BRICKS & MORTAR: Frozen Kazakh market starts to thaw

By bne IntelliNews February 24, 2009

Clare Nuttall in Almaty -

Prices have been slashed, developers are making decisions about whether to scrap or salvage unfinished projects, and behind the scenes deals are being done: Kazakhstan's frozen real estate market has finally started to thaw.

For more than a year after Kazakhstan's construction bubble burst in mid-2007, the market was static. Unrealistic expectations on the part of sellers and landlords kept prices high, while buyers waited for the market to bottom out. Now, prices have plummeted for residential and commercial property, and deals are looking increasingly attractive.

According to Kazakhstan's National Statistical Agency, the average price of residential real estate on the secondary market fell 1.7% month-on-month in January to $881 per square metre (sqm). For new residential real estate, the decline was 1.0%. Prices for Almaty real estate fell 2.6-4.6% month-on-month to $1,588-1,929/sqm on the secondary market. Visor Capital forecasts a further fall this month due to the devaluation of the tenge.

In Almaty, the most active market for office space, real estate agents report a "tremendous fall" in rental rates. Opinions are divided on how large the fall has been, with estimates ranging from "up to 30%" to "35 to 40%" for class-A office space. The drop in prices for class-B offices is even larger - from 40% to 50%. This follows job cuts or at least a cancellation of expansion plans at many of the investment banking and financial services firms, who make up the bulk of tenants at Almaty's priciest office blocks.

"Astana is even worse, because there isn't much business activity," says Dastan Kulzhabay, strategic consulting and research director at NAI Kazakhstan Aristan. "Government organisations and state-owned companies are the main tenants of major buildings and business centres. Private tenants at the top end of the market tend to be representative offices of foreign firms, which only want 100 to 200 sqm. A lot of [smaller businesses] can no longer pay for office space, so are moving back into their flats."

Shopping space

The price decrease has been smaller in the retail sector, because there is still a deficit of space in this category, at least in Almaty. "Projects are being postponed, which is keeping supply down. There are not many vacancies," says Charles Raether, head of Jones Lang LaSalle's Kazakhstan office. However, he notes that more Kazakhs are now heading back to the traditional bazaars, where goods are cheaper, rather than the supermarkets and upscale shopping centres. "Landlords are having to re-negotiate rents, but they aren't down by as much as those for office space."

Some retailers are even expanding. Kazakh chains such as electronics retailers Sulpak and Technodom expanded aggressively in the boom years. However, others, including supermarket chain SM Market, have waited and now, unencumbered by debt, are taking their chance to grow in a less competitive market. Foreign companies are also making their move into Kazakhstan. Inditex Group, owner of the Zara and Bershka brands, is in negotiations with a local partner; Metro has a 20-strong team in Almaty and is poised to enter the market; and Ikea may at last make its move, now that land prices have dropped to affordable levels.

The situation does, however, depend on the quality of the retail space. "Almaty's professional retail market is still under-developed. Foreign companies expanding here have strict requirements, and at present Mega [Center] is the only space that meets these. It has a waiting list, while weaker projects are struggling," says Kulzhabay. There have even been some incidents of shopping centre managers offering free space for a while - at the less popular centres - just to avoid empty space.

Meanwhile in Astana, where developers optimistically thought demand would catch up with supply, the situation is more difficult. There are no less than 10 shopping centres in close proximity to each other on the Left Bank. They will face stiff competition when the shopping and entertainment centre at Khan Shatyr centre opens later this year.

Under these circumstances, landlords are bending over backwards to accommodate their tenants, and competition between rival business and shopping centres for clients is fierce. This is a relatively new development. As late as the autumn of 2008, after the second wave of the crisis broke, landlords were not making concessions, notes Raether. "There is an increased interest from tenants in discussing, renegotiating or relocating. Now landlords have lowered their rates significantly. Some are even taking the pre-emptive move of going to their tenants and offering them better terms. It's a tenant's market."

"Managers and developers are offering more to their customers," agrees NAI Kazakhstan Aristan CEO Bahitbek Katen. "Shopping centre managers and developers are training their people up as professional managers, being very attentive to each tenant, and trying to take each others' tenants."

Home help

On the construction side, residential projects are moving ahead with the help of the government's support package. Meanwhile, commercial projects are receiving triage - with the funding markets effectively closed, decisions need to be made on whether to complete, abandon or adapt unfinished development. Investment depends on the global situation - it won't recover here until it recovers in Europe and the US, and investment comes back. "The biggest problem is financing, getting debt or equity is very difficult in this environment. This is holding up some decent projects. Projects that are far enough along are being finished, but nothing is happening with the others," says Raether.

In one high-profile example, the Almaty city authorities confirmed in early February that the planned 500,000-sqm shopping mall to be built under Republic Square - which has resulted in Almaty's central square being hidden behind aluminium hoardings for more than a year - won't now be built. Instead, developer Bazis-A will convert the space into an underground car park.

Some other unfinished projects are being bought up and (where necessary) completed, in the hope of selling them on to foreign investors. In certain cases, the larger banks have taken over struggling projects, when falling land prices meant their collateral was no longer sufficient to cover the risks. Typically these projects are packaged together, before the banks seek buyers.

Although deals are rarely - if ever - announced, insiders say there is quite a bit of merger-and-acquisition activity going on behind the scenes. "There are many M&A deals in the real estate and construction markets now, but they are difficult to track because of the lack of transparency," says Kulzhabay.

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