For years, cranes have dotted the Azerbaijani capital’s skyline in a clear sign that money from lucrative oil and gas exports was being used to fuel a real estate boom. But with government spending slashed as a result of depressed oil prices and private consumption plunging following a double devaluation of the Azerbaijani currency in 2015, the Baku property bubble has well and truly burst.

After experiencing double-digit growth for the better part of the last decade – and a 25% y/y increase in turnover to $5.6bn in 2014 – Azerbaijan’s real estate sector contracted by a factor of 3.8 times in the January-September period last year, according to Nusretin Ibrahimov, general director at consultancy MBA Consulting. Mirroring the depreciation of the national currency, prices declined by some 26% for residential real estate, by 34% for commercial real estate and by 12% for land in 2015.

Home to a third of the country’s population, the capital of Baku has seen the largest residential and commercial real estate developments over the years, including the upscale residential and office towers Port Baku, business complexes like ISR, Demirchi and Caspian Plaza, shopping malls, over a dozen five-star hotels, and various entertainment venues.

The nouveau riche and arrival of foreigners attracted by the country’s oil wealth sent Baku real estate prices skyrocketing, to the point where few Azerbaijanis earning middle-class salaries could afford real estate in the capital. And while construction projects are continuing – and cranes continue to dominate the skyline – the financial instability has put Azerbaijanis off buying real estate despite the drop in prices, raising question marks about who will purchase the expensive developments when they are eventually completed.

Strapped for cash

Even consumers who can still afford it are reluctant to buy real estate these days. “People prefer not to make large investments at the moment and are in no hurry to spend money,” Ibrahimov says.

The recent economic crisis, fuelled by the currency depreciation, high inflation, unemployment, and declining budget revenues and public spending is unlike anything Azerbaijanis have seen in the last decade, so consumers do not know how to react, a source in Baku tells bne IntelliNews. After the double devaluations of the manat in 2015, Azerbaijanis have exchanged their savings into foreign currencies and are waiting for oil prices and the economy to turn.

This applies to those Azerbaijanis that have savings; a wave of lay-offs in the past year coupled with already high unemployment mean that few Azerbaijanis are able to save anything these days. Those still in work typically earn less than AZN400 (€216.8) a month on average, which is hardly enough to allow for savings or for purchasing real estate in the capital. Macroeconomic data speaks to the level of the population’s indebtedness: at end-January, banking sector loans stood at AZN20.6bn (€11.16bn) compared with savings of just AZN8.6bn (€4.66bn), according to the central bank.

Furthermore, the decline in investment from Russia and in mortgage lending, traditional sources of financing for real estate purchases, have dried up, contributing to the drop in demand for real estate. Mortgage lending fell by 12% y/y to $56mn in January-June 2015, the latest official figures show.

The Azerbaijani government set up a public mortgage fund, the AMF, a decade ago to help citizens purchase residential real estate at lower interest rates than with bank mortgages. After banks all but stopped mortgage lending in 2015, the government promised that the AMF would step in to cover the decline in commercial mortgage lending, but the institution has failed to do so if recent figures are anything to go by. In February, the AMF gave out a meagre two mortgage loans (Azerbaijan’s population is 9.7mn) worth some AZN86,000 (€46,630).  

Besides, the institution caps loans at $31,900, which is barely enough to purchase a two-bedroom apartment on the outskirts of Baku, leaving most residential real estate in the capital city outside its scope. The additional requirement that borrowers earn at least AZN700 (€379.7) a month, almost double the average income in the country, to qualify for its mortgages leaves out those most in need.

With interest rates on mortgage loans averaging a high 15-16%, commercial banks are hardly a viable option for those interested in real estate who do not qualify for AMF mortgages. And seeing how the average residential real estate price in the capital was $958 per square metre in December, most properties in Baku – ie. those that are above 32 square metres in size – do not qualify for AMF mortgages.  

Out with the old

One possible solution to boost the real estate market, according to the Emergency Situations Ministry (MES), is to demolish the communist-era buildings, most of which are low-rise, and to replace them with buildings of five, seven or nine storeys. “Residents of these [old] buildings will be moved to new apartments. Thanks to the additional areas in the new buildings, the construction companies will be able to cover their costs and make profit – the MES will support these companies,” the minister, Kemaladdin Heydarov, said in February.

Baku is a mismatched combination of shabby-looking Soviet-era buildings and glitzy new skyscrapers, so some architectural renovation would be welcome for aesthetic as well as energy efficiency and safety reasons. But past experience with such beautification projects in Baku have been painful for the evicted residents; in 2010-2011, local and international non-governmental organisations (NGOs) reported extensively on evictions in the Azerbaijani capital, whereby residents were forced to move out and compensated below the market price of their properties.

Allowing private companies to take over buildings and compensate residents could merely foster more abuse of power and corrupt practices, as it has in the past. Many of the ostensibly private companies that win government tenders for such construction projects – like Akkord, which reportedly belongs to Heydarov himself, and Azimport, which won an astonishing 700 government tenders in 10 years – have a poor record in treating employees and other stakeholders.

Acording to sources in the government, Baku is also looking to rev up the real estate sector through a scheme that would involve granting free land to developers, enlisting private banks for financing, and offering government guarantees for their loans. The authorities vouch that the scheme would be profitable for all involved, and could result in returns as high as 20% for banks and 10% for developers. The plan is still in the works and will be made public in April, the sources told bne IntelliNews. 

Nevertheless, real estate players are hopeful that the new schemes could breathe some life into the moribund sector and that activity will pick up starting in 2017. In the meantime, they are bracing for a challenging 2016, Ibrahimov concludes.