Social housing, preferential mortgages remain key in Azerbaijan’s housing strategy Crisis relief valves

In recent years, Azerbaijan's real estate and housing construction market has faced a range of challenges, leading to a slowdown in the construction of new homes and a decline in sales as apartment prices continue to rise. These negative trends have contributed to a decrease in lending activity through the Mortgage and Credit Guarantee Fund (MCGF).

Despite this, the Fund remains a key tool for providing social mortgages, and, in collaboration with the State Agency for Housing Construction (MİDA), continues to support sustainable market demand in the country. The future of social housing development and preferential loans was the focus of a seminar held in Baku on December 25, titled "Housing Finance and Business Support Tools."

The residential real estate market in Azerbaijan has been influenced for over two years by a combination of internal and external factors, which have contributed to a dynamic rise in apartment and private house prices. A key factor has been imported inflation, which has driven up the cost of construction materials, machinery, fuel, transportation, labor, and most notably, the rapid increase in the price of land suitable for development in Baku, Sumgayit, Ganja, the Absheron Peninsula, and other urbanized regions of the country. All of this has resulted in higher production costs and a reduction in the volume of housing construction in the capital and other regions. 

According to the State Statistics Committee of Azerbaijan, the capitalization of the country's construction market decreased by 5.8% in 2022, while the total area of completed housing amounted to 2.593 million square meters, 24.8% less than the previous year. Similar trends were observed in 2023, with construction volumes reaching around 2.511 million square meters, reflecting a decline of more than 3%. This negative trend was also evident in the first half of the current year, with 5,204 residential buildings completed, covering a total area of over 702,910 square meters—approximately 26.8% less than in the same period the previous year. At the same time, according to data from the State Statistics Committee of Azerbaijan, the number of low-rise houses built from January to September of this year also decreased by 14% compared to the same period last year.

It is quite evident that the reduction in housing construction by housing and construction cooperatives (HCCs) is putting pressure on market demand, both in the new-build segment and the secondary housing market, driving up real estate prices. As long as current market trends persist, the real estate market in the capital shows no signs of price reduction, even despite a decline in apartment sales activity. These complex processes are also affecting the Mortgage and Credit Guarantee Fund (MCGF), which has reduced the issuance of housing loans this year. 

According to recent information from the Central Bank of Azerbaijan (CBA), from January to November, the MCGF issued loans totalling 396.1 million manats ($233 million), which is a 9.3% decrease compared to the same period last year. Over this period, the amount of refinanced loans by the Fund decreased by 7.4%, to 418.9 million manats ($246 million), indicating a slowdown in the "revolving" mechanism, which uses repaid loan funds to finance new mortgage projects.

To compensate for the sluggish dynamics in the turnover of funds, the Mortgage and Credit Guarantee Fund (MCGF) has increased its issuance of securities. During the reporting period, the Fund raised 500 million manats ($294 million) through the issuance of mortgage bonds, ensuring a 35.1% increase in liquidity. 

"Since 2009, the MCGF has issued bonds totalling over 1.906 billion manats [$1.1 billion] and made interest payments to investors holding its bonds amounting to approximately 278.5 million manats [$163 million]," said Ilham Kalashov, an advisor to the Chairman of the Fund’s Board, who participated in the seminar "Housing Finance and Business Support Tools." "Over the years, the Fund has attracted around 3 billion manats from capital markets."

Importantly, despite the ongoing challenges in the real estate market, the funding for the Mortgage and Credit Guarantee Fund (MCGF) from the state budget has not only remained stable but has even slightly increased, reaching 87.7 million manats ($51.5 million). This has allowed the Fund to remain a key tool for social mortgages in the country. Moreover, the MCGF's social mortgage program, with its preferential 4% annual interest rate, a 10% down payment, and a 30-year repayment period, is the most sought-after product of the Fund. The increase in budget funding is having a positive impact on stabilizing the overheated real estate market during this challenging period. 

Additionally, loans under the social mortgage program are most beneficial when combined with the purchase of homes in budget-friendly multi-apartment complexes being built by the State Agency for Housing Construction (MİDA). These include large-scale social housing projects in the Yasamal and Surakhani districts of the capital, new initiatives in Sumgayit, Ganja, Shirvan, Lankaran, and now in the Karabakh region, where homes are being constructed in the cities of Fuzuli and Jabrayil under MİDA’s programs.

"Over 70% of the apartments sold by MİDA were purchased through preferential social mortgage loans from the MCGF," said Rasim Abdullayev, Director of the Mortgage Lending Department of the Fund, during the seminar "Housing Finance and Business Support Tools." "Since 2018, the Fund has provided preferential social mortgage loans totalling 233.1 million manats [$137 million] to 4,802 citizens, as well as 82 commercial mortgage loans worth 3.6 million manats ($2.1 million) for the purchase of apartments built and sold through MİDA's initiatives."

It appears that social mortgages combined with the purchase of housing within the MİDA system will remain the mainstream of housing finance for a long time, especially given the positive developments in this segment. For instance, in early December, another sale of 544 apartments, located in the "Sumgayit" and "Lankaran" residential complexes, took place as part of the State Agency for Housing Construction's projects, utilizing preferential mortgage loans and also funded through the "Affordable Housing" system on the "E-Government" portal (www.e-gov.az). 

The housing selection process was monitored by an operational headquarters set up in the administrative building of the State Agency, with the involvement of representatives from Azerbaijan's State Security Service, the Special State Service for Communication and Information Security, the Innovation and Digital Development Agency under the Ministry of Digital Development and Transport, AzInTelecom, and the media. These security measures were aimed at preventing any violations or fraudulent activities during the digital apartment selection process, ensuring full transparency. Subsequently, a representative from the State Agency for Housing Construction demonstrated additional security measures implemented in the selection process to prevent faster apartment selection using special hacker programs.

Another significant advantage in the work of the State Agency for Housing Construction (MİDA) is the maintenance of construction costs for residential buildings within optimal limits. Notably, despite the rapid increase in land prices for constructing multi-apartment buildings in Baku and other urbanized regions of the country in recent years, contractors working on behalf of MİDA build buildings on state-provided land, which significantly reduces construction costs. As a result, the price per square meter of apartments in social housing complexes is much lower compared to private housing construction cooperatives (HCCs), where the cost of 1 square meter starts at two and a half thousand manat ($1,470) or more.

Finally, all apartments sold through MİDA are fully renovated, equipped with kitchen furniture, individual heating systems, and meters for water, gas, and electricity. In the well-maintained and landscaped courtyards of these residential complexes, children's gardens, sports and playgrounds, parking lots, and other amenities are often created.