Issue 6, 2012. December-January

   

DECODING THE GEORGIAN REAL ESTATE MARKET

Hotels and commercial warehouse/logistics space are two sectors primed for growth and development in Georgia, according to a recent three month survey by IPM and Jones Lang LaSalle, financed by Tbilisi City Hall and the Georgian Investment Agency. Investor.ge spoke with IPM's Kote Gabrichidze and Martijn Kanters about new trends in the market, and prospective sectors for investment. This is the first article in a two part series about the Georgian real estate market. The February-March issue will explore the sectors and investment opportunities in more depth.

The Georgian Real Estate Market Overview (GREMO), new report by IPM and Jones Lang LaSalle, provides new insight into the supply and demand trends (with some interesting findings on pricing and vacancies) in five distinctive sectors - retail, residential, office, commercial, and hotels.

The supply-demand relationship is lopsided in most sectors, particularly the growing need for two and three star international brand hotels and modern commercial/industrial space. The report, however, goes deeper than the usual figures and charts. It highlights the market's undercurrents, including the impact of Georgia's unusually high homeownership and the distinct preference for owner-occupied buildings in the office real estate sector.

Some of the data - like the number of office workers in Tbilisi and the number of modern warehouses in the country - is completely new. Below is a short overview of the findings from each section. The full reports are available at www.gremo.ge.

Hotel & Leisure
Based on the research collected by IPM and Jones Lang LaSalle, the demand for hotel rooms far outweighs the current stock, particularly the need for three star hotels from international brands.
Total turnover for the hotel and leisure sector was 808 million lari (approximately $480 million) in 2011, and the number of tourists in Georgia has increased 20 percent a year over the past several seasons, pushing room occupancy to 58 percent in Tbilisi - higher than the EU average, according to Martijn Kanters. The Kazbegi, Svaneti, Borjomi and Kakheti regions are also very popular.
Tbilisi alone accounts for 76 percent of all business tourism, and 39 percent of total guests registered in the country. Today in the capital there are 153 hotels, with a total of 3,612 rooms and 6,279 beds- a 25 percent increase since 2009.
Batumi receives 32 percent of the country's tourists. There is a 37 percent hotel occupancy rate in the Achara region, although most are small hotels and family guest houses. In Kakheti, Georgia's wine region, the number of tourists spiked in 2009 from under 5000 to over 35,000 in 2010. Room occupancy was 42 percent in 2011.

The Industrial Market
IPM and Jones Lang LaSalle's three month study indicts that there is a lack of modern warehouse and logistics space in Georgia. There are some warehouse facilities in Tbilisi and Poti - but close to nothing in the rest of the country.
The increase in transit cargo, and the interest in Georgia as a transportation hub, is increasing demand for logistics and warehouses - with the largest potential in Tbilisi and Rustavi. The report found that there are 286,736 square meters of warehouse/logistic space in the country - and none can be classified as modern by European standards.
The Gebrüder Weiss project, expected to open next year, is an indicator of the new demand - and potential for development - in Tbilisi, IPM Consultant Martijn Kanters noted.

Office Space
One of the interesting findings from the research was that Georgia has an uneven development/ownership relationship: while developed real estate markets include investment funds as well as developers and renters, the Georgian market is largely confined to just developers and tenants. In addition, there is a high number of owner-occupiers, meaning many companies opt to build their own buildings: 47 percent of the 255,870 square meters of modern office space in the capital is owned by tenants.
The market is also very fragmented, with pockets of high vacancies as well as areas of high demand. Prices in Tbilisi, where most of the current office space stock is located, are largely stable, although there is no concentrated business area in the capital.

Residential Space
Georgia has one of the highest home ownership rates in the world - 91.5 percent. In the capital, the rate is slightly lower at 85.6 percent. The report found that over 50 percent of the housing stock was built between 1960 and 1990, and much requires significant repairs. House prices are stable, averaging between $800 and $1000 per square meter in both Tbilisi and Batumi. While the residential market took a hit immediately following the August 2008 war and the global financial crisis, there has been a steady increase in demand since 2010, largely in the low to mid price range.
The mortgage market, however, remains small - reportedly just 6 percent of consumers purchased real estate with bank financing in 2011.

Retail Space
Just half of the 700,000 square meters of retail space in Tbilisi, Batumi and Kutaisi is modern-type shopping space while the rest is traditional- such as bazaar and outdoor marketplaces - and there is just one modern shopping mall in the country --Tbilisi Mall.
The anchor of the mall, Carrefour, a branch of the French hypermarket, is a harbinger of the market's potential for big box outlets, according to the report, which noted Carrefour's plans to expand nationwide. While the majority of the Georgian population still lives at or below the poverty level, the country's GDP has been steadily growing since 2010, rising from -3.8 percent in 2009 to an estimated 7.5 percent growth in 2012.