Katen Bakhytbek.On the bottom.//July 2008. http://www.wfin.kz/node/903

KIT: Did the market reach the “bottom” or not is an issue. Obviously, as soon as epic with shareholders ends, construction companies will find new sources of financing and US economic rise from the collapse, the real estate prices will soar again. Many experts predict soon recovery of real estate market. And even forecast the limit of prices growth – upper than European level which is 15%. However, the exact time, when the market falling ends, pronouns very carefully. So, all players have, at least, one task. The state should solve the problem of victims of real estate market, shareholders should sue unfair developers and wait till construction is over. Bank should find new ways of investments, since they do not intend to invest in construction and find resources for mortgage. Developer should find new resources to continue projects because appropriated funds are not enough, think experts: to finish the real estate constructions with higher state of completeness more than 160 bn tenge is necessary and to finish all construction in Astana more than 180-240 bn tenge.

“Emergency for” crane

After President decree fund to finish projects with equity participation are appropriated and participants of program of state support for construction sector are defined. But this problem is not over yet.

Based on information provided by Ministry of Trade and Industry, there are 339 objects with equity participation, where 46 thousand shareholders take part. Around 200 objects of 123 companies are considered as “problematic”, which requires court examinations, bankruptcy procedure and special state approach. Vise- prosecutor  Askhat Daulbayev says that “unfinished projects” 42 and 110 are in Almaty and Astana correspondingly. After inspection the fact of funds misuse, construction without permits and settlements of residents in “not in service building”. Large scale frauds require changes. Soon the conditions of work for developers will be tougher. “I believe that if this law is enabled it will “clean up” the market and not every even major developers will be able to construct based on have equity participation”. So, market will be monopolized, offers will be reduced and square meter will not be cheaper” assures Oleg Alferov. Director of Qncepto, consulting company.

Probably, the amendments to the law of shareholder will be adopted. They have been initiated by the Association of Financiers of Kazakhstan. They think that every construction project should have a project company with bank account, which will accumulate money from shareholders. Only having this scheme, it is possible to control the transactions. Even today everyone cheered up when saw the state support: projects will not turn into protracted constructions and shareholder will get keys from their apartments.

Help has been given but construction industry is not reanimated. It is not because there are catastrophically no funds. Here is another reason: banks as financial mediator should credit construction companies and banks are responsible for return of state funds to FUR “Kazyna”. In their turn, financial institutions are ready to work only with companies, which meet the crediting requirements. “We revised many developers’ applications and chosen only less risky developers. Necessary to mention that there are not many of them”- said  Ablakhat Kebirov, chairman, Temirbank. Many bankers confirm that a few of them have liquid mortgage and can meet the liabilities.

No one is secured

A year ago some construction companies offered to their potential shareholders really unique product – insurance. Basis-A construction company actively announced this program. Based on information provided by insurance companies, some developers offered this bonus to their clients but it did not spread over the market.  Several insurance companies participated in program of voluntary insurance of shareholders, guarantying that apartments bought at the stage of basement construction, will be finished or everything will be recompensated. 

There were scandal investigations of projects participants, holding insurance certificates, but they did not get anything. So, voluntary insurance is useless and it did not solve the problem at least, until this type of insurance is obligatory, thinks Chairman Boris Umanov.
For shareholders, whose companies have been supported by the state, the program of voluntary insurance seems to be not necessary. Now the completion of real state constructions are supervised by  “Kazyna” and risks of insurance companies are diminished. “Additional guaranties do not take into consideration now, because it will lead to rates increasing” – explained vice chairman of insurance company “Nomad Insurance” Rinat Akhmatyanov. Though there is state funding , risks covered by insurance company is not excluded. But to estimate this risk is very difficult.

It comes out that the program of shareholders insurance functioning for two years turned to be a mean to attract clients. Chairman of the board of directors, Alexander Belovich, repeatedly pointed that interest to this product exist because “financial literacy grows. Not everyone would invest into construction based equity participation without additional guaranties”. Insurance is done at the expense of the developer and was not included in to the price of accommodation. Cases, when insurance company tried to get guaranties from individual person in companies – sureties are not recalled.

Insurance companies explained that they are not allowed to reveal the information about companies in corporation who has their support.

Debt portfolio

Scandals around “frozen” objects undermined the demand for real estate. People are afraid to deal with  protracted constructions, banks’ new mortgage credits went in “steep dive”. Another reason is of damping of demand on real estate market is rising of interest rates. Some construction companies tried to solve the problem of expensive mortgages independently. So “Elitestroy” created mortgage company “EliteStroy Finance”, which credits the purchasing of appartments on equity participation basis in their projects.  It is clarified that mortgage funds comes from own assets and bonds placement.

Loan for 3-15 years with first payment of 30-40%, interest rate is 11-16% and average interest rate in commercial banks is 19%. So, around 20-25% of appartments on equity participation basis are sold through this mortgage company due to relatively good offer.
Around 80% of real estate is bought as mortgage before crisis because of the acceptable crediting conditions. Now, current situation damages debtors and banks.  Vice President of Association of real estate in Kazakhstan assures: “the major problem in the country is real estate mortgages. Banks have more than 100 thousand unrecoverable loans. Banks are ready to sell them even 10-205 less than their market price.”

Oleg Alferov believes that the possibility to establish the moratorium on repayments of developers and mortgage debtors should be considered based on situation in bank funds. The same are going to ask credited shareholders, who experience “mortgage tiredness” reinforced by rent payment while waiting the completion of construction.

It is not clear if the consensus will be found. The procedure how to deal with “problematic debtors” is described in details, but mass failures to repay are observed. Mortgages are burden for banks especially if uncompleted construction is a guaranty.

Still have a choice

Construction companies, who have uncompleted objects and want to continue their activities, are forced to make a tough choice.   Some of them will construct using expensive loans, damaging profit, others - look for alternative ways. Among them are those companies, who were refused to get loans and those who decided to work independently.

In some cases voluntary refusal to get the state loans is based on more advantageous offers. For instance, MAG Company applied to get fund from “Kazyna” but it was not in the fund list. “Today MAG has another source of financing. One of the banks opened for us credit line, which allows funding the construction objects to the necessary extent. It has better conditions than fund from “Kazyna”-said Abay Zhunusov, President of JSC “MAG”.

Kazyna offers loans at 16% of interest rate; meanwhile other banks have 14-15% clarified in Association of Developers of Kazakhstan. Corporation “Ak Auyl” rejected state loan. They explained future tenants that state loans are too expensive and company will seek the alternative way of financing. But no one wants to wait, so organized non-government organization initiated the license recall process. Analysts and foreign investors are confident that now it is the time to pay attention on world capital markets because Kazakhstan and its construction sector is attractive for investments. “Of course, I doubt that the profit would be 50-100 % as before. Our forecast that profitability will be around 20%, which is still high” – says Mark, Lerh, Director of Cab Invest, Germany.

Arab and Russian investors announced their entering the construction market. The potentially profitable projects are thoroughly selected.

Kazakhstan experts doubt the possibility of such collaboration because the politic of local developers is specific. Director of consulting company “NAI Kazakhstan Aristan”, Bakhytbek Katen says that to attract institutional investors, Kazakhstan companies should clear up all documents, be more transparent and competitive in compare to other cities with millions populations. Absence of these conditions will makes foreign investment not available. That’s why many developers do not have other choice but crediting.

MAG Company is inclined to count on bonds issuing as before, as well as BI group.

Such companies as “Kuat”, “Vek”, “Basis - A” use credits from Kazakhstan banks and stake on state support. “Unfortunately, cheaper credits are not offered”- says Askar Begaliyev, president of “Vek” corporation. Officially, they did not comment on the availability of funds to finish construction objects as “Ak Auyl”, “TS-Engineering” and “Elitestroy”.

Time for speculations

Price reduction, as the function of demand, will not be significant in the beginning of the year. The buying activity in real estate market went down on 70-90% in the forth quarter 2007 but in the beginning of 2008 monthly growth of 3-5% is observed – informs National Association of realtors (NAR). Analytical agencies provide the information about price per square meter reduction. For example, real estate on primary market fell in price on 0.5% and on the secondary market – 3.9%. The steepest fall down was in Aktobe – 12.8% , Astana – 12.6% and Almaty – 9.6%.

Survey of professionals working on real estate market showed that more tan 44% of experts assume reaching the price “bottom” in third quarter of 2008. It is necessary to point that often experts, speaking about actual real estate prices, say current level of 1.5-2 thousand $ per square meter. However, forecast of real estate market reviving is ambiguous. Some of them think tentatively: one year of slackness is long period for regression and in fall prices will go up. Others inclined to think that price “bottom” is not reached yet and tendency to price reduction is continued.

Analytics from NAR consider the price strongly depends on speed of economic growth and wellness of population. These two indicators show that active growth is not expected. Government and national bank forecast that GDP in 2008 is 5%, in 2009 – 6.3%. Main outcome of economic slowdown is reduction of purchasing power and consequently, reduction in populations’ interest in this market.
Banks will not stimulate the demand. To develop mortgage lending long-term recourses are required, however, currently, banks are offered only short-term loans. They are not able to draw in recourses for 1-2 years and give mortgage for 10-15 years, which means that there will not be big investments in mortgage from credit organizations in this year. Local developers rely on credit line, but on bankers’ opinion, they are not available yet. In spite of banks having the excess of liquidity, they are afraid to invest in construction.

There are no prerequisites for market reviving, thinks Daniyal Baibolov, director of “Real Reality” agency. Besides, he thinks that real estate prices might go down. The head of “Temirbank” also thinks that to forecast prices growth is still early. “It will happen only if people buy real estate. This depends on many factors which are hard to predict” – explains A Kebirov.

“US economic as external factor is considered  to be the  main” – say some analysts. They are sure that stabilization of American markets will have positive effect on world economy as well as on Kazakhstan  economy. “In couple of months everyone will start buying apartments. First customers will get big money. A year ago renting gave profit of 6-7%. Now we are actively buying branches. In comparison to possible payment and real estate prices, we see the profit of 15-16%. It is real to get the profit by leasing. It means that prices are in acceptable range”- says Mikhail Lomtadze, head of Kaspi bank. In fact, time for speculations is coming again.
Developers forecast growth of demand. “Anyway, construction business will be in demand, because the deficit is getting more pronounced.” If in 1998 housing had 20.8 mln of square meters and 19.8 square meters per resident, in ten years housing did not change but there are1.8 square meters per resident. Population increased from 1.13 mln to 1.335 mln people – explained Askar Begaliyev, president of “Vek” corporation. However, what prospectives in housing problems have Kazakhstan population are not clear yet. At the moment of “soap bubble” growing and ripening on the market, housing was not affordable. When prices fell down it is still luxury. Someone, who does not really need a house but able to invest, again won the game.

Text by Katerina Tretyakova.

Katen Bakhytbek.On the bottom.//July 2008. http://www.wfin.kz/node/903