Clare Nuttall in Almaty -

Prices have at last bottomed out and started to rise again in Kazakhstan's real estate market. For 2010, the forecast is a fragile recovery and the gradual completion of many part-finished construction projects.

Real estate firms have reported an increase in activity since March. Prices started to rise in October when major construction firms Bazis A and MAG put their prices up by $100 and $50 per square metre (sqm), respectively, after several months of rising sales - although developers are still very willing to negotiate with buyers. "The increase in the official price is symbolically important. They are telling the market that the crisis is over and you better look at buying," says Roger Holland, president of CBRE Scott Holland. "However, this is a very fragile recovery. I expect this winter will be quiet, but by March 2010 things will be more positive. The resolution of [the bank] BTA's debt restructuring removes a big hurdle."

Milena Ivanova-Venturini, director of equity research, banking and finance for Central Asia at Renaissance Capital, agrees. "There is a consensus that the real estate market has already reached bottom," she says. "Some brokers are talking about prices going up. The population is confident that prices will not go down any further, which is an important psychological factor in the market's recovery."

Finished and furnished

With people buying again, albeit cautiously, completion of unfinished residential projects is progressing. Some building sites have been busy for most of this year, as state funds were used to finish projects that were more than 80% completed or with a high proportion of pre-paid apartments. State fund Samruk-Kazyna now owns 6,000 apartments in Almaty and 14,000 in Astana that have been completed through Kazakhstan's anti-crisis programme.

Before new projects can be launched in the residential real estate sector, there is still a backlog of pre-crisis projects that need to be completed. Property developers are under pressure to complete these rather than launch new ones, since the regional and city authorities stopped issuing new permits in 2008. Completing old residential projects - dubbed "ghosts" or "skeletons" - is likely to take up to 2011. "This is a long-term issue. Gradually absorption is happening as the less advanced projects find financing. But for some it won't happen. Some ill-thought-out projects in bad locations will most likely remain as shells," says Holland.

In the pre-crisis years, both banks and construction companies based their investment decisions on wildly optimistic assumptions about the purchasing power of the population. Luxurious apartment blocks were priced far beyond the means of most people, who instead have taken the cheaper option of building their own homes in the suburbs of Almaty and other major cities.

Even among property developers who already have financing in place, changes are being made to their plans to bring them into line with reality. Apple Town, a multi-billion-dollar mixed-use development in Almaty being built by South Korea's Woolim, ran into difficulties because of the size and pricing of the apartments - around $800,000 each ($4,500/sqm). However, Woolim has raised an additional $400m from South Korean banks and - after scaling down its apartments and reducing the price - started building early this year. It is gradually finding customers.

On Kazakhstan's Caspian coast, the even more ambitious Aktau City project has also been scaled back. Originally, the construction of a "Dubai on the Caspian" was planned, to be funded mainly with Middle Eastern money. Now, the regional authorities and Samruk-Kazyna are taking the central role in the planning. Rather than the glittering new city once envisaged, they will gradually build new suburbs around the existing city as and when they are needed. The mega-projects more closely grounded in reality are progressing, albeit more slowly than scheduled. The G4 City project, a plan to build four satellite cities with affordable housing to soak up Almaty's excess population, is still going ahead. However, the sheer scale of the project means it could take up to half a century to complete rather than the 25 years originally planned.

The G4 management team plan to raise $800m-900m on international markets in 2010, and have already appointed an investment bank. However, with Kazakh banks still reluctant to issue new loans, especially to the real estate sector, for most developers financing remains a difficult issue.

Kazakhstan is short of most types of real estate - affordable housing, offices, retail and warehouse space. Almaty, for example, is extremely short of quality retail space and the city's modern malls have long waiting lists. However, construction of new malls has been slow. 2009 saw the opening of the Sputnik mall in March and A'port - Central Asia's largest shopping centre - in September. The opening of another mall, the Prime Plaza, has been delayed until 2010. "There are a growing number of international retailers who are looking for space at professional, modern malls, but the banks are not willing to invest even in the reconstruction of existing malls," says Nursultan Kassenov, managing director of NAI Aristan Kazakhstan. "The projects that are still going ahead are working with their own capital or funds from their partners."

The recovery of Kazakhstan's real estate sector is set to be both slow and fragile, with continuing vulnerability to international shocks. Funding will also be difficult to obtain. However, after being frozen for more than two years, the market is finally starting to thaw again.