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CONSUMER TRUST DEFINING REAL ESTATE MARKET
Georgia’s real estate boom has shifted from a demand for new apartments to the secondary market in Tbilisi, according to analysts.
A Bird in Hand…
Wary of the pre-pay sales that ignited the construction and real estate boom in Tbilisi in 2007-2008, Georgians are spending money on the ‘secondary market” – homes and apartments that are already built and ready to live in.
According to Kote Gabrichidze, who has studied the market for Institute for Polling and Marketing (IPM), while demand for living space has remained stable, potential buyers are skittish about investing in new developments after the financial crisis.
While there have been no bankruptcies reported among major Georgian developers, the fate of many projects is unclear and there are limited financing options for developers attempting new projects.
During the real estate boom in Tbilisi, a major force driving prices and new developments was a marketing – and financing – technique developers used called ‘buying in the air.’
The premise was simple: a developer purchased property, commissioned an architect to draw up plans, and started selling new units – before they were built.
Consumers, hungry for new living space and encouraged by liberal loaning practices at the banks, were eager to scoop up apartments at relatively affordable buy-in prices, according to Zurab Eristavi, the director of Rentals, LTD.
The closer a project came to completion, the more expensive the apartments became.
But the double hit of the August 2008 war and the global financial crisis dried up financing – and with it, some unfinished projects.
“Before crisis, all development companies were using pre sales – 100 percent pre sales,” Gabrichidze said.
Today, however, most sales are taking place in the secondary market – a direct exchange of cash for product.
According to official data from February, transactions in the secondary market were up to a four-year high point during the first quarter of this year – and nearly 25 percent higher than the same period in 2008.
Eristavi said it boils down to trust: people are uncertain about how quickly new projects will be completed so, if they have the money, they prefer to buy existing apartments and homes.
This “deficit of trust,” he noted, extends to the banking sector – the financing lifeline that most Georgian developers depended on during the height of the construction boom in 2007.
“The only way transactions are happening now is you give me the money and I get you the property right away… no promises,” he said.
“This is the main thing because this really kills the market.”
Gabrichidze noted that some niche markets are doing better – new projects that are unique or who cater to the wealthy.
The rest of the projects, he said, depend on the marketing savvy of the developer – and their ability to secure financing to complete the projects that are still in process.
City Hall’s New Life for Old Tbilisi – a project that allows qualifying developers to get financing backed by the city for projects that will provide housing to residents of Old Tbilisi – has been “very timely” according to Eristavi, because it has given developers a way to access bank funds and continue working.
The fact that construction continues and projects are being finished has contributed to keeping the market solvent: despite dire predictions, there has not been a radical reduction of price in any one sector of the real estate market – rent and price per square meter has stayed relatively stable.
According to Eristavi, prices have gone down around 15 percent – not a major change,especially considering that pre-crisis, real estate prices were “were really, really high.”
Gabrichidze credits two factors in keeping the prices to near boom-level: a conscious decision among the developers not to try and compete for the lowest price and renewed interest in the secondary market.
Smart marking on by developers is also helping. Gabrichidze said that apartments in new projects might list near pre-crisis prices, but if you are ready to buy, the sale’s team will throw in a new garage or finished walls.
He noted, however, that the market is a lot less fluid than it has been in the past. For instance, people who want to buy a finished apartment are unlikely to be swayed into purchasing one in an uncompleted project.
“The market today is very structured, and each section is very orientated on its [market]. You cannot move from this segment to this segment,” he said. “If a person is orientated on the secondary market, it is very difficult to move him to an unfinished apartment.”
Market Down? It’s a Good Time to Invest
Vasilis Konstantinou, s senior advisor at the Greek development and project management company ERGO 3, spoke with Investor.ge about entering the market during a crisis – and their plans to stay.
ERGO 3 was attracted to the Georgian real estate market during the hustle and bustle of the capital’s real estate boom. Then came war, then financial crisis. But the Greek company decided to stay – and develop.
“How can you learn the market? By making something, an investment of your service, to know exactly the local parameters,” Konstantinou said, noting that initial investments are the “price of admission.”
“We felt that Georgia is a place where we should look for possibilities.”
Together with a local partner, they have invested $2 million – primarily in two hotel projects outside of Tbilisi.
“We hope that it [the market] will recover, there are signs of recovery, but our projects are small projects…we are not looking for volume, we are looking for quality,” he said, adding that a “gut feeling” tells him that there is a market for ERGO 3’s product.
“I see that there is a robust and strong middle – middle-upper class --- here in Georgia who would like to get quality products. It is a very, let’s call it, it is more of a gut feeling than statistics…it has served us well in the past.” |
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