The FINANCIAL — Strong economic recovery, an open and transparent business climate and supporting government have opened up new opportunities for real estate investment and new players in Georgia, claims a new survey made by Jones Lang LaSalle and IPM.
“According to the report there is significant potential in the industrial and logistics market, evidence of which is the recent investment by Gebrüder Weiss. Gebrüder Weiss will be delivering the first modern logistics facility in 2013,” Martijn Kanters, one of the authors of the survey, told The FINANCIAL in an exclusive interview. “In the meantime I remain sceptical about the residential and office market.”
The CEOs and managers of Jones Lang LaSalle and up to 100 global real estate companies will be attending the Tbilisi Real Estate Conference on 3-4 December in Tbilisi.
Q. What are the main problems of the real estate market in Georgia?
A. The main problem of all these segments is high owner occupancy. What’s remarkable is the high percentage of owner-occupation at 47 percent of total modern office stock. More than 90 percent of the Georgian population lives in the residential spaces which they occupy. In EU countries this rate is about 40 percent. This is one of the distinctive things about the Georgian real estate market. Local as well as international companies entering the market buy spaces for their own use and rental business is not so active. Most of the large occupiers own their buildings, among them Bank of Georgia, TBC Bank, and ProCredit. International office occupiers are typically accommodated in smaller schemes in the CBD, such as PWC, Ernst & Young and Booz Allen Hamilton. We have to push the Georgian real estate market to a more modern format.
Another specific problem is lack of modern buildings. There are almost no newly-built modern buildings that meet international standards. Energy efficiency standards are not protected either. We don’t have such regulations at all.
Q. You said that the industrial and logistics market has great potential. Why is it so prospective?
A. The industrial market is promising, but it is lightly developed. The industrial heartland of Georgia is formed by Tbilisi and nearby Rustavi that account for over 60% of national industrial output. Poti is a growing industrial and transport hub as well. The Government has committed GEL 2.5 billion to improving the main Trans-Georgia road corridor. Recently, the Tbilisi bypass road was completed and there are still important on-going works.
Existing warehouse & logistics stock in Georgia currently amounts to 608,734 sq.m, of which just 286,736 sq.m could be classified as modern space, although not by European standards. Of this, 80.6% is located in Tbilisi, the remaining 19.4% in Poti. Elsewhere in the country, modern industrial space does not yet exist.
As I’ve already mentioned, a large part of existing warehouse and logistics space is owner-occupied in small units and large, developer-led logistics parks do not yet exist in Georgia. A modern commercial real estate chain should include occupiers and the people who are involved in business.
The industrial market really lacks modern buildings. There are one or two warehouses which can be classified as modern ones. This is less interesting for investors. The first premium standard logistics centre by Gebrüder Weiss will be opened in Tbilisi in 2013. This will support other international companies entering Georgia. The prospects are quite good and we’ll see how it develops.
Q. You consider the retail market quite prospective as well. Why is this sector interesting for investors?
A. The retail market is more or less developed in Tbilisi, Batumi and Kutaisi. Modern shopping centres are rare here as well though, as the market is in an early stage of development. The total retail supply in these three main cities is estimated at almost 700,000 sq.m, of which more than half is traditional formats. Outside Tbilisi, large modern shopping centres do not exist.
The sector has great potential but the problem is very low supply of modern retail spaces. Most shopping centres are built without any standards. There are no elementary working conditions, for example, air conditioners. The only sizeable modern shopping centre is the 72,000 sq.m Tbilisi Mall. The recent entry of Carrefour paves the way for further expansion of the retail market, with specific opportunities for big box retailers. There are several local supermarket chains, but the prices are quite high. Sometimes prices are even higher than in western European countries. This is a result of low competition.
The electronics market is not developed either. There is only one big chain – Elit Electronic. This sector is still open for development.
Prime high street rent stands at USD 40-45/sq.m/month, a level which has remained constant over the past ten years. The most stable street is prime pitch Pekini, the area of choice for most brand stores. Recently however, high street rents have been increasing on Agmashenebeli to the same level as on Pekini and are forecasted to grow to around USD 60. The top rent is at Tbilisi Mall, reportedly at USD 90.
Q. You said that office and residential markets are the least promising. Why?
A. Yes, the office market is the least positive story. Total modern office supply in Tbilisi currently amounts to 255,870 sq.m, which 47 percent of owner-occupation. The overall vacancy rate for modern offices currently stands at 13%, however there is wide variance among the districts. The highest vacancy rate is in Vake-Vera at 30%, but in the developing area around David Agmashenebeli Avenue, vacancy is close to zero.
Almost all modern spaces are located in Tbilisi. Currently 75,000 individuals are working in offices in the country. Out of them only 20,000 are working in modern offices.
The service sector is leading in the Georgian economy and therefore offices are in demand. But developing companies make major mistakes when they don’t have adequate planning of office buildings. As a result there are lots of offices waiting for rental. But the demand is mainly for small and comfortable offices. At the opposite end developers are building bigger spaces. Dubai was developing very successfully and everyone started building offices. But now lots of them remain without purpose. This has caused a kind of crisis in the region. This could happen here as well.
Q. According to the report, the hotel market is undersupplied, with a clear lack of international operators, particularly in the two and three star segments. How can the sector develop?
A. Tourist arrivals increased steadily during the period from 2006 to 2009 and exponentially in 2010 and 2011. Total tourist arrivals reached 2.8 million in 2011, with almost 60 percent arriving from neighbouring Armenia, Azerbaijan and Russia. The number of registered guests in accommodation facilities reached 853,049 in 2011. With the average length of stay stable at 4 nights in Georgia, the total number of overnight stays in 2011 is estimated at around 3.4 million. With the recent boom in tourism demand, supply has yet to catch up. While demand grew by 140 percent during the period 2009 to 2011, the volume of hotel beds increased by just 38 percent to 25,833. As a result, average hotel occupancy rates increased significantly to 36 percent in 2011. But Tbilisi and Batumi which are the main tourist centres of Georgia, are accounting for almost 70 percent of registered guests in accommodation facilities. This is a very high rate resulting from low competition. So the sector is waiting for great investments, especially in 2 and 3 star hotels.
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