Events in the global financial markets and the actions aimed at recovering the markets are still fresh and, therefore, it is difficult to precisely determine their effects on the real estate markets, which are inert as a rule. Serbia’s real estate market is underdeveloped, so that the global financial crisis still has no such direct and clearly visible influence on our market as it has on the developed markets. As far as further residential development and prices of apartments are concerned, we do not expect them to drop significantly for a short time.
If nothing more drastic than what we have seen so far happens in the global capital markets, we should expect the crisis to deccelerate the growth of market in Serbia. An increase in the price of capital will, most certainly, result in reduced demand in all markets, but the demand will not drop automatically. The markets that registered strong growth can only slow down their development, while those markets whose growth oscillated will take a downward turn.
Moderate increase in the price of capital should not have much too big influence on the potential buyers of residential space because the salaries in Serbia grow faster than the price of capital and it can be expected that the number of people who can take loan will rise in time. On the other side, large increase in the price of capital or greater availability of mortgage loans could significantly endanger residential market because most purchases are financed in that way.
Based on the available information, the price of mortgage loans will go up by about 250 base points, which can be considered as significant growth. We are not sure if this is only a temporary impact that will quickly disappear or the price of capital will stay this way for a while. In case of the latter, such increase in the price of capital will drastically reduce the number of people who buy apartments on credit.
It is most likely that the availability of capital will have a significant influence on the availability of project finance capital, especially for big projects that were once financed from cross–border loans. Difficult access to the funds for development of facilities can stop the supply’s growth. However, project finance difficulties can only be felt in a year or two.
Residential Market in Belgrade
Residential market in Belgrade is at its peak at the moment. Prices have been pretty stable for almost three months and it is not likely that they will be significantly changed for a short time, primarily because of the high demand and the market sluggishness. However, we should expect the prices of less quality and smaller apartments, which are dominant in the market, to drop for mid-term period. The prices of these apartments will be influenced by both price of capital and increased supply.
We should have in mind that the current prices of apartments are such not only because of the high demand and the availability of mortgage loans, but also due to market spinning. The information that the demand for residential property is huge and that the prices achieved in certain transactions (picks) were enormous was available to all participants in the market, which influenced the present prices of apartments. In general, the prices achieved in this way are rarely sustainable.
The percentage by which the prices of apartments will drop is hard to estimate. In any case, a drastic decrease in prices should not be expected due to high demand. What is most likely is that the prices will be cut by 10% to 20%.
We expect only certain parts of the city to achieve possible growth in the future, thanks to the vicinity of infrastructure or capital projects. Sooner or later, the city center will be refurbished and the difference between the prices of apartments in the center and in other parts of the city will be noticeable.
Present Mortgage Crisis
The right questions at this moment are: how the authorities in Belgrade should react in order to get ready for the crisis and what is the role of residential development in all that. Reduced demand in local and EU market may lead to reduced export and recession, decline in GDP, inflation, larger payment balance and budget deficits. The solution for the fight against recession should be sought in the healthy part of local demand that is not going to “push“ import, but production and investments. And is there a better example of that than residential development!?
As we already pointed out, there is a real deficit of apartments in Belgrade and that could be that healthy part of the industry which would generate “good“ demand and, thus, maintain the growth of GDP above the level of recession in this turbulent time. There are many different opinions about the way in which the state should enter the whole story of residential development and they range from the extremely liberal ones to the opinions that place the state in the position of the contractor.
The promises that the state is going to have thousands of apartments built and then sell or rent them below the price are always well-received by the poor, that is, they have a populist effect on the population that was used to having the state take care of everything. That would represent an inappropriate market interference by the Government, which would endanger both participants in the market and the market segments wherein the state interfered the most, such as, for example, development of small apartments in the suburbs.
The proposition that every liberal likes, including me, is that the state should create a favorable environment using the mechanisms it has, and the market will be adjusted by itself. That means that the Government should pass the law on privatization of city building land, introduce the right tax policy, make the “guillotine“ of regulations governing the issuing of permits, adopt the land-utilization plans for the entire city and adjust the level of demand through fine control of the mandatory reserves for mortgage loans in order to prevent drastic increase or decrease in the prices.
This would be a perfect plan if there was no financial crisis, but now we should seek some “middle“ way. In the situation when the residential development should be the healthiest sector of our economy that generates the growth of GDP, the state should react proactively and accelerate the whole process, that is, we can not afford ourselves that luxury to wait for the market to adjust by itself. In short, the state should also support supply and demand. As far as supply is concerned, the state should provide the developers with the locations that are legally and urbanistically “clean“ and possible guarantees that would ensure project finance. When it comes to demand, the state should use NBS’ measures to determine the mandatory reserves for mortgage loans and, in that way, influence their price and demand.
The state should appear as an undertaker in some exceptional situations, that is, in case of development of apartments for socially endangered people, people with disabilities, war veterans, etc. Construction of apartments by the state should be an exception, not the rule, although many ministers love to be presented as Santa Claus with a shovel in his hand. In this time of global financial crisis, our residential market can help the entire economy maintain the high level of activities and necessary growth of GDP.
Joint Head of Valuation
King Sturge Ltd. Belgrade