Rising prices, changing regulations: Navigating Baku's real estate challenges Will increased mortgage funding provide relief?

One significant factor driving demand for high-end housing in Baku over the past year has been the activity of the Mortgage and Credit Guarantee Fund of Azerbaijan (MCGF). Although there has been a slight decline in housing lending during the first three quarters of this year, the fund remains a crucial player in the mortgage market and is actively expanding its housing leasing program.

Recently, Azerbaijani President Ilham Aliyev announced an increase in the authorized capital of the MCGF by 8.9 per cent. This adjustment includes funds allocated in the current state budget to support social mortgages. As the market continues to evolve, effective strategies will be needed to manage the rapid growth and ensure housing remains accessible for all residents.

For the past two and a half years, Baku's residential real estate market has been influenced by various internal and external factors, leading to significant price increases for apartments, private homes, and land plots. While the construction industry was once highly profitable, it is now grappling with challenges that have resulted in rising production costs and a decline in housing construction volume.

From January to June 2024, a total of 5,204 residential buildings were commissioned in Azerbaijan, covering over 702,910 square meters. This represents a decrease of approximately 26.8 per cent compared to the same period last year. This trend is not surprising, as housing construction cooperatives (HCCs) have been struggling with a lack of affordable vacant land for development—not only in central areas but also on the outskirts of the capital. As these challenges persist, the dynamics of Baku's housing market continue to evolve.

Recent changes to construction regulations have mandated that builders adhere strictly to development rules, preventing the previous practice of increasing density by reducing non-residential spaces. This shift has further constrained the dynamics of Baku's construction market.

Inflation from 2022 to 2023 significantly impacted construction costs, leading to higher prices for building materials, particularly imported ones. During this time, the cost of labour also rose, along with increases in diesel and gasoline prices for machinery use.

Along with these challenges, there has been a noticeable uptick in interest from former Azerbaijani entrepreneurs repatriating their capital and businesses from Ukraine and Russia. Over the past two years, this has heightened demand for the capital's real estate.

Amid inflation risks, more local businesses are engaging in risk hedging by investing in residential properties as an asset. This trend, combined with the rising rental yields from real estate, is putting additional pressure on prices in Baku's housing market.

"Apartment prices in Baku have surged by 14 per cent over the past year. Specifically, the cost per square meter in new secondary segment buildings increased by 14.9 per cent, while prices in older Soviet-era buildings rose by 11.3 per cent. In the primary housing market, the price per square meter in new constructions climbed by 15.7 per cent compared to the same period last year," Vugar Oruj, Chairman of the Azerbaijan Society of Appraisers said.

These trends have resulted in a significant imbalance in the budget housing segment, where demand remains high but supply has sharply decreased. It is becoming increasingly evident that the current rise in prices cannot go on forever. Real estate prices have reached a peak that no longer aligns with average salaries or expected economic growth rates.

Real estate expert Elnur Farzaliyev noted that the prolonged rise in housing prices has created a shortage of buyers, as many potential purchasers are opting to wait and see how the market develops. He observed that last year's data indicated that most apartments were sold through mortgages and some via intra-bank loans, highlighting the challenges faced by buyers in this evolving market.

According to a survey by the Central Bank of Azerbaijan (CBA) on lending activity in the second quarter, there has been a tightening of credit conditions for mortgages funded by banks' own resources from April to June of the current year. The CBA attributes this tightening to several factors, including financing costs, competition among banks, the state of the real estate market, and the capital and liquidity positions of the banks.

In this context, Farzaliyev notes that most buyers are now seeking to purchase homes through relatively low-interest loans provided by the Mortgage and Credit Guarantee Fund of Azerbaijan. To date, the Fund has issued a total of 3.2 billion manats (nearly $1,9 billion) in mortgage loans, enabling 51,710 families to improve their housing situations. Notably, over 931 million manats (nearly $548 million) has been allocated for preferential mortgages aimed at vulnerable groups in the population. Overall, 67 per cent of those who have benefited from mortgage lending through the Fund have been young families.

The demand for funds from the Mortgage and Credit Guarantee Fund remains high. From January to September of this year, agent banks issued housing loans totalling 365.6 million manats ($215 million), with 66.5 million manats (nearly $40 million) allocated for preferential (social) mortgage loans. According to the Fund's data, 3,017 families improved their housing conditions through commercial mortgage loans, while 844 families benefited from social mortgage loans, with an average loan amount of 94,683 manats (nearly $56.000).

In recent years, the MCGF has also made significant strides in a relatively new area: the housing leasing system. This program allows individuals to lease real estate under specific conditions, with the option to purchase and register the property later. The leasing mechanism was tested at the end of 2019 and officially launched in early 2020. Initially, it struggled to gain traction due to low demand in the real estate market during the COVID-19 pandemic. However, as quarantine restrictions were lifted and the real estate market began to recover, this segment of housing lending experienced rapid growth.

As of October 1, 2024, a total of 5,512 families have improved their housing conditions through the leasing mechanism, with 1,126 of these agreements signed between January and September of the current year. The Fund has leased apartments to citizens at 14 different locations: six in Baku, three in Khirdalan, three in the settlements of Masazir, Saray, and Mammadli in the Absheron district, and two more in Sumgayit.

Another important focus is increasing state financing for social mortgages in close collaboration with the State Housing Construction Agency (MIDA), which has been actively building a significant number of social housing units over the past few years. A recent step toward optimizing preferential mortgage lending was the September decree by President Ilham Aliyev, which established procedures for providing state financial support for preferential mortgage loans to servicemen studying at special educational institutions subordinated to the National Defence University, which is under Azerbaijan’s Ministry of Defence. This initiative aims to enhance the use of relevant statistics and reports within an electronic system, thereby improving servicemen's access to financial benefits related to mortgage loans.

The volume of social mortgages for 2025 will soon be clarified during parliamentary discussions on the draft law for the state budget for the upcoming year. Recently, a Decree signed by the Azerbaijani President was published, outlining amendments to the MCGF Charter. This Decree increases the Fund's authorized capital to 1,68 billion manats (approximately $629 billion), marking an 8.9 per cent increase. Specifically, the authorized capital has been raised by 87.7 million manats (nearly $52 million), which is allocated in the state budget for 2024 to support social mortgage financing.