BRICKS & MORTAR: Kazakh real estate - new game, new rules

By bne IntelliNews October 3, 2008

Guy Norton in Almaty -

After years of easy pickings, property developers in Kazakhstan need to be more professional if they are to attract fresh investment and new clients in the post-credit crunch era. That's the clear message from NAI Kazakhstan Aristan, a joint venture established in January this year between NAI Global, a major player in the US real estate market, and Kazakhstan's Aristan Group, a diversified property and financial services group.

NAI Kazakhstan Aristan is looking to improve industry standards in the Central Asian republic's real estate market which, after enjoying a boom for best part of this decade, is now having to face up to the grim possibility of a bust. "We see it as our task to develop the local market," says Nursultan Kassenov, managing director at NAI Kazakhstan Aristan, adding: "There's still a lack of transparency in the construction and real estate industry in Kazakhstan."

By way of example, he cites the lack of official criteria for office classification, which means that in the past some commercial real estate developers have played fast and loose with the truth when it comes to claims about the quality of their projects. "Contrary to what developers may say, there's currently only two real 'A+ Class' office developments in Kazakhstan, both of which are in the Regional Financial Centre of Almaty district," claims Kassenov, adding that many supposedly 'A Class' commercial properties are barely up to internationally recognised 'B' or even 'C' classification standards. Kassenov says that NAI Kazakhstan Aristan is working with the likes of international property consultants such a CBRE and DTZ to compile a commonly agreed set of classification standards that will match those in developed markets elsewhere in the world.

Second class property

The good news for property developers such as Capital Partners, which built the landmark Esentai Tower on Al-Farabi Avenue in uptown Almaty and which merits its 'A+' ranking, is that despite the credit crunch there's no lack of potential tenants. "Demand still remains very strong for high quality, well located properties," says Kassenov, adding that there is still plenty of appetite from both local and international companies for elite developments.

The real weakness in the commercial real estate market in Kazakhstan is in the 'B' and 'C' class segments, traditionally rented by small- and medium-sized enterprises from Kazakhstan that are now feeling the pinch from the twin effects of the country's economic slowdown and the choking off of low-cost lending by Kazakh banks. "SMEs have been hit hard by the credit crunch and so there's now an oversupply of this type of property."

On the residential side of the real estate market where prices have fallen by as much as 65% over the past 12 months, Kassenov says that still strong demand has been offset by lack of access to capital "Ability to pay is an issue - there's a lack of mortgage finance available from local banks."

The net effect of all the above local factors plus the bearish outlook for global property markets means that there's a great deal of uncertainty on both the commercial as well as the residential fronts in Kazakhstan. "We won't see any clarity until the end of 2008 at the earliest," concedes Kassenov.

Given the uncertainty NAI Kazakhstan Aristan has adopted a one-stop-shop approach, by which it can provide a wide spectrum of advisory and development services, ranging from sourcing land plots through to actual construction and managing completed properties. Headquartered in Kazakhstan's commercial capital Almaty, the firm is in the process of opening an office in the official capital city of Astana and claims to be able to execute commissions throughout the length and breadth of Kazakhstan.

The firm is also looking to service the needs of clients looking at other cities in the region. "We're receiving request from international companies to research the property markets in Bishkek [Kyrgyzstan], Tashkent [Uzbekistan] and Ulaan Bataar [Mongolia]," says managing partner Bahitbek Katen.

In terms of investor appetite, Katen says that the strong interest shown by South Korean and Chinese investors in the Kazakh market prior to the liquidity crunch period has now faded, but is being slowly replaced by interest from banks and funds from the Middle East, Western Europe and the US. Nevertheless, Katen says that more needs to be done to promote the Kazakh property market overseas. "Cheap lending by Kazakh banks meant there was no effort made to market Kazakh real estate internationally." He adds that the fall in property prices in the developed markets such as the US and Europe means that it's even harder to get investors to focus on the investment opportunities in emerging markets like Kazakhstan.

With regard to the future prospects for the property market in Kazakhstan, Katen says that the country's outdated infrastructure is acting as a break on development. "The lack of electricity capacity is a particular problem," says Katen, adding that demand is outstripping the country's power supply.

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BRICKS & MORTAR: Kazakh real estate - new game, new rules

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