The FINANCIAL — Georgian construction companies are dreaming about the time when there’ll be political stability in the country and donors who can supply them with the money they need to return to the pre-war situation.
“To return back to the pre-war economical situation our company needs approximately USD 5 billion,” Zaza Razikashvili, Chairman of the community Olympic Star, President of the Business-Group Olimp, told The FINANCIAL.
Olympic Star, whose annual turnover in 2008 was USD 27 billion is now negotiating with investors. “We have changed our strategy. It’s going to be more laconic now. Currently we are focused on completing already started projects,” Razikashvili says.
“Iberia Real Estate needs USD 8.2 billion for its full recovery,” Ramaz Mosashvili, Chairman of the Supervisory Board of JSC Iberia Real Estate, informed The FINANCIAL. In December Iberia Real Estate announced about the beginning of negotiations about the acceptance of an USD 8.2 billion credit line from the Overseas Private Investment Corporation (OPIC).
“This was the first case of acceptance of financial resources in the real estate development market of Georgia after last August’s events. The project for which the credit line was received implies building an economy class residential complex on the territory located between Kavtaradze St. and Tbilisi State University Building. This will be the first project which has the full financing of construction from the very beginning in the history of the Georgian real estate market. On 10 December, 2008, the ceremony of signing the credit contract took place in Washington, U.S.,” Mosashvili notes.
JSC Iberia Real Estate (“Iberia”) is one of the leading real estate development companies in Georgia. Iberia, which operates on the Tbilisi real estate market, has grown dynamically over the last nine years. Iberia has completed nine projects and has 11 ongoing projects in various sectors, such as residential, office, commercial and hotel.
In contrast to Iberia, Olympic Star has not received useful funds. “We have not received any investments yet. Currently we are negotiating with sponsors and hope to reach success. Existing sponsors are interested in the Mukhiani commercial project, Gonio project, hotel complex on the Black sea and Saakadze square in Tbilisi. The main issue is about getting co-financing,” Razikashvili says.
The restoration of political and economical stability is equivalent to any financial support for development company Axis. “It is not easy to speak about any concrete amount. To maintain the stability of the business environment is much more important for our company to restore the status quo. Another important factor is to overcome the economic crisis inside and outside the country,” George Kapanadze, Director of development company Axis, one of the leading Georgian construction company, declared.
Annual turnover of Axis in 2008 was USD 24 billion. As the result of current economical destabilization, the management of the company decided to reinvest its whole profit. “Taking into consideration the crisis situation, company Axis changed its tactic plan and decided to reinvest its whole profit. We are objectively estimating the situation and our priority aim is to execute the construction plans as were originally scheduled. So the main part of our cash inflow is to be mobilized in construction and serve our priority plans,” Kapanadze notes.
“Axis has not received any financing,” Kapanadze says.
While the U.S. Government is discussing which companies to support financially, Georgian development companies, which were key players of the local economy before the crisis, did not consider the Government a supporter. “During this crisis we would say that the Government is not able to provide financial (or other) resources to aid such massive industries like real estate development, thus, the only feasible way to retain the position on the market is to attract investors to their individual projects,” Mosashvili, Iberia, notes.
“Economical management is the responsibility of our government. The priorities stated by our government are right and we expect their fulfilling. As for developers, I think that they have a chance to pass the crisis effectively if they compare their priorities correctly. Companies should start adjusting market supplies to clients as well as to investors. The potential of foreign support should be discussed not as developers’ direct financing but for providing banks and other financial sectors with long term cheap credit lines. That will relax the whole economy and encourage developers,” Tornike Abuladze, Executive Director of Arci, one of the first Georgian construction company, says.
Annual turnover of the company Arci in 2008 was higher by 25% than in 1997. “That means that in spite of all difficulties experienced last year, like the August war and world economical crisis, we overcame the trials of 2008 successfully,” Abuladze notes.
Currently Arci is negotiating with 4 new investors. “There are three sources of investing: bank, investor and client. Currently we work successfully with all three of them. Most interesting is working with high and middle sized Georgian investors, for whom we have special offers,” Abuladze says.
During 2007 and 2008 Redix sold 70% of space at its Business Centre at Vazha Pshavela Ave. “We managed to utilize the total invested money that was USD 34 billion,” Natia Kukuladze, Head of Sales and Marketing department of Redix, says.
“Throughout 2008 Redix was building only one complex business centre on Vazha Pshavela. We had fluently supplied ourselves with all necessary building materials before August’s war. That’s why we did not have to attract additional investments. Against the background of the current economical situation Redix completed started project with its own resources,” Kukuladze says.
As Kukuladze stated, fulfilling all their obligations to their customers has made them think about starting a new project in nearest future.
According to Abuladze, Arci, price decrease at construction companies won’t reach the same level as it was abroad. “Western crisis was caused by bad loans on long term hypothecs. Against the background of bad loans banks started the sales of real estate used as guaranty and it became over needed. That logically caused a price fall and this last one was followed by a whole chain of stagnation,” Abuladze explains.
“Also in the USA and the West the total amount of hypothec portfolios was a hundred times more than our country’s budget. Georgian banks do not have such large hypothec portfolios. And the middle term of hypothecs in Georgia was not more than 3-4 years, while in the USA their middle term was 30 years. These all caused global default and total sales of real estate on the market. In Georgia it is unlikely to happen on such a scale any time in the next ten years. The USA’s examples can’t be repeated here and accordingly prices won’t fall down in unprecedented proportion,” Abuladze presumes.
While waiting for political and economical stability Georgian construction companies have started offering more flexible circumstances to their customers.
“We think that the current panic in our society is short-term. It may be caused by the existing crisis that itself must pass soon. The consumer market nowadays is quite unstable and we prefer to implement short-term plans in such a situation. To help consumers’ confusion we are offering them flexible terms of purchase on-credit and bringing in to the market our ready-for-living flats. We think this will minimize the risks perceived by consumers by a lot,” Kapanadze, Axis says.
“Olympic Star has insured projects and also two years of credit without percents. We think that the panic is now over and in our observation we can say that since January the situation has started improving. Many wrong expectations came about as a result of the previous crisis situation, like sales of real estate and political destabilization. At this time we are seeing more activity from our customers. This is caused by a lot of reasons and the main is customers’ trust in the address of developers,” Razikashvili mentions.
“Consequently we remain optimistic and think that we have the best offers to present to our customers. These are: 1. finished houses – customers do not face any risk of its non-completion, and there are flexible conditions on them. 2. Insuring mechanism from price decrease – we don’t expect a price fall on real estate in the near future but as people still have some doubts, so as not to lose money we offer them a promise that in case of price decrease of over 10% to return money. 3. Non risky scheme – this scheme insures our customer’s risks of not fulfilling the project foreseen in the contract. Our clients will pay step by step after the completion of each stage of the construction. All these three schemes are popular today and have been observed over the last two months of sales. During this period we sold 16 units, 13 from these are living houses,” Abuladze notes.
On February 18 Arci will celebrate its 20 year anniversary.
“When such a systemic shock takes place against a background of a global financial crisis we should not expect a miracle and an end to the recession in two weeks. Restoration of construction companies will depend on the overall economic situation. Experts of real estate often express the graphic which describes that the cycle of real estate repeats all the steps of economical development just one step behind,” Ramaz Mosashvili, Chairman of the Supervisory Board of JSC Iberia Real Estate, notes.
Written By Madona Gasanova