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Iran’s real estate market: investment potential and risks

In 2016, the US partially lifted sanctions from Iran – a year earlier, the world powers signed an agreement to limit its nuclear program. According to The Wall Street Journal, since then European companies have signed dozens of contracts with Tehran: Peugeot and Renault will produce cars in this country, Vodafone together with a local partner will build telecommunications infrastructure, the oil company Royal Dutch Shell has signed an agreement on the extraction of energy resources. Direct investment in Iran from abroad increased from $ 1.26 billion. In 2015, to more than 11 billion in 2016.

The state plans to attract investors to the local real estate market, with plans to build 2,700 districts in 495 cities with a total population of 19 million people. According to the Iranian edition of the Financial Tribune, citing the words of a member of the High Council for Securities and Foreign Exchange Operations Hossein Abdoh-Tebrizi, the total cost of infrastructure projects that may be of interest to investors is estimated at $ 300 billion.

Bubble burst
Over the past 10 years, the Iranian real estate market managed to survive first a period of rapid growth, then a recession phase. Now prices and sales are rising again.

In 2007, the Iranian government launched the Mehr Housing program: developers received free land in exchange for a commitment to build low-cost apartments for first-time homeowners. The government paid a commission to banks to give loans to developers, whose profits reached 300%, and buyers received a mortgage for 99 years.

Over the next five years, almost 2 million housing units were built, in 2011–2012, 14 thousand real estate transactions were concluded each day. From 2011 to 2013, when oil cost $ 100 per barrel, investors actively invested money in luxury real estate: during this period 600 thousand building permits were issued, and the volume of expenses in this sector amounted to $ 300 billion.

Rapid construction provoked inflation and excess liquidity. In 2010, sanctions were tightened, the rial rate plummeted, and real estate prices in foreign currency equivalent doubled in the next two years. The real estate market has entered a recession phase, and private investors are gone. In 2014, the Mehr Housing program was withdrawn from the balance of the Central Bank of Iran.

After the “bubble” in the Iranian real estate market burst, many objects were unclaimed, especially in the premium segment (objects more expensive than 80 million rials / m² or $ 2.5 thousand / m²). According to the Financial Tribune, the number of vacant apartments in Iran increased from 620 thousand in 2006–2007 to 1.65 million in 2011 and about 2 million in 2016–2017: in fact, every tenth residential building is empty in Iran. According to the Statistical Center of Iran, as of March 2017, there are 490,000 vacant apartments in Tehran alone. According to the Minister of Road and Urban Construction, Abbas Akhundi, the total value of uninhabited houses in Iran reaches $ 250 billion.

Potential
In conditions when the Iranian premium housing market is oversaturated, investment in the construction and redevelopment of rental housing in the middle segment is still promising. Objects worth less than 3 billion rials (about 80 thousand dollars) account for almost half of the transactions in Tehran.

According to the Central Bank of Iran, in the 11 months to February 18, 2017 (the end of the fiscal year), the number of transactions in the capital increased by 6.5% compared with the same period a year earlier. Of these, more than half (54%) are apartments built in the last five years. The average cost per square meter in Tehran during this period amounted to 43.6 million riyals (1.2 thousand dollars), which is 5.4% more compared to the same period of the previous year.

A number of factors stimulate further price increases. Iran needs 1.5 million units of housing per year, while the market at this stage is able to provide only 700 thousand objects. At the same time, construction volumes are decreasing: according to the Central Bank of Iran, the number of building permits on average in the country in 2015–2016 decreased by 13% compared with 2014–2015, in Tehran – by 20%. Private sector investment in construction over the same period also decreased by 13%.

Another promising market is the hotel sector. According to the World Travel and Tourism Council, the number of tourists in Iran will increase from 5 million in 2016 to 10 million per year in 2027. According to Clifford Chance, until 2026 the Iranian government will support the construction of 250–300 hotels.

The tourist infrastructure in Iran is only developing, and the market for quality hotel services is not yet saturated, as in Europe and North America. As noted on the site dedicated to the Iran Hotel & Tourism Investment Conference, only 13 out of 96 Teheran hotels are classified as four- and five-star. Under these conditions, Iran’s access to the Persian Gulf and the Caspian Sea and the resort area on Kish Island are good opportunities for investors.

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