real estate crisis
Kazakh Residential Real Estate Sector Ripe for Consolidation
Translated from the Kazakh weekly Business & Power - the original article in Russian can be found here.
Kazakhstan’s construction companies have been forced to search for new sources of capital. As local analysts suggest, now is the time for the builders to switch from relying on bank loans as a sole source of financing to partnering with strategic investors. This may result in increased mergers and acquisitions activity in local real estate and construction sector.
The mid- and long-term outlook of purchasing power among the Kazakh population will likely be lowered - not only as a result of the liquidity crisis, but also because of the of the deteriorating health of the entire economy. Accordingly, builders need to search for alternative sources of funds, and reexamine their strategies and financial models. “Today’s lack of liquidity affects big builders with excellent reputation just as much as small construction companies. The absence of acceptable bank financing shapes no longer only the market for real estate, but the whole consumer sector of the economy as well”, says Bakhytbek Katen, director of NAI Kazakhstan Aristan, a consultancy.
“Recent freeze of construction shook the reputation of the entire real estate market”, says Oleg Alferov, the vice president of National Association of Realtors. “As a consequence, buyers’ activity in the fourth quarter of 2007 was at its lowest level in the last three years.”
Present situation is favorable for those interested in entering the Kazakh real estate and construction sectors. The barriers to entry are low compared to the last few years, and interested parties may be able to acquire shares in new and unfinished projects relatively cheaply.
Alexander Kalinin, the chairman of Kazakhstan Estimators Association agrees: “The banks were focused excessively on the construction sector. Mortgage banking, construction and other real estate loans and similar financing deals accounted for 56-70 percent of the banks’ credit portfolios.” Under the current conditions, the sector is ripe for consolidation. According to Kalinin, the market will soon be dominated by large corporations characterized by high quality of their property portfolios, balanced price policies and additional sources of financing besides Kazakh banks. “One such institution could be, for example, corporation ‘Basis A’. I have no doubts that it is backed by serious shareholders with strong interest in Kazakhstan’s economy.” Other business models will have difficulties surviving in the new conditions, suggests Kalinin.
The Lessons from Kazakhstan’s Real Estate Crisis
Kazakhstan has been hit hard by the recent banking and real estate crisis. Will the lessons from this crisis lead to a more developed, resilient and just economy in the future?
Background:
Kazakhstan’s GDP grew by 10.6 percent in 2006 but slowed to 8.7 percent in 2007, and according to the forecasts of local analysts, will slow even further to 6 percent in 2008. Inflation, at the same time, grew from 8.6 percent in 2006 to 18.8 percent in 2007. The main factor that led to worsened economic conditions was the local credit crisis triggered by this summer’s subprime woes in the United States and the subsequent global liquidity crunch. This crisis has hit hard Kazakhstan’s praised banking sector and exposed its reliance on cheap foreign credit and overexposure to the speculative construction and real estate sectors.
A shake-up of such magnitude was a first for Kazakhstan. Until this summer, the market has been increasing steadily, and Kazakh real estate was among the most attractive investment plays in Central Asia. The growth came after nearly a decade of stunted development following the collapse of the Soviet Union in 1992 and the Asian financial crisis in 1998.
With the introduction of mortgages in the early 2000’s, the real estate industry began expanding quickly, especially in the more affluent urban areas. Residents of Almaty, the largest city in Kazakhstan, have been particularly active and have held almost half of all outstanding mortgages in Kazakhstan. In the last two years, however, the market has clearly been showing signs of troubles lying beneath. The unprecedented pace of growth in real estate prices has started to crowd out potential middle-class homebuyers and gave way to unregulated speculation.
As the market boomed on and reached its peak in the summer of 2007, the presence of the bubble was obvious and widely discussed. But only the global credit crisis triggered by the uncertainties about the U.S. mortgage sector has finally brought the exuberant growth to a stop. The crisis and the lack of global liquidity have forced banks to make credit standards more stringent and raise interest rates. This has virtually overnight turned Kazakhstan’s speculative demand-driven real estate market into a state of near-panic, and the years of double- and triple-digit growth in real estate prices in metropolitan have come to an end. So far, the price of one square meter on Almaty’s real estate market has fallen almost a quarter from a June peak of nearly $4,000.
