Georgian Construction Industry Returns to Growth, but Risks Remain

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The FINANCIAL — Despite the pre-election turmoil in Georgia, turnover of the construction sector has increased by GEL 271 million in the second part of 2012, amounting to GEL 817.7 million according to data of the National Statistics Office of Georgia.


The FINANCIAL — Despite the pre-election turmoil in Georgia, turnover of the construction sector has increased by GEL 271 million in the second part of 2012, amounting to GEL 817.7 million according to data of the National Statistics Office of Georgia.


The sector, which failed to overcome the effects of the recession for a long time following the beginning of the 2008 global economic crisis, has shown significant growth in employee numbers. “The construction sector in Georgia is definitely in a phase of revival,” Zaza Gelashvili, Professor at Free University of Tbilisi, told The FINANCIAL. The sector may still experience a second downturn though if the political situation continues to worsen.

“There is a real danger that current political events will have a negative impact on the real estate market,” said Nikoloz Urushadze, General Director at Paragon LTD, a member of the Royal Institute of Chartered Surveyors (RICS).

In 2011, according to preliminary figures, turnover of the construction sector was GEL 1.703 billion.

“In the second quarter of the current year the number of employees in the construction business increased by 6,444 people, coming to 53,426 workers in total. The data of the two quarters of 2012 exceeds the number of workers of the whole of 2011 by 21,909. In 2011, a total of 31,517 people were employed in the construction business,” Gelashvili said.

“2011 and 2012 were quite successful years for the real estate market. Stability is a key point for this market in general. Till last week Georgia had been maintaining stability. It was the most important message to investors; they could easily foresee capital investment. Georgia has hosted many investors from Arabic states, Israel and Russia, all interested in investing in real estate,” Urushadze said.

According to Urushadze the largest projects of the past two years in the residential business were m2 and Lisi, run by SBRE and GRDC “As the daughter company of Bank of Georgia, m2 has been selling four and five times more flats than predicted. This is a better result than from before the August 2008 war. So its reputation is a permanent problem of this sector. Consumers do not trust that developers will complete the projects they start. Our company planned a project that included a specific number of selling spaces but as time went by the sales volume sharply exceeded our advance expectations.”

“There were no changes in the industrial sector of the real estate market. The opening of Uptown Tbilisi was an important event in the commercial sector. The opening of such a huge-scale project will increase competition on the retail market. Prices will therefore get closer to what they are in reality. Product prices in Georgia are two to three times higher than in other European countries. Those who frequently travel abroad do not go shopping in Georgia because of the high prices. The opening of more shopping centres will thus get retail prices closer to what they are in Europe,” Urushadze said.

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“2012 was a very successful year for our company. We sold the amount of space we predicted. A total of 40%, which is approximately 3,700 square meters, was sold during the ten months of 2012,” said Shota Keldishvili, Director at IDECO.

The company IDECO is running the construction Opera Residence. The project is already completed and in use. At present the company is in the process of housing residents. The company is offering apartments for sale and also for rent. Prices start from USD 2,300 per square metre.

“We are optimistic about 2013. We expect growth of the real estate market. We are working on the development of new projects. More concrete information about future projects will be revealed at the end of 2012,” Keldishvili said.

Keldishvili said that while an election year generally hinders the development of economic growth, it has not affected their business. 

“The crisis in the construction business has more or less already been surmounted. There are signs of recovery in certain areas of Georgia. Batumi should be noted in this regard, where in recent years recovery of the construction sector reached apparent liberation. As for Tbilisi, signs of revival can be seen, but still, the frozen projects of old construction companies do need to be rehabilitated. Lack of funding for rehabilitation is the reason for the delay in this. The support of financial organizations could be a solution for this sector in order to speed up the process, which will in turn speed up the rehabilitation of the sector as a whole,” said the management of Dexus.

“We observed 30-40% decrease in June-July, however from August 5-10 sales increased by 40-60% in comparison with the first two months of summer. Accordingly we cannot see any slump in demand for real estate in regards to the pre-election period. Demand has actually significantly increased on completed objects as well as those that are under construction. In addition demand is being observed for economy, medium and premium-class residential premises,” said officials of Dexus.

Construction companies Arci, Axis, Orbi Group and Iberia Business Group declined the opportunity to provide The FINANCIAL with their sales statistics.

“Frozen residential projects belong to companies that were dominating the market before 2008. Many of these companies had only a few years of experience and management not suitable for stressed and declining markets. When extreme boom was suddenly followed by extreme downturn caused by force majeure like Russian-Georgian war and global crisis, the companies found themselves unable to cope with the negative effects leading them to actual bankruptcy. The main cause of the problems was the overoptimistic planning of business, which was reflected in pyramid like system of acquiring and starting as many new projects as possible without fulfilling the obligations on started projects.   With many companies facing actual bankruptcy, a new bankruptcy law then needs to be adopted to simplify procedures for the frozen projects. The existing bankruptcy law is so disadvantageous for companies that they cannot actually declare themselves to be bankrupt as the current legislation requires payment of a huge amount for taxes in such a case,” said Urushadze, Paragon.

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“The owner companies of the frozen building projects will not manage to complete them; companies that cannot fulfil their responsibilities should leave the market,” Urushadze added.

Dexus currently has seven projects under construction: Mioni Resident – 18,800 square metres, Chachava Str #2-10; Marijani – 35,300 square metres; Likani – 12,200 square metres; Bakuriani apartment on Tsakadze Street – 4,000 sq. metres; Uni Mall – 16,000 sq. metres on Khosharauli Street 29; Uni House – 1,600-23,700 sq. metres on Khosharauli 29; Isnis Savane on Dodashvili 18.

The price of property at Dexus ranges from USD 480 to 1,300 per square metre.

According to the Center Point rehabilitation’s interim results of 2011 Dexus attracted GEL 33,170,000. Out of this sum GEL 22,775,000 were incurred in construction and the value of total space sold was GEL 6,120,000.

According to the rehabilitation plan of Centre Point Group, Dexus plans to complete all the stalled projects step by step over a span of several years. In total Dexus will spend GEL 95 million on completing all the projects within the rehabilitation project of Center Point Group.

“Apartment prices vary dramatically, from USD 400 to USD 3,000 per square metre, depending on the space and location. The prices are quite realistic, since they are formed under the conditions of a free market. The fact that the great majority of companies do not have any problems selling completed apartments, especially small-and medium-size apartments, proves that the prices of real estate are reasonable,” said Gelashvili, Free University.

Gelashvili said that the main mistake of the construction business, and why they got into the recession in the first place, was the poor forecasting of future financial flows, excessive optimism and unforeseen risk. This sector is currently in the stage of getting over the crisis, and political instability now presents the only possible danger to this.

“We had abnormal price growth of real estate in Georgia which accordingly resulted in an abnormal drop. If it were not for the August war and global recession of 2008 we would have had a much better result than we do now. We would not have so many uncompleted buildings. That said however, a shift would have occurred in the companies ruling the market in any case,” Urushadze explained.

“Speculation is an inevitable process of the real estate sector. It is run by inside players as it is possible to gain a big amount of money in a short period of time from this. It might be unethical but it is not against the law. The same happened in the USA in 2007 which was one of the actual causes of the recession. An artificial boom on the construction sector and banking sector later bursts, just like a balloon,” Urushadze told The FINANCIAL.

“Most apartment buildings that were built during the Soviet period are slowly breaking down with time. We do not have any mechanism for looking after such buildings. The prices of such homes will start decreasing, and in 30 years they will cease to exist at all,” Urushadze said.



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