Residential Real Estate Sector - Batumi: Understanding the Potential
The total transaction value of Batumi residential real estate market reached USD 0.51bn in 2018, delivering the two year CAGR of over 30%. A total 12,303 apartments (+13.7% YoY) with livable space of 665,000 Sqm (+13.4% YoY) were sold.
The highest transaction activity was along the coast, with sales in peripheral areas also delivering robust growth. Apartment sales in Q1 2019 are roughly on the same level as Q1 2018, a possible effect of new banking regulations. We expect growth to pick up throughout the year.
Tourism is a key factor that shapes Batumi housing market. International tourism drives the rental market activity in Batumi and the origin of tourists to the city broadly correlates with origin of non-resident buyers. Ukraine and Russia have become major players on the international apartment sales market, followed by Israel, Turkey as well as countries from the immediate region. The proportion of international sales in Batumi soared from 14% in 2015 to 36% in 2018. This also explains the rising proportion of non-resident loans in Adjara’s mortgage portfolio.
We believe the impact of Russia’s recent flight ban is manageable. Tourism in Batumi will grow at estimated 4% despite the external stress. We expect that international tourist accommodation market will grow beyond GEL 1.5bn by 2025, with intra-country tourism also adding to growth. Based on current bed-to-tourist ratio in Adjara, more accommodation will be required in future.
Local factors will contribute to the market growth in future. Ongoing urbanization, decreasing unemployment rate and growth in household wealth are further propelling the demand. Infrastructural investments from the government will support the market growth.
Purchases of apartments tend to be in either the higher end or lower end segments. These combine for 84% of purchases, with the mid segment accounting for the rest.
A total 65 construction permits for 648,000 Sqm of area were issued in 2018, up 26% YoY. As of Q1 2019, projects under development consist of 1,253,000 Sqm living area. This represents circa two-year sales at 2018 run-rate. Sizable portion of these units are already sold on.
We expect the future development of the city to follow the boulevard line and the semi-rural areas to the south, simultaneously filling in the diminishing gaps of coastal areas and the old town. The renovation of Soviet era buildings is a likely scenario. A municipal decree limiting the K-2 construction intensity coefficients could suppress margins for future development projects.
In 2018, the aggregate sales-weighted house price level grew 7.2% YoY in GEL and 5.5% in USD, driven by the robust transaction volume. There are no signs of overheating on the market. Going forward, we see the potential for steady increase in prices in the long-term, with possible headwinds in the short-term.
Gross rental yields are slowly declining but currently stand high at 9.5%, they remain higher than country’s average mortgage and deposit rates in both national and foreign currencies. Yields are also higher than deposit rates in the countries of respective international buyers. 66% of buyers acquire apartments in Batumi for rental cash flow. However, the disparity in yields between the top and bottom percentiles of property owners are substantial.