Nicholas Watson in Prague -

Desperate times calls for desperate measures.

Kazakhstan's real estate market, which for the past few years has looked like a bubble in the making, is now in a slump. Desperate to stop the rot, the government has announced it will start buying residential apartments in a bid to support prices.

The main culprit is, of course, the collapse of the housing market in the US, which pulled the rug out from underneath the sub-prime segment of the mortgage market. The effect of this has rippled out through the global financial markets, causing a liquidity squeeze that's now hurting the heavily indebted Kazakh banks. Having been such huge lenders to the construction and real estate industries, a collapsing housing market puts them in precarious position.

According to official figures, from a peak of over 75% in July 2007, growth in Kazakh real estate prices had fallen to 43% on year by December. Residential property prices nationwide fell 0.6% in December from the month before, while prices in Almaty - where house prices have risen the most - dropped 2.4%. The years of double- and triple-digit growth in real estate prices in the metropolitan areas are well and truly over.

On February 12, Deputy Prime Minister Umirzak Shukeev announced that the government would buy up to 8,000 residential apartments in Astana at a price of $850-$1,200 per square metre. By comparison, the average price of residential real estate on Astana's primary market was $1,300 per sqm, according to the Kazakh state statistics agency.

Shukeev said the government will acquire residential real estate from construction companies that's more than 50% completed, which will be used to house the staff of national companies and for renting. Apparently, KazAgro, Samruk, Samgau, Kazyna have all indicated they are ready to buy about 2,000 flats for their workers. Shukeev said the number of government-financed projects might be increased from the current 27 to 40, implying that most of the 112 projects approved by the government for financing either won't receive or don't want to receive the support.

The government's plan should help ease the pressure on local construction companies, which are suffering from having relied on bank credit to fund projects and now find a growing amount of real estate on their books which no one seems interested in buying. By lessening the possibility of major defaults in the construction sector, the government is hoping this will also decrease the likelihood of a serious deterioration of the quality of banking assets linked to the sector.

"We view the move as part of the broader effort to support the local construction and banking industries, which have come under mounting pressure from the effects of the global liquidity crisis," say analysts at UniCredit. "Overall, we expect some $500m to be used for the buyout, and, provided that the government does not resell the housing, this could indeed prevent a further slide in real estate prices."

However, analysts note that the announced buyout prices are very close to the construction costs, which limits the profitability of such projects. As such, the plan almost certainly won't kick-start growth in the construction industry.

Yuriy Khramtsov of Visor Capital agrees that the government's plan is little more than a short-term fix. "Subsidizing the real estate market by purchasing a small number of apartments at the offer price will not increase real demand from individuals in the future, as it will not change income levels that support the market," Khramtsov says. "We believe that the government should stimulate construction companies to study carefully the incomes of their potential buyers, mutually collecting the required information. As real estate has lost its credibility as a reliable investment instrument, only fundamental factors are likely to support real estate prices."

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