The FINANCIAL — The August war and financial crisis are showing their effects on the Georgian construction market. Developers and construction companies started making special offers, discounts and finally lowering the prices. As for the secondary house prices according to major Real Estate Agencies they are sold nearly 40% lower than before the crisis level.
However buyers are still avoiding fast investments expecting further decline in prices. Levan Lomtadze, The FINANCIAL, investigated current trends in the marketing strategies of leading real-estate companies in Georgia.
“House prices have been decreasing by 10-15% from September to December on average,” Alexander Chubinidze, sales manager at makler.ge real-estate agency operating in Tbilisi, told The FINANCIAL.
“If this situation continues then makler.ge is forecasting a further 5 to 10 % decline in prices”.
“We saw the biggest decline in September when sales figures were close to zero. After that the number of houses sold tripled every month. The tendency now is a little more positive than 2 months ago,” says Guram Palavandishvili, real estate agent of ERDO Company.
According to the four major Real Estate Agencies in Tbilisi makler.ge, ERDO, N-house and Sigma the average prices on houses sold in September-December of 2008 were the following per sq. meter: Avlabari – USD 819; Vake – USD 1,300; Vera – USD 1,250; Mtatsminda – USD 900; Plekhanovi – USD 1,100; Gldani – USD 400; Saburtalo – USD 1,100.
“The average prices in the last two months have decreased by USD 100 per sq. meter. This crisis has woken up the construction companies. Of course this process is painful for many companies, but it has positive sides too. Now construction firms have started offering new products and discounted variations. The situation could be worse and now we are positive about the future,” stated Tornike Abuladze, Executive Director of ARCI.
Center Point based on recent research results said that there is a significant demand for cheaper real estate. So the company decided to offer a new Economical Class product in the suburbs of Tbilisi, where prices will be USD 350-500 per square meter.
Big challenge for construction business
“In 2008, before August, we had an average increase of 3-5% on houses being built,” Tiko Ratiani, PR Manager of ARCI, told The FINANCIAL. “Following August there was a halt in this tendency and already in October prices had decreased by 10-15%. From December 10 ARCI has had New Year tariffs. We offer instalment lasting 3-15 years. In this case the first deposit is only 10% of the total cost. In the case of a full payment the client has a 10% discount. We also have a special offer for our clients. Today there is an expectation that the prices will decrease. For this reason customers are avoiding buying now.”
“In general the prices of real estate are determined by the construction costs and rate of sales. Of course since August sales figures declined, though in December there was a slight tendency of increase. Accordingly if the rate of sales becomes stable and the costs of construction stays the same as it is today, we shouldn’t expect further decline in prices. In the worst case prices will go down by a further 10%,” Ratiani adds.
ARCI’s marketing representative says that in 2008 on average there were 13-20 commercial and living spaces sold. From September-December ARCI had these prices per sq. meter: Avlabari – USD 980; Avlabari2 – USD 1,211; Isani-Samgori – USD 960; Saburtalo – USD 1,050, Vake -USD 2,300; Nadzaladevi – USD 895.
“January-February are going to be tough months for construction businesses. But the Government promises that in February there will be funds provided to banks so that banks can give credits again. For this reason we are optimistic. Currently banks are offering credit lines with 50% interest. This is of course not a good deal for a company. In September-December of 2008 we were in a vague situation, but now positive tendencies can be seen,” says Lela Kurdgelashvili, Marketing Manager of Olympic Star, developer company.
Nodar Khaduri, expert in economy says the USD 4, 5 billion that was promised to be provided to Georgia is not instant funding.
“In this case the Governments of donor countries will need the ratification and consent of their parliaments. Plus this amount will be dependent on the internal processes in Georgia. This amount will be transferred over the next 3 years, in total by the end of 2010,” explains Khaduri.
It significantly decreased the credit resources of banks. In addition to the aforementioned, banks in Georgia were mainly dependent on foreign financial investments because the Georgian population itself didn’t have enough savings to create the credit resources needed in the economy.
Signs of unemployment
The global financial crisis and credit crunch provoked a decrease in foreign investments. This put pressure on banks to limit the mortgage loans and credit to construction companies in Georgia. By the spring of the coming year our banks will have to pay back USD 500 million debts to their foreign lenders. As the Government promises the banking sector may receive over USD 1 billion aid. Stemming from the fact that USD 500 million will used for debts the rest will be available for credits. If this process doesn’t extend over a long period experts say there is a possibility that the construction business will be revived again.
“There are about 100,000 people working in the construction sector and in sectors directly linked to it. If we take into account that there are 4 family members in each, we already have potential revenue of 400,000 people. That is nearly 10% of the entire population in Georgia. Just imagine what would happen if construction companies started laying off their employees,” continues Mr. Khaduri.
The vast majority of these people are subcontractors, electricians, masons, carpenters, painters, framers, roofers, tile workers, painters and agents. They are either independent contractors or small-business owners. Others work in trades that rely on people remodelling or repairing their homes.
“Starting from the August war, tremendous economic uncertainties have been driving consumers from the housing market, and it’s going to take some major incentives to bring them back,” says one of the experts.
As the Moody’s chief economist says businesses have gone from trying to hold onto workers, by reducing their hours, to laying them off in an effort to survive.
Last week Tbilisi Mayor, Gigi Ugulava, had a meeting with the representatives of Georgian construction companies. The Mayor explained that despite the fact that there will be aid for these companies in order to revive the industry and avoid the unemployment wave, still companies shouldn’t depend too much on Government subsidies.
“Because of the war and increased risks investments have stopped. There were many speculative deals before the war, meaning that groups of people would buy 700 sq. meters in a construction and then sell it at a much higher price. This wave of speculative purchases has stopped too and influenced prices. Plus those Georgians living abroad who were expecting that house prices would rise and serious investors who have stopped purchasing real estate here. Who will want to buy a house in Georgia if they can buy a house for the same price in Europe,” explains the General Manager of Real Estate Company Sigma.
“When we’re talking about a decline in prices we have different statistics in the central parts of Tbilisi and in the suburbs. Many sellers have to pay mortgage loans and thus they sell houses nearly half as cheap as they would. The overall decline is from 20 to 40%. In the suburbs there’s a relatively higher rate of decrease,” he adds.
“As it is known crisis in the real estate business of the UK has lasted for more than 2 years. During the same period the same business in Georgia developed very successfully. By the information of IPM several UK investors increased their activity in the UK and invested money in some Georgian developer’s projects,” says Konstantine Gabrichidze, Real Estate Research Department Manager of IPM.
The Institute of Palling and Marketing (IPM) is finalizing the last wave of Real Estate Census Research which has been conducted twice a year since 2003. Based on the latest research results the average price of residential spaces in Tbilisi in December of 2008, rose by 22.7% compared with December 2007, Supplied Residential Spaces grew by 11.7% and Estimated Value of Residential Spaces rose by 39%.
“At the same time we can say that these figures are of the whole of 2008 and not only of the last 4 months after the war. The fact is that the situation according to sales volumes during this period is critical. During August the sales decreased to 5% (minus 95%) compared with the volumes before the war. From September sales volumes started slowly growing – in some companies it rose by 10%, in some by 15%. At the same time the situation improved for those companies which have more interesting market offerings,” Mr. Gabrichidze told The FINANCIAL.
As for 2009 according to Gabrichidze if monthly sales volumes grow, prices will stay, or slowly go up. If volumes do not grow and decrease even further which is quite probable, prices will slowly go down.
“The main factor influencing the sales volumes is the feeling of safety. Because of different circumstances (political, economic and others) buyers who are not feeling safe prefer not to spend money today but wait for a later period. We can conclude that, if the political and economic situation is positive in 2009, by the end of the year sales volumes will reach 30-40% of the volumes which the Tbilisi Real Estate Market had before the war,” states Gabrichidze.
This is the latest information on house prices in Tbilisi from the Census Research of Real Estate Business, provided exclusively to The FINANCIAL. This research includes information about leading and non-leading developers and construction companies in Georgia, but not the secondary market (individual sellers).
Average sale price of residential space, USD / per sq. meter, December 2008:
Isani – Samgori 738.8
From September to December The Olympic Star sold 6-7 flats on monthly average. In Didube flats were sold for USD 900 per sq. meter, in Ortachala for USD 900, in Saburtalo at the Olympic Star project for USD 1,200 and on Saakadze Square for USD 1,500.
The flats that Kalasi sold in Avlabari were for USD 1,200 per sq. meter and in Bagebi from USD 1,200 to 1,500 per sq. meter.
“The prices on steel, oil and armature have decreased significantly worldwide. If our companies had reserved armature and bought it at the old prices then it will be tough for them to cut prices. But anyway when the demand for a product, in our case a real estate, decreases the price should decrease respectively too. If the buyers wait for the prices to go down and start buying property again in let’s say 4-5 months, the prices will follow up and rise again,” says expert Nodar Khaduri.
“In the period of low demand construction companies have to make some concessions to correspond to the market. Sooner or later prices are going to decrease. If not directly than it’ll take some other form, like offering discounts, new instalments, relatively cheaper houses and many new kinds of products.”
According to ARCI current prices are close to the 2007 level, but are still higher.
“If because of the crisis the prices on building materials don’t decline, we shouldn’t expect prices to decrease in the next 6 months. Georgia is not very dependent on the global economy, for this reason the processes that are going on there won’t have a significant effect on the Georgian economy. Therefore we don’t expect a very difficult situation to be appearing on the horizon. As soon as the banking sector overcomes the crisis situation, we will have a construction boom again. If you buy at ARCI, you are insured that you won’t have to pay any additional amount. If the prices go down the difference in price is paid back,” a Marketing representative of ARCI told The FINANCIAL.
“Today we are optimistic about the future of banking and construction sectors in Georgia. Currently we have negotiations with 3 banks on partnership. In December ARCI signed a memorandum with an investor which made an investment in our new project,” says Tiko Ratiani, PR Manager of ARCI.
“As a New Year present we have a 7% discount at Olympic Star. Our main revenues now come from the old instalment sales. In the time when sales have decreased dramatically this amount is vital and is used for employee salaries and other costs. We localized the projects and have postponed starting new ones. Now the most important thing is to manage to direct existing resources to current projects, until the situation improves,” claims the Marketing Manager of Olympic Star.
“Now when there are expectations for housing prices to go down, some groups of people are trying to take advantage and buy property for cheaper prices. Then these groups will sell at much higher prices. Even when we had such offers we didn’t sell. Construction companies have put too much money in the current projects and it’s not worthy for us to sell cheaper than the prime cost. If today any of the companies sells the space that is being built at a lower price than it really costs, the buyers should know that these projects won’t be finished,” she continues.
Because of all of that mentioned above buyers are reluctant to buy homes. Anyway remember that no matter for how long the construction business declines there’s always an upturn, so wait for the right moment and buy your home then.
Written By Levan Lomtadze