Issue 2, 2014. April-May

   

HOTEL CONSTRUCTION RENEWS BUILDING BOOM IN TBILISI

Six large hotels planned - and a score of smaller construction projects - are giving Tbilisi's dormant building sector a buzz. But unlike the construction explosion from 2005 to 2007, this boom is far from a bubble, industry specialists say.

Nino Patsuria

The building business is making a comeback in Tbilisi, after years of recovery following the 2008 financial crisis. But industry specialists believe the new development trend signals major differences in how the sector is growing and maturing after the 2007 construction bubble.

Lisi Lake Development in Tbilisi

One major difference from the 2005-2007 boom is the driving force behind the growth: this time around, large hotel projects are pushing the sector forward, not mortgaged apartment sales, noted Tengiz Lomitashvili, a managing consultant and partner at TBSC Consulting.

Over the next two years, six major hotels are planning to open in the capital: Rixos, with 180 beds; Millennium Hotel, with 220 beds; Park Inn, with 200 beds; Hilton Garden Inn, with 180 beds; Rooms Hotel Tbilisi, with 150 beds; and Intercontinental Tbilisi, with 200 beds.

Lomitashvili noted Georgia's growing number of tourists is luring large hotel projects to the capital: last year the tourist inflow in Georgia grew by 22 percent - the highest in Europe, putting the number at over 5 million. The official prognosis of GNTA for 2014 is 18 percent.

In Tbilisi, he said, the four and five star hotel market is already "saturated." But there is room for three star accommodations.

"The 3-starred hotel segment has the highest potential as far as 4-5 starred hotel segment is gradually becoming saturated, considering the existing pipeline supply in this segment. Out of 170 of all class hotels and 7,000 beds at the moment in Tbilisi, there are only up to ten larger (50 rooms and up) hotels. As for the announced pipeline, more than 1,000 rooms will be added in next 2-3 years, most of which will be in 4-star segment. The whole the 3-star segment is free," he said.

A Changing Market

Hotel construction provides a more stable environment for the sector to rebuild. Now, noted Lomitashvili, the impetus is on good management, not quick profit.

The Park Inn by Radisson Rustaveli Tbilisi

He said that change signals there has been a fundamental shift in the market structure. To an extent, the large companies that used to dominate the real estate industry have been replaced by flexible small developers focused on local needs who focus on one project at a time.

"You can hardly find a street in Tbilisi, either downtown or uptown, without a new, small construction site," Lomitashvili says. "These are mainly small independent investments groups who build small projects based on their own financial resources and sell them. There are, however, some big developer companies like Bank of Georgia's m2 Real Estate still do well thanks to proper management."

Redix recently started the $31 million 164-room hotel Hilton Garden Inn project on Chachavadze Avenue, which is scheduled to be completed by 2016. With $18.8 million being covered by EBRD, the project also includes residential housing. In addition, Redix, which entered the real estate market in 2007, also holds a portfolio of office and commercial space.

In response to questions by Investor.ge, Redix said "demand" is high in the market, noting that their luxury apartment project was quickly "full."

Other real estate development groups agree that demand for apartments is high in the Tbilisi market.

For Lisi Development, a multi-phase residential project near Tbilisi's Lisi Lake, interest from potential buyers has been steadily increasing since construction started in 2011.
"In 2011 we already had real clients for 30 percent of the residential places. And demand has significantly increased after the completion of the first phase," the projects press department said via email.

"We must say that almost for the whole past year demand for the residential housing is steadily growing. We think that this tendency will be the same at least for next three years."

With around three percent of the market in their portfolio, m2 Real Estate launched two large residential projects in Saburtalo, a central, primarily residential region of Tbilisi. The construction, a $14 million investment, have been financed by the International Financial Corporation (IFC) and FMO, the Dutch development bank.

The Georgian Co- Investment Fund is also primed to make new investments in the sector. Among the potential projects named by the fund in its initial presentation, there were hotels in Tbilisi and in the regions. In March, the fund also announced tentative plans for a large scale real estate development in central Tbilisi.

Irakli Burdiladze, the chairperson of the Supervisory Council for m2 Real Estate, noted, however, that the market is also changing based on consumer demands.

Unlike the boom years, when people were willing to trust developers and purchase apartments in buildings that had yet to be constructed - a practice known as "buying in the air," today, consumers demand good management and better guarantees. "We never start a project unless half of finances required for the project is attracted via our own capital or other financial institutions," Burdiladze told Investor.ge.

Lomitashvili agreed, noting that today consumers sign deals only when construction is actually ongoing and near to finish.

"This speculative bubble when consumer acquired new apartments by banking loans rather than their own savings had to burst finally, and now consumer became wiser and the demand is rational and close to real purchase power," noted Giorgi Abashishvili, a deputy dean at Ilia State Univesrity Business School.

"Now the demand will go up at a reasonable pace close to the economic growth of the country and not without logic like the pre-crisis boom."

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