Issue 1, 2012. February-March



Before the crisis, real estate was one of Georgia's fastest growing sectors: housing costs increased more than 400 percent between the years of 2003 and 2007. The end of the building boom took the bottom out of the market in 2008. Today, however, the sector is showing signs of a comeback.

Maia Edilashvili

Drawing courtesy of Arci

Three years after it crashed, Tbilisi's building sector is warming up. Despite the scores of half-constructed carcasses of planned apartment complexes and building centers, there are tepid signs of life in the capital's real estate sector.

The numbers are strong and growing: for instance, the number of construction permits granted over the first nine months of 2011 in Tbilisi - 3895 - is nearly three times as high as the number of permits in 2009.

In addition, the Financial Stability Report 2011, prepared by the National Bank of Georgia (NBG), states that in 2010, the volume of completed residential buildings increased by 52 % compared to 2008, while the volume of newly launched construction declined by 70 %.

The sector is also showing signs of strength in the country's GDP: construction was up at 7.3% of GDP in the third quarter of 2011, marking a turnaround from its negative growth just two years ago.

The biggest push for real estate has been through the banks, noted local developers.

In 2008, the capital's building bubble burst after the war and the global financial crisis caused banks to cut off financing. Since both developers and buyers depended on loans to lubricate sales, the end of lending sent the market into a tailspin.

Drawing courtesy of Arci

Giorgi Kapanadze, the director of Axis, a large developer in Georgia, noted that banks were "skeptical" about giving loans in 2009. The boom-era had bolstered sales of "apartments in the air"- the practice of selling apartments before the building was completed. While pre-construction sales were a bonanza for developers during the height of the bubble, once the market crashed, banks were left with half-completed buildings and outstanding mortgage loans on their books. Today, however, Kapandaze stressed, developers are focused on completing projects - not just starting new ones. He said that, prior to the 2008 crisis, all of their sales were for buildings that had not been finished. Now the demand has changed: clients and banks expect completed projects.

"In 2011, banks started to give loans again," Kapanadze said, noting that Axis has resumed construction on all its pre-crisis projects and expects to have them finished by 2013. "We have succeeded in finishing our head office and shopping center on Kazbegi Avenue. In all these areas the demand outweighs the supply [so the market is good]."

George Kananshvili, Managing Partner and CEO of Dexus Management Company, which now owns Center Point- one of the hardest hit developers, confirms that home sales are good if they are completed or close to completion. He notes that during the high season (September-October ) an average of two apartments were sold every day.

When Dexus took over Center Point in September 2010, there were 55 unfinished buildings throughout Georgia and 6,200 disappointed homebuyers.

"On some buildings grass was already growing," Kananashvili noted. Now he says that, thanks to "good management," they have already finished eight buildings and resumed construction on an additional 15.

While not every customer is happy, Dexus is in on-going negotiations with those who have not received their homes yet; the company has pledged to give money back to anyone who is not happy with the new terms for their contracts.

"1,750 households have already received homes and 1,200 more will get housing within the next several months," says Kananashvili, adding that the company plans to spend 95 million lari over the next two years, and plans to satisfy housing claims by all remaining Center Point customers by 2013.

Forecasts for higher demand for living space

The nascent growth trend should get stronger as demand for housing increases, according to the Georgian National Investment Agency (GNIA), which published a real estate ‘snap shot,' based on 2010 figures.

The GNIA report estimates that Tbilisi has the lowest average living space per capita in Eastern Europe: according to their calculations, Tbilisi has just 16 square meters of living space per person - compared with 24 square meters in the ten European states that joined the EU, and 36 square meters in Western European capitals.

Dexus's Kananashvili anticipates that demand, and price, will continue to grow, especially at the top end of the market. But, he noted, the nature of buyers will change as people move from investing in real estate as a business to purchasing apartments for their own use.

"Previously, two thirds of the apartments that were purchased were purchased for investment purposes," he said.

"Now the buyers are final customers, which has made them more demanding in details like the size and brand of the elevator, exterior, façade and surroundings."