The Tbilisi housing sector displayed a dynamic growth in 2018, as the total turnover of the market reached USD 1.61bn, up by staggering 39% YoY. The 65% of the value was driven by the new apartments. A total of 34,591 apartments (+31.4% YoY) with livable space of 2.32mln Sqm (+31.5% YoY) were sold. Saburtalo and Didi Dighomi led the sales, with the former losing and the latter gaining share, while other districts remained relatively stable. Apart from the social and economic trends largely driving the demand, we believe that increased availability of mortgages and the anticipation of new stricter lending regulations further incentivized buying.
Following the introduction of new construction requirements, the building permits in Tbilisi fell 45% YoY in 2018. We estimate the average three-year lag between permit issuance and building completion, according to which the number of new buildings supplied to the capital will decline sharply in 2021.
TBC Capital research estimates the value of the yet unsold apartments, both completed and in pipeline at USD 1.14bn. This is the total size of the primary market, which will become habitable in years 2019-2021, with a small fraction already finished in 2018. As the number of new permits in Tbilisi is falling rapidly, we believe the flats currently under development but yet unsold are likely to comprise the bulk of new apartment market in the coming years.
Throughout the year, the aggregate house price level was up by 6.5% in GEL and 5.3% in USD YoY. The increase was driven by the robust growth of transaction volume. In Tbilisi, property prices are not overvalued based on the fundamental indicators, with no red flags for a real estate bubble. Going forward, we see the potential for steady increase in the prices in the long-run, while remaining reasonably balanced in the near-term. The increased demand and diminishing supply will contribute to the price growth. Stricter building regulations which make the construction costlier are additional factors for price increase. At the same time, the new regulations suppress mortgage availability, bringing relative ambiguity to prices in the short-term.
The rental yields have been stable throughout 2018, revolving around the mean of 9.3%. The yields have historically been higher than deposit rates as well as foreign currency mortgage rates, making apartments an attractive income yielding asset.
The demand has been strong for mortgages, with the portfolio up 39.5% YoY. In Tbilisi, half of the housing transaction value was financed through bank loans. Georgia’s mortgage penetration rates remain lower than in most of EU countries, pointing to the substantial room for lending. However, due to stricter lending framework, we believe the sector may need to switch to inner installment schemes and identify alternate ways of financing the operations. We see the capital market solution as one of the outcomes.
The proposed regulations for banning K2 coefficient sales could shift new larger projects to suburban areas with higher construction intensity coefficients. Alternatively, we see this regulation as a medium for resuscitating currently inactive construction permits with higher K2.
As the construction is becoming costlier due to the new regulations, we believe this gives larger developers a competitive edge to increase their market shares, as scale makes it possible to operate in a suppressed margin environment.
