Naubet Bisenov in Almaty -

Kazakhstan’s commercial property market has been shaken by the uncertainty stemming from the devaluation of the national currency twice in the last 18 months. The market has stalled as the increasing costs of capital significantly tightened the conditions for starting new developments.

In response to falling oil prices and the rapidly weakening currency of the country’s main trading partner Russia, the Kazakh authorities devalued the tenge by 19% in February 2014 to restore the competitiveness of locally-manufactured products. However, this did not stop the economy slowing, as the oil price and the ruble dived further, exerting enormous pressure on the tenge to fall further. Having burnt through $28bn on maintaining the exchange rate within a trading corridor, the Kazakh government finally decided to abolish the corridor altogether and adopt a free-floating exchange regime on August 20.

“It is still early to judge the effects of the latest devaluation of the tenge on the market, as there is no trading corridor now and the situation is different from the February 2014 devaluation because then there was an exchange rate corridor maintained by the National Bank,” Gulshat Sariyeva, head of the Kazakh country branch of Veritas Brown, a commercial real estate services provider and member of the Cushman Wakefield Alliance, explains to bne IntelliNews. “The 2014 devaluation had somewhat suspended the development of new projects, and developers and investors are now trying to complete projects under development. But it is challenging for investors to take decisions on launching new projects.” Sariyeva adds, however, that “government policy for subsidising interest rates for the development of real estate is quite helpful.” 

Because of the devaluation pressure the tenge felt at the end of 2014 when the Russian ruble touched historical laws, local banks stopped issuing loans for construction projects, deterred by the uncertainty over whether the authorities would keep supporting the tenge or give in and free up the exchange rate. Since the abolition of the trading corridor on August 20, the tenge has lost 50% of its value and traded around KZT282 to the dollar on September 15. “In anticipation of another devaluation, many commercial banks stopped issuing loans in both foreign currency and tenge in December and this froze the market. Many expected deals in the commercial property market were either delayed or scrapped altogether,” Elvira Akbayeva, director of Corporate Occupiers and Investor Services at Veritas Brown, tells bne IntelliNews. “The floating exchange rate regime has also affected the market and players are now watching developments.”

Uncertainty over the exchange range continues, as market expectations suggest the equilibrium between the tenge and ruble should be somewhere around the previous level of KZT5/RUB1 (against the current KZT4.22/RUB1), despite government assertions that the previous levels against the ruble are unrealistic. This has further tightened conditions and limited access to capital for Kazakh developers. “Until the adoption of the free-floating exchange rate, typical conditions for commercial banks providing funds for development projects were that developers chip in at least 30%, and sometimes up to 50%, of total investment in cash. Banks also stopped regarding land as security and require additional assets as security for issuing loans,” Sariyeva explains.

This is an echo of the global financial crisis that hit Kazakhstan badly in 2008-2009, before which Kazakh banks, intoxicated by easy access to cheap but short-term money on global markets, embarked on a spree to issue expensive but long-term money for property deals in the local market. As the price of land increased rapidly, banks began accepting it as security for loans, but after property prices collapsed banks adopted more sensible approaches to security.

The 2008 financial crisis also changed local banks’ behaviour, as many of them have now switched to consumer loans because they offer higher yields – up to 30% a year, compared with loans for commercial development projects where yields are between 10% and 15% in a best-case scenario.

More transparency

Like many sectors of Kazakhstan’s emerging economy, the property market is very closed and developers do not often publicise their activities, sources of funding or details of deals they conclude, sighs Sariyeva. “Usually, commercial property developments of higher class are more transparent, as international practices developers have adopted here are in line with practices employed in mature Western markets,” she says. “It is hard to talk about the sources of funding for development projects in Kazakhstan because information is scarce, but we know that many successful commercial property projects have been funded by local commercial banks.”

Analysts link the murkiness of the market to the general investment environment in Kazakhstan, which does not encourage the development of an open investment market or stock exchange. “The level of the stock market’s development shows the level of transparency in other markets. Major property players are not listed on the stock exchange, which requires absolute transparency, which is why the property market lacks transparency,” Sariyeva notes, referring to the fact that out of 130 issuers on the Kazakhstan Stock Exchange (KASE), there is only one rent services provider listed, as well as one property agent that issued bonds.

However, there is a silver lining to the 2008 financial crisis that has encouraged the qualitative development of the commercial property market in Kazakhstan. “Prior to 2007, low-class developments and old Soviet buildings dominated the office market, whereas now the market has developed and there is a number of modern Class A and Class B business centres in Almaty,” Sariyeva says. “This is a sign of a developing market.”

Developers also gained experience from the global crisis. “Developers who survived the previous market stagnation have developed strong skills, which will definitely help them discover growing risks in the new environment, even though a free-floating local currency is an absolutely new challenge both for local developers and investors,” she suggests.

While developers understand that they should be very flexible during times of economic difficulties like the one that Kazakhstan is currently experiencing, their flexibility is limited by the cost of investment and the whims of shareholders and investors. “We believe developers should be very flexible in the current circumstances. However, it is worthwhile mentioning that their flexibility will mainly depend on the cost of their investments as the appetites of their investors, mostly shareholders and local commercial banks, will define the minimum levels both for rental rates and sales prices,” explains Sariyeva. “Unfortunately, the latest devaluation will lead to the appreciation of capital in Kazakhstan and this will result in an increase in debt burden.”

Almaty market

The government expects economic growth to slow to 1.5% in 2015 against 4.3% in 2014 and the slowdown of business activity combined with increasing supply are forcing tenants of business centres to adopt cost effective approaches. While demand for high-quality, well-located office space remains stable, occupiers of less popular offices are becoming more cost conscious, resulting in about a 5% decrease in the weighted average rental rates for Class B office premises in Almaty, a preferred destination for new international occupiers seeking to establish operations in the country as it remains the country’s largest financial and commercial centre, Veritas Brown said in an industry research paper for the second quarter. The addition of 9,000 square metres (sqm) of office space in the second quarter, pushed the average market vacancy rate to 6.5% against 6% in January-March.

According to the research, the base rental rates for Class A premises picked up from a bottom of $35 per sqm a month in Almaty in 2009 to $55 in the second quarter of 2015, while the base rental rates for Class B offices fell to $20 per sqm a month in the second quarter of 2015, the levels seen when the market bottomed out in 2009.

The rent levels are set and vacancy/occupancy rates are formed purely by supply and demand, Sariyeva notes. However, “the supply of residential, office and commercial properties, in general, has changed completely and the market itself has changed qualitatively over the last seven-10 years.”

Veritas Brown specialists expect the number of commercial property projects under development might go down because of anticipated low yields in the current economic situation. Following the crisis of 2008-2009, developers have switched to housing construction projects because these projects have relatively short rates of return compared to commercial property projects. This explains the lack of interest in Kazakh development projects among foreign investors, but general improvements in the investment climate in Kazakhstan and increases in foreign investment should change the situation on the property market. “Should foreign investment increase in Kazakhstan, then we may expect foreign investment in major commercial property projects,” Sariyeva believes.

Astana market

Unlike in Almaty, demand for office space in the country’s capital, Astana, is mainly driven by the public sector, although the corporate sector is also expanding. The average vacancy rates marginally fell for Class A offices in Astana in the second quarter, while the vacancy rates for Class B offices demonstrated an upward trend, the Veritas Brown research shows. Despite the addition of 18,000 sqm of Class A office space in Astana in the second quarter, rental rates were not affected by expanding supply: they range between $22 and $40 sqm a month for Class A premises and between $10 and $35 for Class B premises, even though the average rates fell from $31.8 in the first quarter to $28.5 in the second quarter for Class A offices, but increased from $20 to $24.3 for Class B.

Astana will host the EXPO 2017 international fair and the development of the Astana office market maintains a positive outlook, Veritas Brown analysts believe. However, considering the number of projects under development, there is a high potential for supply to exceed demand in the medium term, resulting in rental rates going down as vacancy levels rise. Generally, the completion of proposed projects is expected to double existing office stock, the firm’s research paper notes.

Despite this, the construction of infrastructure, mostly shouldered by the state, and the creation of a better business environment will benefit Astana’s commercial property market in the long run, Sariyeva believes. “Before developing any market or sector, first infrastructure and the business environment should be created. Otherwise, this will lead to the situation on the property market we had before the 2008-2009 crisis when demand outstripped supply,” she says. “When institutional investors enter the market at the stage of creating infrastructure it will benefit everyone, as foreign institutional investors will set up units in Kazakhstan and create job opportunities for the local population. Any business or tourism inflow in a country benefits the local property markets as it creates additional demand.”