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About Plunge in Real Estate Market Prices: Vakhtang Charaia

According to the Ministry of Economy, total supply of office spaces in Tbilisi will increase by 18% as of 2017, while the supply of modern commercial spaces will increase by 50% as of 2017 after the construction of several major shopping malls will be completed.

The Tbilisi real estate market prices have declined by about 25%-35% in terms of rental or leasing at the beginning of 2016 compared to the same period of 2015. It should be noted essential contraction in prices started in September 2015. The different situation is reported concerning the purchase of real estate.

In this case, prices have slightly decreased or are confined by only the New Year discount campaigns. The problem consists in decreased demand rather than in increased supply.

On the one hand, those who have accumulated capital abroad and, on the other hand, those, who have taken mortgage loans in foreign currency, cannot afford to satisfy their demands through their current incomes.

The number of people, who have enough financial resources for purchasing real estate, is very unimportant. As a result, we have received the situation, when solvency falls in relation to the real estate sector and the real estate prices will also inevitably decline.

Reduction in apartment prices (as well as rental and leasing fees) is directly related to the GEL depreciation, because the prices are mainly determined in USD and the consumers fail to serve the liabilities amid the volatile exchange rates.

For example, the borrower had to pay 87.5 000 GEL for a 50 00 USD apartment before the GEL depreciation ($1=1.75 GEL), while today the same apartment’s price constitutes 125 000 GEL. The apartment price has increased by 37.5 thousand GEL. In case of a 100 000 USD apartment, the price has increased by about 80 000 GEL and this factor considerably aggravates  the consumer burden, who receive incomes in not USD, but in any other currencies.

Despite heavy situation we do not expect the 2008 crisis to be repeated in the developing sector, along with economic growth negative tendencies. Price contraction tendencies will continue, however, the situation will be improved along with the economic recovery.

It is worth noting the interest in real estate market and the housing sector in terms of foreign direct investments (FDI) has decreased to 17.3% from 31.4% as a result of increased indicators of investments in the finance sector and the decreased interest in the real estate sector (because of contraction in prices).

Valuable operation of the housing sector in the country is one of the indicators of the current economic activity. According to Geostat, the national statistics service of Georgia, as of September 1, 2015, the quantity of employees in the development sector decreased to 61 000 from 68 000 year on year.

Moreover the value added generation in the development sector decreased to 1.44 billion GEL from 1.66 billion GEL for the past 3 years. The further contraction of this sector will damage the state budget.

On the other hand, the averaged salaries of employees in the sector have considerably increased. Namely, the salaries have increased from 947 GEL to 1422 GEL on average, according to the 3Q15 report.

It should be noted, along with the GEL depreciation, real estate prices were slightly decreasing, while a major part of developers applies products of domestic production (50/50 in case of reinforcements), not of foreign production.

To put simply, their production expenditures have not increased by 40% for the past 18 months. Consequently, developers have the resources to lower prices without bearing losses, Moreover, they have resources to launch new construction projects, because the decreased prices will enable them to draw new clients.

As to the bank sector, it is interesting that the ratio of loans that commercial banks have issued to the development and real estate sector (1.2 billion GEL) in the bank sector’s total loans portfolio (15.2 billion GEL) accounts for 7.7%.

Consequently, stagnation in the development sector cannot inflict much loss to commercial banks, even more so if the bank sector takes preventive measures.

Finally, despite prices on apartments and office and commercial spaces, including rental and leasing fees, are declining in relation to foreign currency, the same indicators in the national currency show growth tendencies and this may become a good ground for implementing similar operations in GEL.

This process would restore confidence in the national currency and lower the dollarization coefficient in the country. This is one of the important components for long-term and stable economic development of the country.

Vakhtang Charaia TSU Analysis and Prognosis Center, for Caucasus Business Week ©