Clare Nuttall in Almaty -

The whole of southern Almaty resembles a vast construction site. In the financial district cranes surround the glittering towers of the Nurly-Tau business complex, while across the six-lane Al-Farabi highway teams of builders are hard at work on more plate glass office blocks that will become the new home of several of Kazakhstan's largest banks. But further south, where the city grid gives way to modern developments scattered across the foothills of the Tian-Shan, many of the sites lie silent.

For the most part, these are the high-end developments - dubbed "elite" and "business class" housing - that are at the root of Almaty's construction sector woes. On March 13, the Kazakhstan government announced it was allocating $500m to help banks finance loans for construction companies in Almaty. However, the writing is already on the wall for some companies within the southern capital.

The construction boom in Kazakhstan started with the reconstruction of Astana, as the city underwent a radical transformation from provincial town to the capital of one of the world's emerging oil economies. Meanwhile, the construction boom of Almaty, the centre of the country's oil industry, began around 2003 as incomes grew and with them demand for real estate.

By 2007, it was evident that this boom had become a bubble. Projects were over-leveraged and developers - both the well established companies and the hundreds of more fly-by-night players that had operated since the boom began - suddenly felt the pinch when the liquidity crunch hit Kazakhstan and cheap debt disappeared.

The global economy is not the only culprit. Developers are guilty of failing to carry out proper market research, focusing on the upper end of the market, while demand for more affordable housing is far stronger.

New developments have mushroomed in the upper part of the city, whose location above the cloud of pollution that regularly shrouds downtown Almaty makes it the most desirable - and therefore expensive - location. These include KUAT Corporation's Tau Samal, which boasts underground parking, high-speed lifts and armoured entrance doors, and the gated Luxor compound of villas clustered around a spa styled like an Egyptian temple - inspired by a visit to Egypt by the president's daughter Aliya Nazarbayeva. But demand at this end of the market is finite, and many of the projects currently in development may not find buyers even if they are completed. "A lot of buildings are class-B or class-A, which not many people can afford to buy," says one Almaty-based estate agent. "Even if the government helps these companies out, there is still the question of who is going to buy their properties. There are no sales going on at the moment."

Now, many of the smaller companies - of which there are over 900 in Almaty alone - are in trouble. KUAT Corporation, one of the country's largest developers, is also struggling. Earlier this year, it had been unable to pay its workers. On March 18, angry buyers rallied around one of the company's construction sites to protest against its failure to deliver on the money they had paid for their new homes.

Deflating the bubble

Fears that a collapse of the residential property market could bring down the rest of the economy - in particular the banking sector - prompted the government to set up a $4bn stabilization fund. Much of this is earmarked for Astana, however. And in Astana alone, completing all the projects already started would cost more than the entire fund. Therefore, concerns about the country's southern capital prompted the government on March 13 to announce the $500m allocation for Almaty. "The essence of this problem is how well deflation of the bubble can be managed," says BTA Bank managing director George Iosifyan.

"Either prices can be gradually reduced to a sustainable level from which another growth cycle will happen. Or, we could neglect the problem, throw no lifelines to the sector, and let it create a domino effect across other sectors of the economy that are directly or indirectly tied to the construction sector. I think the government took a very responsible approach by deciding to extend a $4bn facility to support construction and [small businesses]," he says.

However, there are questions over how much the government will be prepared to pay. Developers have been paying inflated prices of up to $2,000 per square metre for land in southern Almaty, but the National Association of Realtors forecasts that prices will drop by around 60% by the end of this year. A working group launched last year by Almaty's akim Imangali Tasmagambetov forecast that $2.6bn would be needed to complete all residential projects currently in progress in the city.

Sceptics have also raised the issue of how the funds will be allocated. This should be carried out according to two criteria. First, projects with a high number of prepaid dwellings - up to 30,000 people in Almaty have made financial commitments such as taking out mortgages on as yet unfinished housing developments. Second, those that are nearly finished and, therefore, need less money to complete.

The government has stressed that allocation of the fund will be an open process, with the media involved. However, how the press will be involved, and to what extent, has not been specified.

With an estimated 140 construction projects unfinished in Almaty, there will undoubtedly be more casualties among the industry. But for those companies that can weather the current crisis and rethink their business plans, long-term prospects for the construction sector are more positive. "In general, there is very strong pent-up demand for housing all over the country, so in the medium to long term, we are still quite positive about the construction sector providing that the prices are right," Halyk Bank's chairman and CEO Grigoriy Marchenko said in a recent interview with bne. "It could be a blessing in disguise for our construction sector if they start to pay more attention to economy and business class types of housing and concentrate less on expensive housing which they are now either unable to sell or unable to complete."

Other bankers concur. "It is obvious that a bubble was created. When you have prices for real estate doubling within a year it is not a very normal thing," says BTA's Iosifyan. "But there is still a significant demand for real estate in Kazakhstan. Supply is still far behind demand. Even though the bubble is deflating and prices are coming down, in the long-run I think that construction will be well placed as a sector within the economy."

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