Clare Nuttall in Almaty -

There isn't much to be optimistic about right now, so it should come as no surprise that there is little evidence Kazakhstan's dire residential real estate sector is bottoming out. Renaissance Capital is forecasting instead a gradual recovery over the next two to three years. Strong state support for the sector is expected to continue.

Public opinion on whether the market has reached its lowest point is split 50/50, according to Renaissance's observations in Almaty. "In itself, this is enough to ensure that price trends remain unstable and that most of potential demand will be postponed," the firm writes in its report, entitled "Kazakh residential real estate: After the bubble burst."

Despite government purchases of apartments in Astana, the absence of new construction during the last 12 months and improved housing affordability after a 40% drop in prices, there is no immediate prospect of a recovery, Renaissance says. In addition, the yet-to-be-completed supply overhang remains significant, particularly in Astana.

Distressed selling has not begun, although there are numerous potentially sellable properties. "Banks' ability to sell properties is impaired by weak demand because mortgage origination has not yet recovered and opinion on future price dynamics is split," the report explains. Banks appear to prefer to keep collateral on their books rather than liquidating it. Anecdotal evidence suggests that if an auction fails to detect a buyer at initial cost - which is set reasonably high - banks do not pursue it.

Before the fall

The Kazakh housing market was booming until mid-2007. New housing commissions increased on average by one-third every year between 2002 and 2007, while prices were a stunning 18 times higher in 2007 than in 2000. Renaissance writes that the growing supply of new housing, "in our view, became incompatible with price appreciation once the financing suddenly became less available when the banking crisis erupted in the summer of 2007." Extremely active mortgage origination in 2006 and the first half of 2007 added to the problem, sending real estate valuations to record levels.

Statistics published by the General Prosecutor's Office in July suggest that roughly half of all residential projects that were under construction by mid-2007 failed to be completed on their own. In mid-2008, 285 development companies were operating in Kazakhstan with 407 projects at various stages of construction. Of these, around 200 projects - mostly in Astana and Almaty - being developed by 123 companies, have been designated by the authorities as "problematic."

Worst affected by this are the customers - known as dolschiki - who had contracted with developers to purchase units that were being built. They account for over KZT104bn that was paid for units in "problematic" developments. "Trust in the prepayment system has been severely damaged and customers' willingness to be exposed to developers' risks is minimal. The majority of potential buyers will now want to buy only after completion," Renaissance Capital says.

The plight of the dolschiki is very much on policymakers' minds. President Nursultan Nazarbayev has acknowledged the issue as meriting heightened attention by the government and listed it as the government's top priority in his address to parliament in early September.

Overall, state support for the real estate sector, part of the $4bn financial stability package announced in November 2007, has been extremely high. So far, various government initiatives total more than KZT196bn, Renaissance Capital calculates. A further $1.2bn is expected over the next few years. Budget funds are being allocated to complete construction, and funds are allocated only to commercially viable projects that are between 10% and 90% complete in terms of both construction and the area pre-sold to customers.

A framework agreement was signed between the government, sustainable development fund Kazyna and Kazakh banks in December 2007. Under the agreement, Kazyna deposits 85% of the total money required with the banks, who provide an additional 10% while the remaining 5% is provided by developers. The banks bear all the risks of completing the projects, and have the option to opt-out, as Halyk Bank has done. The total value of this programme is over KZT128bn, and at present covers only Astana and Almaty.

Government money is also being channelled into the real estate sector through direct subsidies to the akimats (municipal authorities) of Astana and Almaty. These are intended to help dolschiki with the most uncertain prospects of having their homes constructed, and - in Astana - to maintain a positive image of Kazakhstan's newly built capital.

According to Renaissance, punitive actions by the Kazakh authorities against developers haven't been effective. "The previous (as opposed to the current) wave of credit default swap widening by Kazakh banks in early August was fuelled by media reports about the state's coercive actions against developers, including the seizure of properties and the arrests of owners," the report says. "These measures only impacted a limited group of small-scale companies and were not industry-wide."

To date, the General Prosecutor's Office has initiated criminal investigations against only eight fraudulent companies. While more criminal investigations may follow, the authorities are unlikely to move against large developers participating in state-sponsored rehabilitation programmes.

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