2023 April-May Analysis

TBC Capital: Tbilisi residential real estate market’s outlook strong, stable for 2023

Transactions, price, and yield

Tbilisi’s residential real estate market started 2023 with no signs of faltering after a year characterized by unprecedented growth in both rental and sales prices, says TBC Capital’s latest market watch released in March. January figures show seasonally adjusted MoM growth in transactions came in at 14%, while MoM sales prices were up 2.7%. Annual growth proved even more substantial, with average sales prices coming in at $1,103 per square eter, up30% compared to January 2022.

This growth in both transactions and sales contrib-uted to a 54% YoY increase in the size of the market, amounting to $210 million – growth that TBC Capi-tal Senior Research Associate Giorgi Mzhavanadze says is due to several factors. “On the one hand, we do have a low base effect when comparing January 2022 to January 2023,” he says. “The end of 2021 and beginning of 2022 were still part of the post-Covid recovery, meaning transactions hadn’t yet recov-ered to their 2019 levels.”

“On top of that,” he adds, “was the impact of war-re-lated migration. While we didn’t see many migrants active in the sales market (about 5% of total transac-tions) last year, the significant uptick in demand in the rental market caused rental prices and yields to surge in the second part of 2022. This, in turn, led to higher demand in the sales market – predominantly from domestic buyers.”

And data from January shows that rental prices and yields continue to remain high. Average rental prices were up 119% YoY and 3.3% MoM in January, with rental yields coming in at 12%. “The current rental yield is unusually high,” says Mzhavanadze. “The average for the Tbilisi market since 2016 has been 8%, and we are currently 4 points above it – that’s nearly as high as the long-term deposit rate for GEL.”

Consumer Preferences

Buyers in Tbilisi continue to overwhelmingly seek out apartments with an area of less than 75 square meters, with 74% of January purchases falling into that category. Figures from the first month of 2023 showed a higher bump in transactions and prices for old apartments compared to new ones, with older apartments seeing a 19% YoY increase in transactions and prices up 2.6% MoM; in compari-son, transactions for new apartments registered an increase of only 8% YoY and a slight decrease of .2% MoM in price. TBC Capital’s Mzhavanadze says this trend could also be related to the influx of migrants. “We classify new apartments as those sold within three years of when their building permit was grant-ed,” he clarifies. “When a large number of migrants moved to Tbilisi last year, they were looking for completed and furnished apartments to move into immediately, which is why we think demand for older apartments has increased.”
As for locale preferences, Tbilisi’s Saburtalo district came in first in terms of registered sales transac-tions for January (20% of total transactions) with Didi Dighomi in a close second (18% of total trans-actions), while Mtatsminda and Vake registered the highest sales prices, both coming in above $1700 per square meter, on average.

Market to stabilize in 2023

Tbilisi’s residential real estate market should remain strong but stable for the remainder of 2023, accord-ing to TBC Capital’s projections. Forecasts for December 2023 indicate that only minor annual growth is expected by the end of the year, with a 3.9% YoY increase in sales prices and 1% YoY growth in rental prices predicted.

“Several factors will continue to impact sales prices,” TBC Capital’s Mzhavanadze explains. “One is the high rental yields we noted, which drive up demand in the market. Inflation is also still generally high and construction costs are currently elevated, with emigration-related labor shortages in the construction sector having driven up labor costs by 30% in USD terms compared to a year ago. And, of course, the appreciation of the lari has also had a positive impact on sales prices in USD terms,” he adds. “But interest rates are also high now, which is having a small, but negative, effect on the mortgage market. Based on all these factors, we expect sales prices to continue to grow – albeit much slower than last year – throughout the rest of 2023.”

Looking at the rental market, Mzhavanadze says the impact of war-related migration has largely been absorbed. “We estimate that around 30% of the short-term migrants that came to Georgia last year may leave this year; of those that remain, we estimate 10% may purchase property and leave the rental market. This will ease demand on the rental market, and likely cause minor MoM declines in rental prices within the second half of 2023.”

Most importantly, he notes, is that Tbilisi’s residen-tial real estate market looks to be in a healthy posi-tion. “We are monitoring the market closely, and our indicators show that we don’t currently seem to be at risk of a price bubble. The factors that contribut-ed to high economic growth in 2022 have carried into 2023, with continued high levels of trade, remit-tances, and foreign investment coming into the country. We also don’t see an uptick in construction permits that would indicate we may soon face an oversupply issue. Based on all these factors, we would categorize the market as healthy with a posi-tive outlook for the rest of 2023.”