Issue 2, 2013. April-May

   

SLOW, STEADY GROWING CONFIDENCE IN COMMERCIAL REAL ESTATE

New developments, large investments, higher prices and increased demand are all helping the Georgian commercial real estate market rebound.

Maia Edilashvili

Turning the corner

East Point, a 65,000 square meter shopping and entertainment center under development in Tbilisi, is just the latest sign that Georgia's real estate sector has recovered - and is growing at a solid pace. The project was launched by CBD Development, a Georgian subsidiary of Quadrum Property Group, an international development company with projects worth over $900 million in the United States, Southeast Asia and former Soviet Union countries.

"The retail market in Tbilisi is in need of additional first-class space. To meet this demand, and to provide a fresh, innovative retail offering, East Point is designed to be Georgia's first open-concept retail and entertainment destination," explained Nini Gorgodze, the Sales and Marketing Director at East Point.

"We have decided on an open air concept since high street shopping is quite popular in Georgia. The deciding factor in choosing this concept was the relatively mild climate in Tbilisi, which gives our shopping center even more appeal."

East Point plans to offer elite fashion boutiques, high street brands, restaurant and cafes, as well as a multiplex cinema, bowling alley, and a children's education and entertainment center. The mall is set to open in fall 2014.

"We will offer everything you typically find at an international quality shopping center - all of the services required for a family to come and pass several hours- where each member can find options that appeal to them as individuals. This type of environment does not yet exist in Tbilisi," Gorgodze added.

Georgia's real estate sector is in line with the development pace of many Eastern European countries.

In Lithuania, for example, the highest all-time prices for residential property were recorded at the end of 2007, and for commercial property in mid-2008. Real estate prices bottomed out in 2011, with just a slight growth noted in 2012.

"The recent crisis fundamentally changed the attitude towards investment in real estate. After such a sudden and sharp decline in prices, and the market activity in 2008-2010, the interest and the capacity to purchase property as an investment fell quite significantly," Raimondas Reginis, Senior Market Analyst at Lithuania-based Ober-Haus Real Estate Advisors, said.

He noted that one factor that lead the market's return was the "non-professional investors" who buy-to-let properties. For example, in Vilnius, the greatest interest lies in 40-65 sqm sized apartments, which in residential districts cost between 60,000 EUR and 100,000 EUR, and in the central part of the city up to 150,000 EUR.

"At present, such a property generates a yield of about 4-5 percent (if purchased using personal funds), which under today's conditions is quite attractive. Interest rates on deposits in banks presently average only around 0.5 percent to 1.5 percent, therefore, investment in a residential property is a relatively safe and positive alternative for those with limited resources," Reginis noted, adding that those with a little bit more experience and greater resources are interested in commercial property such as offices and retail, which cost up to 250,000 EUR and can generate annual yields of 8-10 percent.

Buy-to-let property, as an alternative form of investment, was popular in the pre-crisis period in Georgia, too, and market insiders note that such "investors" are gradually returning.

Nana, who lives in the Saburtalo district, says that in the five-story building where she lives, as many as 12 out of the 15 one-bedroom apartments are rented out. "They never stay vacant," Nana noted, and added that when she tried to find a two-bedroom apartment for rent for her son's family, they tried unsuccessfully for a month. "Whenever we picked out an advertisement and called the owner, it had already been rented out."

"Since 2010 we have seen an increase in both prices and sales. It's a slow growth but still- it is growth," says Kote Gabrichidze of IMP Georgia, a Tbilisi-based consulting company.

The growing demand, which is observed both for commercial and residential space, in particular in the high class segment, drives costs high.

High-end residential space prices in Tbilisi increased to $1600 from $1300 in 2007, according to a December 2012 report on the real estate sector prepared by Jones Lang LaSalle, a US-based commercial real estate services provider, IPM Georgia, and Tbilisi Municipality.

During the same year, the cost of monthly rentals at prime shopping centers also jumped from $75 per square meter to $92.

IPM's research illustrates that over the past several years average shopping center rates have mostly stablized at $34 per square meter in 2012, down from a high of $45 per square meter in Vake's Chavchavadze and Saburtalo's Pekini during the boom period of 2007.

Aghmashenebeli Avenue in Dighomi is also gaining popularity for retail space - especially since the opening of the 72,000 square meter Tbilisi Mall in April 2012.

"Rentals are quite successful: 64% of the space has already been rented out and in total, we have 80 tenants," says Mariam Kutateladze, Marketing Manager at Tbilisi Mall. The average rental price at the mall is $45 per square meter.

The developer of the project, Rakeen, allowed a large number of fashion stores into the Georgia Retail Group, such as Zara, Banana Republic, Gap, and a range of other international brands. In September, the hypermarket anchor Carrefour opened there.

"On average, the consumer flow [at Tbilisi Mall] is 25,000 a day and the opening of five more new brands is already planned," Kutateladze added.

He noted that the developer's "expectations" have already been met.

Experts underline that Carrefour's entry to the market should attract other big names.

"Carrefour's choice to open in Tbilisi highlighted a very positive outlook for the Georgian market," Kote Gabrichidze (of IMP Georgia) said.

According to him, "quite a serious demand is starting to appear for big-box retail parks."

Located on the motorway known as the Kakheti Highway, which connects the city center with Tbilisi international airport, , the East Point mall expects 70,000 potential consumers to pass daily.

That volume of traffice would provide commercial brands with impressive visibility.

"At present, leasing negotiations are underway with several domestic and international companies, and we are receiving very positive intentions and feedback," Gorgodze, the director of sales andmarket at East Point said.

East Point has already reached agreement with Goodwill, Georgia's largest food retailer, for the opening of an 8,500 square meter store which will include a 6,500 square meter hypermarket. There are plans for adjacent service boutiques, as well.

The first phase of the development will encompass some 65,000 square meters of constructed area accommodating a hypermarket, a DIY (Do It Yourself) store, - an electric and white goods super store, and a 27,000 square meter outdoor fashion mall. The plans include a parking lot with over 2,000 plances, as well.

The developer is covering the entire cost of the project- approximately $50 million.