Northern Avenue or social housing?

Construction is one of the leading sectors of Armenia’s economy. The real growth rate of the sector in 2018 was 4.5%, the highest level since 2008.

Undoubtedly, the construction sector outcome is far beyond from the level of 2008, however, recently there have been active discussions that the current situation resembles that of pre-crisis construction sector state and that construction growth will eventually lead to another crisis similar to the one in 2009. Hereby, we intend to discuss the above mentioned “rumors” and analyze the real underlying factors of the construction sector growth as well as the likelihood of reoccurrence of the same situation.

Construction sector was the driving force of Armenia’s double-digit economic growth during the period starting 2000s till the 2008 crisis. On average, the share of the construction industry’s added value in the country’s GDP during that period was about 25%.

Such growth was largely due to large-scale housing construction (among those were large scale projects such as the Northern Avenue), infrastructure and other state-sponsored projects.

As we can see in Figure 1, in 2008 the share of housing in total construction sector reached to its record level of 60%. This growth was to some degree artificial in nature and was driven by the overly optimistic expectations of future demand. Expensive residential buildings were built in the center of Yerevan, a portion of which are left unfinished or are not fully sold so far. This is especially noticeable on the Northern Avenue, where the apartments are mostly non-populated. The above situation can be characterized as “supply-driven” construction growth.

At the same time, a number of real estate development companies emerged during those years which had only one or two projects in their portfolio. The state did not have sophisticated construction and real estate development standards at that time and the sector was very loosely regulated, allowing for many companies to operate below minimum professional standards. As a result, many of these companies went bankrupt at the first signs of the crisis, and their projects remained incomplete.

A limited number of companies were able to overcome the effects of the economic crisis and these companies are still operating. It is safe to state that the crisis has refined the construction industry and only competitive companies remained in the sector.

The statistical data also shows the strengthening and higher competitiveness level of the industry. While during the pre-crisis period, 70% of the construction was funded by individuals, now the figure has dropped by about three times and currently it makes only 25%. At the same time, the volume of construction by private companies has almost not changed, amounting about AMD 200 bln annually over the past 10 years. This shows that the decrease of the sector was almost wholly in the segment of construction funded by population, which was severely hit by the crisis.

Furthermore, the situation is even harder to analyse when we compare the construction cost dynamics of 1 sq. m. for these same periods.  In 2008, the 1 sq m construction cost  was twice higher than the same indicator of 2018, AMD 423,000 (USD 875) in 2018 compared to AMD 994,000 (USD 3,200) in 2008. This difference is harder to substantiate when we analyse the main cost components.

For example, the cost of cement in 2018 was about 50% higher than in 2008, the cost of raw materials – 20-30%, wages – 20-30%, etc.

One of the reasons causing this difference could be the fact that the share of elite construction in the total mix was higher. However, comparing the elite construction to the present day indicators also shows interesting results: the price for 1sq m of elite real estate currently does not exceed the average price of 2008’s: around USD 2,800.

It also had its impact on sales prices. If in 2008 the sale price of one square meter in Yerevan was $ 1,000 ($ 1,600 in the city center), then in 2018, only $ 600 ($ 1,100 in the city center). Incidentally, this figure includes both the sale of newly-built apartments and the secondary market.

After the crisis, the dynamics in the construction sector has been volatile till the year of 2016, generally having a declining trend. The situation has changed since 2017, mainly due to the increase in the number of major infrastructure projects and housing construction. Construction continues to be one of the most important sectors of Armenia’s economy, contributing 7.3% to the country’s GDP and providing 3.9% of jobs.

The sector is interconnected with other sectors of Armenia’s economy, among which most importantly the non-metallic mining sector, manufacturing sectors, services etc. and its sustainability and growth rates have a multiplicative effect on economic development and jobs in the country overall.

Armenia‘s housing stock and the driving force beyond the sector’s growth

Most of the Armenia’s housing stock was built during the times of Soviet Union. Historically 80% of multi-apartment buildings are located in Yerevan and during the last 20 years, construction of over 4.7 mln sq. m multi-apartment buildings have been carried out in Yerevan, which is only 18% of the overall housing stock. Most of the buildings in Yerevan are out of date but they are still in use. This means that the insufficient infrastructure of these buildings (for example, lack of parking lots, electricity, water and gas supply networks, etc.)  do not meet current standards.

The current state of the housing stock and the growing demand for social housing in the near future allow to predict a sustainable increase in housing construction. The government began to support the sector in 2015, when the mechanism of mortgage interest loan return has been introduced at the expense of the income tax paid by the borrower.

At the same time the government launched several social housing projects. The result of these steps was seen soon enough, and the quantity of housing sales transactions doubled over the past two years and for the first time exceeding the 2007 crisis level.

The construction of apartments expanded to the suburbs, such as Arabkir, Davtashen, Adapnyak etc. In parallel, the introduced financial mechanisms were serios support for the developers and buyers.

Currently, the market average rate of mortgage loans is 10.76% in AMD and 9.63% in foreign currency. For some government programs this rate can be as low as 6%. Such financing tools has increased the purchasing power of middle income families and increased the access to buying new apartments.

We expect that this level of housing construction will be stable continuing the current trend to at least by 2021, when several large-scale state-sponsored projects (“Yeraz Residential District”, “Renaissance Residential District”, etc.) and current under construction private projects will be completed. However, there are some impulses that show the demand for the social housing will continue in Armenia.

The demand for the available offerings of state program supported real estate has exceeded the available supply. This is also true for the private projects, where in completed buildings one can find only big apartments left unsold (with more than 100 square meters in size).

Combining the existing trends, we can see that the volume of non-residential construction (construction in other sectors of the economy) has not changed much in the last 15 years, nor has changed the amount of investments in construction by private sector. The only difference between the pre-crisis and the current situation is the volume of housing construction. If previously, the construction was targeting primarily high-income consumers and elite buildings were developed, now most of the residential developments are targeting the middle class. Instead of luxury apartments built in the city center, now real estate developers offer affordable apartments in suburbs. In the EU countries, the average number of apartments per 1,000 inhabitants is 489 (the highest is in Estonia, 550 apartments), while in Armenia and in Yerevan the number of apartments per 1000 people is lower by 2.5 and 1.8 times. This gap by international standards, the physical condition of the housing stock  and the expected economic growth, show the sustainable development prospects of the growth in housing construction for the coming years.

Author: Grigor Baghdasaryan