The business of preserving the past: is there profit potential in flipping traditional Tbilisian houses?

With its classic brick masonry exterior, modest story height, and charming balconies, the quintessential archetype of Old Tbilisian residential houses has long captured the hearts of tourists and locals alike. Now, it aims to captivate investors’ hearts as well.

Since an influx of migrants in early 2022 sent rent and housing prices in Georgia’s capital soaring, investors have had their eyes trained on the Tbilisi residential real estate market for its profit-making potential. While the market has largely stabilized since the second half of 2023, with average rental yields dipping slightly to 10.5% (compared to a high of around 12% at the end of 2022), the average asking price has remained around $1,200 per square meter over the last 12 months – signaling that these valuations may have stabilized.

These dynamics, along with several other factors, including a positive outlook on salary growth and an anticipated reduction of interest rates in 2024, have led analysts at TBC Capital to project that residential real estate demand in Tbilisi has largely stabilized and that the market is not currently at risk of reverting to its pre-2022 prices.

With this stabilized demand and high rental yields has come increased investment interest from both domestic and foreign investors. And while some of this interest is coming on the back of the recent surge in the construction of sprawling, multi-story apartment complexes around the city, it has also brought interest in revitalizing some of Tbilisi’s older residences – often located in highly desired central parts of town amidst the city’s unique urban layout and architectural heritage.

House flipping, a term widely popularized in the United States, refers to the practice of purchasing properties, renovating them, and then reselling them at a higher price to turn a profit. While traditionally associated with the American real estate market, the concept is now gaining traction in other parts of the world and may be an answer to the question of many of the inner city’s deteriorating structures. Proponents argue that while the private sector is rushing to meet growing demand for residential housing and maximize profits through new construction, there are both profits and added cultural value in preserving pieces of Tbilisi’s architectural heritage.

Traditional Tbilisian houses

Characterized by their three to four-story structures, brick masonry construction, and distinctive balconies (both timber and wrought iron), traditional Tbilisian houses are scattered all around the city. While the most famous examples of this archetype are often located in the Old Town and Sololaki, well known touristic locations that would prove more difficult to flip due to high property prices, some of the lesser-known gems can also be found in unexpected corners of the city like Avlabari and Chugureti. Featuring high ceilings, tall wooden-framed windows, and spacious rooms, these houses boast a unique spatial arrangement ideal for contemporary refurbishment and serve as a perfect medium for modern designers to reconfigure these spaces, enhancing their functionality and transforming them from single-bedroom dwellings into multi-bedroom residences, inevitably increasing the property’s inherent value.

Despite accurately conveying the historical nature of their respective period through the architectural style, many of these are not officially listed as part of Tbilisi’s cultural heritage. This oversight exposes them to the risk of destruction when left in the wrong hands. However, when acquired by savvy investors with a keen eye for historical value, these properties can offer an opportunity to own a piece of the city’s history at a non-heritage price – with the added bonus of not dealing with the red tape often associated with refurbishing heritage properties.

Prospecting properties

Answering the question of profitability for traditional homes depends on several factors, chief among them the nature of the structures in question, the extent of their historical significance, and the long-term value proposition. While it’s undeniable that erecting new buildings often carries lower upfront costs, overlooking the intrinsic value of preserving historical landmarks risks erasing irreplaceable heritage. Moreover, when investors successfully identify well-preserved existing buildings and collaborate with skilled contractors proficient in upgrading spaces with precision and care, there is a remarkable potential for profit. Conservation experts in the field of heritage preservation always advocate for the “minimal intervention” principle, akin to the well-known business concept of “lean.” This mutually beneficial approach holds the key to unlocking the full potential of renovation projects in Tbilisi’s real estate landscape.

When it comes to flipping, the general rule is to buy low and sell high. However, for many investors, especially those from abroad, navigating this starting point can be daunting, often leading them to opt for familiar territories. Head of the real estate firms Rentals and Eristavi Estates Zurab Eristavi says the key to flipping is to first find the right property. He says this often means targeting neighborhoods with untapped potential: “the right bank of River Mtkvari, for example, has always been more expensive, but the left bank, particularly Marjanishvili street and Ninoshvili area, showcases very old, charming architecture, and the prices are not as inflated there. That part of the city holds greater potential for capital gain.”

While this strategy comes with higher profit potentials, Eristavi says it also comes at a risk for investors when choosing properties in areas that are not yet well developed or maintained. “The main challenge would be the maintenance of the properties. As an investor, you can purchase a property and do your best with it, but you cannot change the entire neighborhood. Often, these neighborhoods are rundown, and property owners fail to maintain their properties. There is a problematic cultural way of thinking that people are only responsible for what is inside of their property – the truth is, for investors, your profit begins with your neighborhood.”

Profit potentials

For investors, procuring properties at a low cost is just the first step. Once acquired, investors must carefully plan their renovation strategy to ensure maximum returns. In flipping properties, the general rule of thumb is to never spend more than 70% of the anticipated value of the house on purchasing and repairs. Therefore, it is crucial to find a team capable of devising cost-effective solutions while respecting the existing fabric.

Nato Tsintsabadze is the president of the International Council on Monuments and Sites (ICOMOS) Georgia, an NGO that works with UNESCO to promote high professional standards of conservation. She says that one advantage for those looking to renovate heritage properties in Georgia is the comparatively low labor costs. “Compared to the UK or Europe, the cost of craftsmanship, especially in the field of conservation, is quite low here,” she explains. This affordability presents investors with an opportunity to execute renovation projects more cost-effectively, potentially yielding higher profit margins.

And while these low construction costs can be advantageous for profits, it is important that quality of the craftsmanship is not compromised. Hicham Wehbe is the Managing Director of RISE CAPITAL GROUP and Rise Real Estate, a company specializing in the renovation and sale of historic heritage buildings in renowned neighborhoods like Vera, Mtatsminda, and Chugureti. He notes that many of the potential buyers for revitalized heritage properties are in search of luxury, appreciating the historical value of the buildings but looking for modern, high-end touches.

“We work with clients who value preserving the essence of the property, advocating for conservation efforts to transform spaces into a new, unconventional definition of luxury. We aim to blend historical elements such as exposed masonry walls and painted ceilings with contemporary features, like modern finishes and amenities, creating sophisticated living spaces,” says Wehbe. “We believe that history is luxury—old is gold, and that is forever beautiful.”

To achieve this high-value proposition in these heritage houses, maximizing interior space is key. Real estate investor Sidney Lee White says this was an important factor in enhancing the value of the residential flat he recently renovated in a historic Rustaveli Avenue building. Originally spanning 74 square meters with one bedroom, one bathroom, a kitchen, and a living room, White’s property underwent significant spatial redistribution. Now boasting two bathrooms, two and a half bedrooms, and an open-space kitchen and living room layout, the property has already accrued value through space optimization. Additionally, the modern finish and amenities further enhance its appeal and value. While White has no immediate plans to sell what he calls his “passion project,” he’s confident that the quality renovations and space maximization will prove profitable when he chooses to sell.

The prospect of flipping traditional Tbilisian houses presents a complex interplay of advantages and challenges for investors. On one hand, the allure of capturing a piece of history and transforming it into a modern masterpiece holds undeniable appeal. Yet, this endeavor requires a delicate balance between preservation and profit, navigating the fine line between respecting cultural heritage and maximizing financial returns. While the current market trends may present opportunities for acquiring properties at lower costs, the evolving landscape demands a nuanced approach and adaptability from investors.

As Tbilisi’s real estate market continues to evolve, investors looking into the business of flipping traditional Tbilisian houses must remain on the lookout for the hidden gems that offer good value prospects within the city’s unique urban fabric!