Residential construction blooming on the wave of Garabagh's revival Review by Caliber.Az

During the pandemic crisis, Azerbaijan's residential property market experienced a period of tangible decline, and even in 2022, a very prosperous year for the economy, there was a recession in sectoral capital investments, moreover, the volume of commissioned housing decreased by almost a quarter. The situation in the industry has changed dramatically this year, and despite inflation, rising prices of construction materials and other factors, the housing construction market has reached sustainable growth rates for the first time in several years. According to the data published recently by the State Statistics Committee, the housing commissioned in January-August of the current year in Azerbaijan provided almost 11 per cent growth.

In a relatively short period of time, the real estate market of Azerbaijan has twice gone through a streak of turmoil and recession: these negative processes were observed during the energy crisis of 2014-2018, as well as during the coronavirus pandemic and subsequent quarantine restrictions in 2020-2021. All of the above had a very unfavourable impact on the activities of housing construction cooperatives (HCCs) constructing multi-storey residential buildings in Baku, Sumgayit, Ganja and other major cities of the country.

In the last two years, the HCC sector has also been negatively affected by the high level of imported inflation. On the one hand, this led to an increase in the cost of the entire range of imported building materials, and on the other hand, local enterprises also experienced a significant increase in production costs due to the significant dependence of the production cycle on imported raw materials, components, semi-finished products and equipment. Finally, with the outbreak of the Russian-Ukrainian war in 2022 and sanctions restrictions that complicated transport links in the Eurasian region, the local market faced a shortage of a number of construction products. As a result, the prices of timber, fittings, roofing materials, flooring, metal structures, aluminium profiles and a number of other materials, a significant share of which was traditionally imported by our country's key trading partners from Russia, Belarus and Ukraine, rose significantly. All of the above eventually resulted in the rise in the cost of construction works, and not in the best way affected the demand in the primary property segment, reducing the interest of investors in this segment of the economy.

Indirectly, all these factors constrained the capitalisation of the real estate market: according to the State Statistics Committee, the total area of housing commissioned in 2022 amounted to 2.593 million square metres, which is 24.8 per cent less than in 2021. Also last year, capex in housing construction totalled 925.4 million manats, down 5.8 per cent from the previous year's figures.

However, this year the situation in the housing construction market started to change for the better. In general, capital investments in fixed capital in the country in January-August 2023 reached almost 10.865 billion manats, increasing by 15.4 per cent. And despite the fact that the share of housing construction today is only 5 per cent of all investments in fixed capital (about 549.1 million manats), for eight months of this year in this segment,  a growth of 2.5 per cent was noted. The most important indicator testifying to the positive developments in the sphere of housing construction is the published data of the State Statistics Committee: for eight months of 2023, the total area of commissioned housing exceeded 1.151 million square metres, which is 10.6 per cent more than in the corresponding period of last year.

What caused the relatively increased growth dynamics of the housing construction market this year, and to what extent is this effect sustainable in the medium term? Since the end of last year, the real estate market has been influenced by the factor of pent-up demand: the decrease in construction rates in the previous period resulted in the reduction of supply relative to demand and influenced the rise in the price of housing in new buildings. Of course, there was no sharp jump in property prices last year and this year, but there was a gradual rise in prices in the primary residential sector in the range of 6-8 per cent. Moreover, this growth was quite enough to increase the interest of HCCs in laying new buildings and completing the construction of houses already under construction. The demand for housing was also supported by the growth of mortgage lending in the past and current years. Thus, the agent banks of the Azerbaijan Mortgage and Credit Guarantee Fund (AMCGF) issued housing loans worth 22.51 million manats in 2022, 18.6 per cent more than in 2021.

According to the Central Bank, this positive trend was maintained in 2023: in January-July, the AMCGF disbursed 279.5 million manats in loans, 18.8 per cent more than the same period last year. Thus, the excess demand for flats and houses, as well as the growth in mortgage supply, were the drivers of the highest activity in the country's property market since the pandemic period.

Another factor affecting the statistics of housing construction was the increased activity of the State Housing Construction Agency and its subdivision - MİDA LLC, constructing budget apartment complexes in Yasamal and Surakhani districts of the capital, as well as in Sumgayit, Ganja, and Lankaran. Since last autumn, MİDA has allocated 14.4 million manats for the construction of 6 apartment buildings in Fuzuli city in the Garabagh region. The activity of agency has been equally active in the current year: in August alone, MİDA signed contracts totalling 81.9 million manats for the construction of nine apartment buildings and a kindergarten in a housing complex in Baku's Binagadi settlement, as well as the construction of eight apartment buildings in a housing complex in the city of Shirvan.

All these facts had a certain impact on the housing and construction market of the country, and the main driver of the revival of the industry was the large-scale projects on the revival of Garabagh and East Zangezur economic regions, which have been carried out for the third year. Here it should be noted that in 2021-2022 the spearhead of state funding was mainly directed to the construction of roads, laying energy, water, utilities and other primary infrastructure, investments were also invested in the formation of industrial parks and neighbourhoods, construction of airports, etc.

In 2023, significant amounts of budgetary investments in the liberated territories were directed directly to the construction of housing within the framework of the implementation of the I State Programme "Great Return to the Liberated Territories of Azerbaijan". In particular, it is planned to build about three and a half tens of thousands of flats and individual houses in the liberated territories by 2027, where it is planned to gradually resettle 34.5 thousand families of former IDPs. Preparations for the reception of former IDPs are very active in Shusha, Zangilan, Fuzuli, Aghdam, Lachin and Kalbajar districts, where large-scale housing construction has been launched with the involvement of domestic and foreign companies.

This gigantic "construction site" provided work for many dozens of HCCs, as well as contractors, design, consulting and other structures, and at the same time stimulated the growth of production of basic building materials, both due to increased market demand and increased government orders. In particular, according to the State Statistics Committee, last year local enterprises increased the production of construction materials by 12.6 per cent, and in January-July 2023 this indicator increased by almost 24.1 per cent - the enterprises of the republic produced construction materials worth 592.9 million manats.

Forecasting the future of the construction sector, it is appropriate to note that the government's long-term plans include investing many billions of manat in housing construction in the Garabagh region, therefore, at least until 2030 there will be a steady demand for HCC services. On the other hand, demolition programmes for dilapidated low-rise housing and five-storey buildings continue in the capital, which also supports the market activity of HCCs. Moreover, according to the Centre for Social Research (CSR), in the three largest cities of the country, the majority of the population lives in houses built over 30 and even 60 years ago. In particular, in Baku, only 26 per cent of respondents surveyed by the CSR live in buildings built over the last 30 years, in Ganja - 18 per cent, and in Sumgayit this figure was only 7 per cent. This means that the construction sector still has a lot of work to do to replace the old housing stock with modern buildings, which will also play the role of a sectoral driver for many years.