Georgians Avoid Investing in High Profitability Businesses

The FINANCIAL — Real estate ownership, gold and jewellery are considered to be the safest investments for Georgians, a survey of 100 residents in Tbilisi shows. Experts explain what stands behind the conservative investment behaviour of Georgians.

“I believe that real estate is the most popular investment for Georgians,” Michael Cowgill, President of Georgian American University (GAU), told The FINANCIAL. “It is tangible and usable in most circumstances. But Georgians also like to operate their own businesses, such as restaurants – often combining a real estate investment with an operating entity. But overall popularity is determined by a simple determination of risk vs. reward. With limited access by most Georgians to capital markets (stocks & bonds) – other low risk financial products such as bank deposits are becoming more popular. They are easy to invest in and the returns are understandable and predictable. But again, in general, the safer the investment, the lower the reward (return),” he said.

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“Georgians seem to be very afraid of losing their invested money, something that can be observed in many post-soviet countries,” said Florian Biermann, Ph.D. Assistant Professor at the International School of Economics at Tbilisi State University. “Unfortunately, there is a fundamental economic law which says that the less the risk of losing money, the lower the profitability of the investment. Therefore, because of their conservative investment behaviour, many Georgians do not earn high returns on their investments,” he said.

“The tradeoff between risk and return is also the reason why interest rates are relatively high in Georgia, much higher than in Europe and the U.S. – investors consider Georgia to be a relatively risky place and demand compensation for that risk in the form of higher returns. As Georgians are so risk-averse, they tend to put their savings in low-yield investments like real estate and other physical goods. This is not necessarily a bad decision. If you have only a little money to spend, you want to make sure that you do not lose the precious capital you have,” Biermann said.

Florian Biermann thinks that conservative investment strategies are reasonable for Georgians. “Investing in financial markets, like the stock market, is always a bit like gambling. In a certain sense, there is not much of a difference between a casino and a stock market. I would recommend leaving that kind of investment to those to whom it won’t be overly painful if they lose their money,” he said.

“Real estate is a very useful and smart way to invest one’s money. It saves you rent payments if you live in the house yourself, and it generates some income if you rent it out to somebody. There is a fundamental law well known in real estate economics: if you own a home, you will not end up homeless. Even if you don’t have anything else, you won’t have to camp under some bridge.

“Gold and jewellery have a reputation to be low-risk investments, but that is not really true. Whenever there is a crisis, the gold price goes up, yet the price of gold was very volatile in the last years, even if the overall trend was positive. However, this positive long-run trend may come to an end and may even have already ended. If one has a reasonable amount of money available, I would recommend to rather invest in solid international companies which have valuable assets and a well-established product portfolio. I would look for innovative industries and manufacturing and avoid everything related to finance and the internet,” Biermann said.

“I do believe that most personal properties are under insured (or have no insurance) for occurrences such as fire, floods, etc. Also, real estate by its very nature is a non-liquid asset and as such, it is often very difficult to find a buyer when you want to sell,” said Cowgill.

“As for jewellery, gold and art – again like real estate they are tangible and can in many cases be enjoyed. The commodity gold, such as in bars, coins, Krugerrands, and jewellery with a quantifiable gold content – has its own value/pricing structure and is rather liquid. Other types of jewellery including those with stones, etc. and collectible art must be approached with the utmost caution and expertise as to what has real value and the potential for appreciation. Storage and theft issues are also a major concern with these investments. Their liquidity can also be problematic,” he added.

“The Georgian economy is suffering from a lack of capital. There would be lower interest rates, more growth and economic dynamics if there was more domestic saving in this country. However, when it comes to money, everybody must do what is most reasonable for themselves, not for the economy, country, or humankind. If Georgians would support their own economy by investing in Georgian companies, it would not help them if Georgia runs into a crisis and the investments would get lost,” said Biermann.

“Let me just provide some of the criteria that investment counsellors use for advising clients: age, health, income level, family details, aversion to risk, expected return and timing; need for liquidity, areas of business expertise, etc. 

“As to what is better for the economy – investments that put money in circulation and create jobs would be preferable. This also occurs when saving money in a bank as the bank then lends that money out to others which can then be put in circulation and also hopefully increase employment,” Cowgill said.

Davit Kikvidze, banking expert at Society and Banks also admits that real estate is the most popular market in Georgia, citing as an example that real estate business has been experiencing 10 percent growth in GDP in 2014. However, he sees the hospitality industry as a very promising sector as the number of tourists is increasing gradually.

“Georgia has been becoming more and more attractive for tourists. Georgia hosted about two million tourists in the first two quarters of 2014. I think that investing in the hotels and restaurants business is very promising nowadays. However, investing in real estate, gold or jewellery is one of the safest and most profitable investments not only in Georgia, but worldwide. After the war between Russia and Georgia in 2008 there was a sharp drop in prices, but it only lasted for a short period of time. Accordingly, real estate should be considered to be a profitable business in any case. As for gold and jewellery, I would say that the strength of the country’s economy is determined by the supply of gold. This means that gold and jewellery pricing consistency is also guaranteed. The same might be said about investing in art, though its disadvantage is the difficulty of selling precious artwork. Also, it is difficult to keep such artwork, which requires certain conditions not to get damaged, and to be sold expensively,” he said.

Money circulation is the optimal solution for those who want to get a profit but it also requires entrepreneurial skills, warns Kikvidze. “Opening a deposit and saving money is the easiest way to get a profit. But we should not forget that we get profit from the financial institution which is oriented on getting profit. Accordingly, the profit which we get from the savings is less than doing business by using this money. Finally, we would say that investing in real estate remains one of the more profitable and strong capitals in Georgia,” he said.

When treated like a business, private education can be profitable but is also subject to business-related risks, according to Cowgill.

“Admittedly, private university education was more profitable in previous years. Most private universities have seen reduced enrolments due to a number of factors, including a general downturn in the economy which has hit the middle class (parents of the main target market for the private universities). An even greater impact on enrolment is the continuing trend for the Government to make certain programmes free to students at the public universities – which creates a very unfair competitive environment. For those universities attracting foreign students, changes in the visa law and criteria limiting students from certain countries has also hurt enrolment and profitability,” Cowgill said.