There has been tendency of rise in real estate prices for the last years in Azerbaijan. The price index increased by 36.3 items in Azerbaijan (91.1%) totaling to 423.8 items in the first market for the period of the year that has been left behind. There has been rise in the second market where price index made up 327.2 items (14.8%). According to Participants of the Estate Market public union, the prices of 1 cubic meters of real estate made up $1,076 in the first real estate market or 4.6% more than the indicator of the same period of 2007 which made up $1,028. In March 2006, the prices of 1 cu. meters of real estate amounted to $731.
Against the background of these developments, there was a sharp demand for the mortgage lending which has carried out in this country in March 2006 in line with the standards of the Mortgage Fund of Azerbaijan (MFA) under the National Bank of Azerbaijan (NBA) up to summer of 2007 when the demand for the mortgage credit exceeded the budget assignments. Some AZN25mln were allotted from the 2006 state budget and AZN20mln from the 2007 state budget. The domestic banks have granted mortgage credits worth AZN260mln through MFA during the whole period of the work of the Fund. Some 8,000 mortgage credits were granted, 1,800 of which were financed by the government and 6,200 by the bank resources. Though Azerbaijani government forecasted, it did not expect the mortgage lending to be in sharp demand, therefore, it faced with the lack of government funds allocated for the mortgage lending. The high real estate prices also contributed to it.
In 2008, AZN34mln the Azerbaijani budget allocated for MFA will be totally spent on the re-financing of the earlier granted mortgage credits. However, new sums are required to restore the system of housing financing. "It is not ruled out that we will be able to attract additional resources from the issue of securities which will be medium-term in the first stage. The grants, transfers from the State Oil Fund of Azerbaijan (SOFAZ) and resources allocated through Ministry of Finance can be other sources of financing," MFA said. The sum repaid from the earlier granted mortgage credits can also be spent for this purpose, but since its quotation rate makes up 2%, it is not a big amount. Talks have been held with several agencies and purposeful work is being conducted to obtain additional resources.
At present, NBA is holding talks with the International Finance Corporation (IFC), German KfW and other large business banks in order to attract funds. In June 2008, IFC is expected to finance mortgage operations in line with its programs including IFC's Azerbaijan Housing Finance Program and IFC's Central Asia Leasing Facility. NBA offers several options to restore mortgage crediting through MFA. First, it offers to change mortgage lending terms and to distinguish between commercial and social mortgage. According to the estimations of the experts, the totality of the current terms and initial factors make social mortgage, precisely, commercial housing finance, which has similar terms, unreal. The social mortgage should be lent on current terms and should be subsidized by the government, but commercial mortgage should be formed and financed on market terms. According to the government experts, a commercial mortgage should be lent only on commercial terms in order to develop mortgage lending, to expand this process and involve all possible domestic and foreign finance sources to this process.
According to the latest data, Mortgage Fund of Azerbaijan will restore mortgage crediting in the second half of 2008. The interest rates on the commercial mortgage are expected to be made favorable for the investors. According to the new interest rates, the citizens wishing to obtain house financing will have to pay 14% interest rates.
Real mechanism of granting mortgage credits
|Initial conditions||Average conditions||Common||Social mortgage||Difference|
|Period of granting credit||15 years||15 years||25 years||30 years||2|
|Amount of credit, AZN||30 000||30 000||50 000||35 000||-2|
Commenting on the rise in the interest rate of the mortgage lending, the Chairman of the NBA Board of Directors Elman Rustamov said that it is important to simplify mortgage lending, to stabilize macroeconomic environment and to decrease inflation. "Mortgage lending is not a social aid and it should not be carried out on preferential terms. I think that one-digit rates should not be applied at all," Elman Rustamov said. In 2007, the maximum rate on the commercial mortgage lending was decreased up to 8% from the previous 12% with extending its term to 25 years and the volume of the credit up to AZN50,000. The commercial mortgage grew very fast and new changes led to the fact that business banks began lending mortgage with 6% interest rates annually.
At present, the leasing of the commercial real estate is exercised all over the world as an alternative to the commercial mortgage. It is instrument which enables to obtain business real estate due to the foreign long-term financing. The leasing of the commercial real estate first of all, offers leasing company to obtain commercial real estate as a property and to hand it over to the leasing party after its term is ended, it is a repeated transfer of the right to the commercial property. At present, the share of the commercial operations in the portfolio of the European leasing companies ranges from 30% to 50%.
Taking into consideration the fact that this service is still young, leasing is not largely used, however, it is one of the best ways of the re-financing of the projects in the sphere of the commercial real estate. The leasing market of Azerbaijan is quite young as compared to the well-developed European markets, but there are all conditions for the development of the real estate leasing in Azerbaijan. The rise in the volume of the construction depends on the developers and realtors to look for additional finance sources. In 3 to 5 years, the real estate leasing in Azerbaijan can reach the indicators of the Eastern Europe, the volume of transactions of which totals to billions of dollars. At the same time, there is potential of development of the leasing of the commercial real estate facilities not only in Baku, but in all regions.
For instance, the large Azerbaijani leasing company Joint Leasing launched this leasing service. The terms of the leasing of the commercial real estate covers 10 years depending on the project with interest rates of 18% and advance pay of 20%. It is doubtless that, the Azerbaijani entrepreneurs obtain leasing not on the most favorable terms. It is worth mentioning that at present, there are 16 leasing companies in the financial market of Azerbaijan which will gradually follow the example of their counterparts and introduce this service. The terms of these new services can be improved and simplified in the conditions of the strong competition day by day.
The leasing is the only way of the capital investments for many potential leasing parties. More and more companies try to build their business for long-term period and to carry out capital investments in their own development. The positive dynamics of the life standards of the population contributes to the rise in the interest in the leasing of the commercial real estate. The growth of the consumer market and money supply accumulation increases the limit for the quality of the real estate facilities. The buildings with a modern design are especially in high demand among the customers, not to mention repairs. The demand for the expansion of the business areas does not run low.
It is evident that it is important to develop leasing of the real estate in order to develop non-oil sector of Azerbaijan. The advantage of the leasing is that the companies obtain working areas without getting burdened with credits and without attracting big volumes of circulating assets. The companies, who sign a leasing deal, can later secure a loan as well. In cases when there are no enough resources to get a loan, the leasing of the real estate is the only way to expand the production.