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 KAZAKHSTAN International Business Magazine №1, 2006
 What Investors Should Know about Construction in Almaty
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What Investors Should Know about Construction in Almaty
 
Stanislaw Glazkov, Director General of BG Consulting
 
As you know, in the near future Almaty will acquire official international status as the region's financial and economic centre. Thus, Almaty's authorities are doing their best to ensure that the megalopolis's image meets international standards. To achieve this goal, a significant part of the city shall be cleared of low-rise residential buildings. According to insiders, there are plans to demolish buildings of a so called individual character – regardless of whether slum housing or mansions – in the area from the Almaty-1 Railway Station to Al-Farabi Avenue by 2017.
 
The purpose of clearing the land is to accomplish three essential tasks. The first is connected with the construction and reconstruction of motor roads to decrease traffic burden on Almaty's roads. The second is connected with implementing the housing programme. The third task is to improve Almaty's image. It should be noted, that, at present, new high-rise houses with adjacent infrastructure and high-grade business centres are being constructed on the cleared territories.
 
Meanwhile, we believe that the current rate of construction will lead to stagnation of profitability in the construction sector for apartment buildings and business centres. At the same time, Almaty's further development as a large business centre will be accompanied by the constant growth of Kazakhstani and foreign demands for offices and buildings.
 
As stated in our survey of the office premises market1, the current rental costs for grade A administrative premises in Almaty are $40-50 per m². We anticipate that, by mid-2007, $50 per m² will be the minimum rate.
1. The International Business Magazine Kazakhstan, No. 3, 2005
 
Thus, to rent 5,000 m², leaseholders will pay more than $250,000 per year and the aggregate costs will average approximately $1.5 million. To purchase a comparable office space, the one-time expenditure will total $15-25 million. Of course, this is rather expensive for many companies. As a result many major investors purchase plots of land on which old residential buildings are located in order to construct offices and apartments (sometimes guised as government-controlled projects). As we have written in the survey, by purchasing a plot of land for $2,000-3,000 per 1 m², it is possible to obtain a ten-fold profit.
 
We will continue this discussion by analyzing the potential attractiveness of direct investments into cleared lands and office construction. First, we would like to address legislative aspects with which you must be familiar before launching certain types of projects.
 
Procedure for the Withdrawal of Lands
The procedure for the withdrawal (purchasing) of lands and estates is determined by the following regulations: the law of the Republic of Kazakhstan On the Special Status of Almaty City; Land and Civil Codes; Decree of the Almaty mayor ? 2/209 of 12 April 2005 (? 5/832 of 15 December 2005) On Measures for Interaction of Authorised Governmental Bodies of Almaty for Withdrawal (Purchasing) of Sites (Rights of Land Use) for State Needs; Almaty General Layout Plan.
 
It should be noted that, in accordance with the current practice of sites withdrawal (purchasing) the following should be undertaken:
· The investor determines conditionally clear plots of land that shall be withdrawn for public needs
·  The investor chooses the most appropriate plot for further construction (as a rule, not less than 2 ha)
·  The architectural authority produces a report On Choice of Sites to be Purchased (Withdrawn)
·  The land committee of the municipality makes a report On the Possibility of Using Sites to be Purchased (Withdrawn)
·  The architectural authorities create and modify the construction design
·  The Almaty mayor issues a decree On Sites Withdrawal
·  The State Public Utility (SPU) AlmatyZher notifies property owners about withdrawal (purchasing) of their sites
·  The SPU AlmatyZher prepares a report on the inspection of purchased sites, and immovable and other properties
·  An independent assessor values the withdrawn sites and property located in this site
·  The investor (developer), SPU AlmatyZher and owners of the estate determine the repurchasing price for the withdrawn sites, taking into account the assessor's report
·  The SPU AlmatyZher purchases sites and the property located on the site at the expense of the investor (developer)
·  The land committee and real estate centre register the termination of rights of property to withdrawn (purchased) sites and the real estate located on it
·  Real estate located on the purchased sites are demolished
·  The land committee and real estate centre register the right to the site addressed to the investor (developer)
·  Construction.
 
Calculating Profitability
For confidentiality purposes, we will provide only a short version of the calculations that prove the attractiveness of construction projects for investors. These calculations are based on real data.
 
We chose a conventional plot of land of about 2.3 ha. This plot was divided into 95 lots, which had an area of 200-1,600 m² on which low-rise buildings were situated. Only 10% of all the buildings were mansions, 20% were slum housing, and the remaining 70% were detached houses.
 
During marketing research, we determined that the market value of this housing varied from $22,000 for a 400 m² lot with slum housing to $520,000 for a 900 m² lot with a mansion. (Table 1). The average prices amounted to $725 per m² for slum housing, $890 per m² for detached houses, and $1,375 per m² for mansions.
 
Taking into account these price indices we calculated the total purchasing cost of all 95 lots, which amounted to $8.880 million (Table 2).
 
Spending
Spending for the investment project (minus spending for the purchasing of land):
· Spending for demolishing dwellings – $22,800 (at the rate of $2-4 per m²)
· Spending for land site restoration – $23,000 (at the rate of $0.1 per m²)
· Construction costs –$700 per m²
· Miscellaneous inputs - 5% of the direct investments
· Borrowing costs – 13% per year
· Compulsory payments to the budget – value added tax (only for commercial premises), corporate income tax, and social transfers.
 
Duration of Project
Based on the computations for the most effective exploitation of the land plot and following the construction standards, we calculated the total spending for construction of five 16-storey commercial buildings (one building may be used for the investor’s own needs) with a total area of 70,000 m2, and of six 12-storey residential buildings with a total area of 60,000 m2.
 
There are several stages in the implementation of an investment project: purchasing a land plot (3 months); demolishing dwellings and land site restoration (2 months); constructing the dwelling unit – (9-15 months); selling the excess units (3-18 months).
 
The selling of excess areas is further divided into three stages: beginning (till the moment of framework construction – 6 months), intermediate (from the moment of framework construction to the finishing of premise – 2 months) and final (from the moment of the full availability of the building – 1 month). Depending on the stage, we determined the prices for selling the areas:
 
In commercial buildings:
· Beginning stage – $1,500 per m²
· Intermediate stage – $1,900 per m²
· Final stage – $2,500 per m².
 
In residential buildings:
· Beginning stage – $900 per 1 m²
· Intermediate stage – $1,100 per 1 m²
· Final stage – $1,500 per 1 m².
 
Based on these prices, we calculated the potential gross income of this investment project, which amounted to $182 million (Table 3).
 
 
Calculating the net income, we took into account the potential gross income from selling the excess areas, all construction spending, and the duration of construction. The next step was to determine the current value, based on the prices of each stage. The aggregate net current income was $3,2050,400 for commercial (Table 4) and $8,949,400 for residential buildings (Table 5).
 
 
Thus, analyzing the potential profitability of the construction of the residential and commercial (one building is used for the investor’s own needs) units, we determined that the absolute profitability totaled 44.54% and the current net profitability amounted to 22.53% (Table 6).
 
 
Conclusion
The calculations demonstrate that construction on lands withdrawn for public needs is very attractive for investors. It is likely that the high level of profitability will be maintained for at least next two years.
 
We hope this article will help large companies make decisions on investing in Almaty's (the only megalopolis in Kazakhstan) construction market. The reliability of such investments is proven not only by the local price information, but also by the trends in other large developing cities, such as Moscow, Berlin, and Beijing.


Table of contents
Lifelong Construction  Vladimir Kananyhin 
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3





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