly driven by relocations and expansions, and the number of projects under construction, the market can easily fall into over-supply.
Q. During the last two years many international retail brands have left the Georgian market. At the same time we were not indulged with the entrance of new ones. What are your expectations of the retail market during 2016?
A. The size and scale of the retail market strongly depends on the demand and the economic situation in the country. Of course the economic downturn has grazed the retail market in Georgia, but as you see, the main players still remain and we are witnessing new entrants as well. For the time being the retail market of Georgia is turning towards being largely saturated, when compared to neighbouring countries, where we run behind is mostly the upscale market that is not expected to change in the foreseeable future. However, the midscale fashion, as well as F&B segment, has enjoyed rapid development and growth in recent years.
Q. How are prices on the real estate market expected to change during 2016?
A. As already pointed out, the market is largely unstable and difficult to forecast during an election year and the ongoing currency fluctuations.
Consumer confidence, job growth and low interest rates are the primary drivers that bring potential homebuyers to the housing market. Considering these factors along with an important increase in new single-family inventory, the single-family housing market is forecasted to set on a positive path in 2016.
The commercial real estate sector having found its way back to stable growth in 2015 is expected to continue its strong run.
Q. Which real estate sector will be the most interesting for investors during the current year?
A. We would confidently say it is Hospitality. The tourism industry in Q1 2016 has moved into a high level in comparison to last year due to the elevated flow of international arrivals at the beginning of the year, (12.9% increase compared to H1 2015) among which the number of Azerbaijani and Russian tourists doubled. Moreover, as a consequence of Georgia re-establishing visa free travel with Iran in February, the number of Iranian visitors has increased and reached almost 26,000. We forecast this year to be highly positive for Georgian tourism. As expected in Q1 2016, there was higher demand caused by seasonal fluctuations, the upward pressure shall continue as per the planned cultural activities by GNTA, in addition to the entertainment events organized by Check-in Georgia.
The main developments in hospitality include Axis Towers in Tbilisi (Pullman Hotel), Hyatt Regency Hotel in Tbilisi, Millennium Hotel Tbilisi, Hilton Tbilisi, Intercontinental Tbilisi, Rooms Hotel Batumi, Radisson BLU Tsinandali, Abastumani Balneological Resort, Kutaisi Best Western Hotel and many others.
It is easily noticed that most of the development pipeline as well as the current market supply are positioned within the higher end/luxury segment. The niche of economy and budget hotels remains to be absorbed and is now becoming of high interest for investors, aided by the governmental incentives and funds offering financing for the mid-scale international and family type hotels. Cushman & Wakefield | Veritas Brown, with an experienced hospitality team on the ground, see large potential in this sector.