Banks and Constructors.Throwing Good Money After Bad
The problems that have amassed in the property sector in recent times are forcing the government to get urgently involved in the situation that has emerged. The government is now deciding which construction companies it should help and which it should not. However, it has stressed that by the end of the year, the focal point is only on supporting construction companies in Astana.
At a meeting of the Security Council on 15 November, Kazakh President Nursultan Nazarbayev said that instability on the Kazakh financial and construction markets posed no threat to the country’s economy. “It is precisely for cases such as these that we have been accumulating reserves. Our economy will easily weather these difficulties,” the president said. He said that this situation should teach us a lesson for the future. “The fact that banks have cut the issuance of loans is, on the one hand, bad, but, on the other hand, it is good. The housing and property sector has been overheating in recent years, and the price of a square metre has reached exorbitantly high levels thanks to cheap mortgages. If this had not happened now, it would have happened next year,” President Nazarbayev said.
Aid Will not Come from Abroad
The liquidity crunch on the international capital markets that had been provoked by the US subprime mortgage crisis has also affected the Kazakh economy. Its consequences have raised serious concerns not only among market players, but also the head of state, who has instructed the government to sort out the situation in the property sector, employing all levers available in order to prevent delays in completing construction projects. In connection with this, the government has urgently drafted a set of measures to prevent the construction sector from crashing.
Deputy Prime Minister Yerbol Orynbayev has said that the government intends to support construction companies through the Kazyna Sustainable Development Fund to preserve growth rates in the construction sector and ensure the completion of construction facilities that are expected to be commissioned in 2007-2008. However, he stressed that priority would be given to construction projects in Astana.
As a result, the government has devised the following mechanism to offer support: Kazyna will set up a subsidiary which will collect, compare and check the authenticity of information submitted by local administrations and commercial banks about construction facilities and funds that are necessary to complete them. In turn, Kazyna will send this information for consideration by a state commission that will decide and endorse a list of facilities, funds and limits for allocating funds for banks. After endorsement, Kazyna will deposit funds in commercial banks at an annual interest of 9% for three years, with the right of withdrawal. The deputy prime minister said: “The condition for depositing funds in commercial banks is that banks and construction companies should co-fund at least 15% of the total value of this facility.”
The head of Kazyna, Kayrat Kelimbetov, has explained that financial aid to construction companies will be offered in line with the following principle: Kazyna will allocate 85% of the necessary funds, commercial banks 10% and construction companies 5%.
According to his information, construction companies have now submitted 227 applications for government financial aid. “The government has compiled a list of 74 facilities eligible to funding. As a pilot aid programme, support will be offered only to construction companies in Astana this year. If the programme turns out to be sustainable, we will continue it in Almaty and other towns,” he said. To this end, the central budget will allocate $400m to Kazyna by the end of 2007.
Moreover, literally a month ago, the head of state ordered the government to find about $4bn in the central budget to support projects that have priority significance for the economy and whose implementation had faced the threat of suspension due to the crisis on the foreign financial and banking markets. Prime Minister Karim Masimov has said that part of these funds will be allocated by the end of this year.
Economist Oraz Zhandosov believes that the main cause of the situation emerged is that the loan boom had boosted housing construction and led to the en-masse issuance of mortgages to the population. “The American events and the fact that funding was closed for Kazakh banks in the middle of the year are only a mechanism that has uncovered the problem. If foreign debts of commercial banks in general had stood at $5bn, the consequences of the US mortgage crisis would have been insignificant in Kazakhstan and the country’s macroeconomic indicators would not have suffered as they did. However, the Kazakh banks have borrowed, according to various estimates, between $40bn and $45bn, and these funds have mainly been spent on issuing loans and mortgages in the country,” Mr Zhandosov said.
In response to the liquidity problem, most commercial banks have imposed a moratorium on issuing mortgages, while the top three largest banks have increased interest rates on mortgage programmes. The banks have increased interest rates by 1 to 6 percentage points. The minimum level of the initial fee now stands at 30% of the cost of housing. This has resulted in a decrease in demand for mortgages.
Kazakh construction companies had built 1.2 million sq m of housing between the beginning of the year and 1 September 2007. A further 1.1 million sq m should be completed by the end of the year, which demands about $1.3bn. Meanwhile, builders have been in a state of frustration for the second month running, because a number of banks had earlier used foreign loans to fund the domestic housing construction market. As a result, construction has been suspended on some facilities.
At the same time, the Industry and Trade Ministry has estimated that these problems will concern no more than 20% of facilities under construction, namely the commercial housing construction sector. However, it is precisely in this sector that the share of people funding their housing is as high as 60%. That is why the main efforts of the government, construction companies and banks should aim to prevent failures in construction companies implementing their obligations to these people.
Here is the Result
Industry and Trade Minister Galym Orazbakov believes that it would be not bad if banks could postpone construction companies’ payments on loans until 1 March 2008 and abstain from selling out property pledged as loan security until the end of the first half of 2008.
Justly assessing the situation that something should be given to the banks in return, Mr Orazbakov proposed: “If the National Bank decides to insignificantly lower requirements set for commercial banks, this will allow them to free up about $1bn. In this situation, at least 40% of this sum or $400m the banks should channel into issuing loans for construction projects and mortgages.”
The Bazis-A construction company’s vice-president for development, Pavel Belovich, explaining the situation in the construction sector, has said that, “there cannot be even talk of” a crisis in the sector. He thinks that some small construction companies are having problems because commercial banks have stopped issuing loans to them, while the Industry and Trade Ministry is trying to prevent possible negative consequences for these construction companies.
Anyway, market players say, the property market has frozen. This is precisely how the markets of, at least, Almaty and Astana are being described at the moment. The vice-president of the National Association of Estate Agents, Oleg Alferov, has said that there is some concern being felt in the air. Correctional trends that started in the second quarter of this year are continuing: less liquid categories of property are showing a gradual downward correction, whereas facilities that are in high demand (especially in the premium and business-class housing segments) are demonstrating price firmness.
The president of the Trade and Industrial Chamber, Yerlan Kozhasbay, believes that the secondary housing market has suffered most from the mortgage crisis, whereas business property is continuing to preserve attractiveness, because the financial crisis is so far bearing a local nature. He said that it was good that the prices had undergone correction now, while the economy is growing steadily and there are financial and organisational resources. “It is necessary to prevent mortgage interest rates from growing now. Since many deals on the property market bear investment and are speculative in nature, expectations and the actions of main banks and financial regulators are playing an important role,” he said.
According to the National Bank, commercial banks had allocated 734 billion tenge for issuing loans to construction companies and mortgages between January 2006 and July 2007, including 544 billion tenge as mortgages. The bulk of mortgages were issued in Almaty (190 billion tenge or 35%), Astana (81 billion tenge or 15%) and South Kazakhstan Oblast (37 billion tenge or 7%).
Counting Chickens Before They are Hatched
The Industry and Trade Ministry has made a proposal to buy out plots of land and property built from major construction companies as a mechanism to stabilise the situation on the housing market and support the construction sector. “In order to replenish circulating assets of construction companies, we suggest that the government buys out plots of land from major domestic and foreign private companies at the price they paid when they bought them with a buyback option which will be valid within a year, calculating benchmark interest rate,” Mr Orazbakov suggested. He said that this measure would make it possible to free up about $40m to enable these companies to complete the construction of their facilities.
It seems that the authorities have finally calculated the profits of construction companies, which, according to unofficial information, reached as high as 500%. That is why they will have to tighten up their belts during the crisis. “In order to overcome the complicated situation on the housing construction market construction companies should assume a number of obligations. For example, bearing in mind that construction companies have highly liquid assets both in Kazakhstan and abroad, it is necessary to induce them to sell these assets to raise funds to complete the construction of housing funded by people. For this purpose, the Tax Committee and the financial police should draft the relevant set of measures,” the industry and trade minister said.
Moreover, Mr Orazbakov believes that the construction companies should cut their expenses and take measures to reduce the production cost of the construction. As a result, construction companies should raise about $700m to fulfil their obligations before people funding the construction of their housing.
The chair of the Industry and Trade Ministry’s Committee for Construction, Housing and Utilities, Kaysar Omarov, has said that BI Group alone has about 25-30% of its facilities, which should be completed by 2008-2011, standing idle. This company is currently building about 20 facilities. “We are trying to prevent the suspension of construction on any facility. Of course, we are making sales, but they are not as good as in the past,” Aydyn Rakhimbayev, the chair of BI Group’s board of directors, has said.
Another company – Ak Auyl – has completely suspended all construction of housing funded by people. “We have about 20 facilities all over the country, only seven blocks of flats are being built, whereas the other 13 have been frozen,” Stanislav Ogay, the chair of Ak Auyl’s board of directors, has said.
Construction companies do not tire of reiterating that construction has now become expensive in Kazakhstan. On the one hand, there is a crisis; on the other hand, prices of construction materials, electricity and other resources are going up. “We pay millions of dollars to obtain permissions to connect a block of flats to power lines. Electricity costs 6,800 tenge a kWh in these blocks, while one block of flat needs millions of kWh,” Mr Ogay said. He said that while discussing the production cost of one square metre of housing, people forget to take into account the cost of land and expenses on building water supply and sewage systems. They only see the tip of the iceberg: cement, bricks and metal. Stanislav Ogay said that the production cost of housing built by Ak Auyl was close to $2,000 a square metre in Almaty.
However, economist Kanat Berentayev believes that construction companies have a very high rate of profit. “When officials made proposals to buy out unfinished facilities from construction companies, they were talking about paying $700-$800 a square metre, including the cost of land,” he said.
Construction companies are now waiting for the government to transfer funds to banks, so they can resume funding the construction sector. For example, Mr Rakhimbayev said: “Construction companies will be bolstered by the measures that have already been taken by the government - it has already allocated 120 billion tenge for stabilising the market. Now, these funds should quickly get to banks and through them to construction companies.”
The government has increased the capitalisation of the Kazakh Mortgage Company by 20.5 billion tenge to buy out mortgages issued to people by commercial banks. However, construction companies say that these funds are not enough. “The total mortgage portfolio in Kazakhstan stands at 520 billion tenge, so the allocated 20.5 billion tenge will not make any difference. The next $3bn I hope will do the job,” Mr Rakhimbayev said.
Mr Ogay is even bolder in his reflection: “I believe that it would be right to use the funds of our pension funds. They are now working for the benefit of foreign economies, it is better this money is used to the benefit of the domestic economy.”
Still, we should not forget that demand on the property market that had not been supported by the necessary infrastructure was to a certain extent provoked by great appetites of construction companies themselves. That is why, as Mr Alferov noted: “From the moral and ethical point of view and in terms of compliance with the Budget Code, it is a big question whether the government should help construction companies. On the other hand, the construction sector is one of the locomotives of the country's economy. Supporting this sector is not rather an economic, but a more socio-political issue, because the point is about protecting the rights of people who are funding the construction of their housing.”
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