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Iran’s property market: investment potential and risks

In 2015, global powers signed an agreement to restrict Iran’s nuclear programme, but the United States partially lifted its sanctions on the country the following year. According to the Wall Street Journal, European companies have signed dozens of contracts with Tehran since then – Peugeot and Renault will manufacture cars in Iran, Vodafone will develop telecommunication infrastructure in cooperation with a local partner, and the Royal Dutch Shell oil company will extract energy resources. As a result, direct foreign investment in Iran increased from US$1.26 billion in 2015 to over US$11 billion in 2016.

The country also is also hoping to attract investors to its property market to finance the construction of 2,700 neighbourhoods in 495 cities with a total population of 19 million. Securities and Exchange High Council member Hossein Abdoh Tabrizi said the total value of infrastructure projects the investors might be interested in is estimated at US$300 billion, Iranian newspaper Financial Tribune reported.

The End of the Iranian Property Bubble

In the past decade, the Iran’s economy has gone through a period of rapid growth followed by a recession, but property prices and transaction numbers are growing again.

In 2007, the Iranian government launched the Mehr housing programme under which developers were offered free land in return for the construction of cheap residential units for first-time home buyers. The government paid banks a commission for loans to developers, whose profits reached 300%, while buyers were granted 99-year mortgages.

Over the next five years, almost 2 million residential units were built. From 2011 to 2012, 14,000 property purchases took place in the country each day. Between 2011 and 2013, when oil cost US$100 per barrel, prime property investors were the most active: 600,000 construction permits, valued at US$300 billion in total, were issued during this period.

Booming construction led to a rise in inflation and excess liquidity. In 2010, international sanctions against Iran were strengthened, the rial plummeted, and property prices in foreign currency doubled over the next two years. The real estate market entered a recession and private investors left. In 2014, the Mehr housing scheme was taken off the balance sheet of the Central Bank of Iran.

After the Iranian property market bubble burst, many properties, especially prime ones (those valued over IRR 80 million or US$2,500 per square metre in value) fell out of demand. According to the Financial Tribune, the number of vacant flats in Iran grew from 620,000 in 2006–2007 to 1.65 million in 2011, and to 2 million in 2016–2017. In fact, every tenth residential building in the country is vacant. According to the Statistical Centre of Iran, as of March 2017, there were 490,000 vacant flats in Tehran alone. According to Minister of Roads and Urban Development Abbas Akhoundi, the total value of vacant Iranian homes stands at US$250 billion.

Property market potential

With an oversaturated Iranian prime residential property market, investments in construction and mid-priced rental property redevelopment are promising. Almost half of all property transactions in Tehran are below IRR 3 billion (US$80,000) in value.

According to the Central Bank of Iran, in the 11 months leading up to February 18, 2017 (the end of the fiscal year), the number of property transactions increased by 6.5% compared to the same period the year before. More than a half (54%) of them involve flats constructed in the last five years. The average price per square metre in Tehran during that period reached IRR 43.6 million (US$1,200), 5.4% higher compared to the same period of the previous year.

A number of factors are fuelling further price increases: Iran needs 1.5 million residential units per annum, while the market is currently only able to offer 700,000. At the same time, the construction volume is shrinking. According to the Central Bank of Iran, in comparison to 2014–2015, the average number of construction permits awarded in 2015–2016 decreased by 13% nationally and by 20% in Tehran. Private sector investments also shrank by 13% during the same period.

Another promising market is the hotel segment. According to the World Travel and Tourism Council´s estimates, the number of tourists in Iran per annum will grow from 5 million in 2016 to 10 million in 2027. According to Clifford Chance, the Iranian government will support the construction of 250 to 300 hotels by 2026.

Iran’s tourist infrastructure is only starting to develop, and the luxury hotel market is not as saturated as in Europe or North America. According to the Iran Hotel & Tourism Investment Conference website, only 13 of the 96 hotels in Tehran are classified as four and five-star. Under these circumstances, Iran's access to the Persian Gulf and the Caspian Sea and the resort area on the island of Kish offer good investment opportunities.

In addition, the retail property market still shows potential. According to the Retail Week website, Iran lacks sufficient grocery retailers for a country with 80 million people. the largest chains (Proma, Refah, Shahrvand and Hyperstar) have only 700 outlets in total.

Developers find it more profitable to build shopping centres than housing in the most populous Iranian cities: Tehran (15 million residents), Mashhad (3.3 million) and Isfahan (2.2 million). Together, these three cities account for a quarter of Iran’s population and half of its consumer spending.

Investment risks

Iran is developing actively, but there are a number of risks investors need to consider, for instance, the instability of the local economy.

Apart from Saudi Arabia, the country has the largest economy in the Middle East and North Africa. However, Iran's prosperity directly depends on oil prices: according to the World Bank, in the first half of 2016, Iran´s GDP grew by 7.4%, while its non-oil GDP only increased by 0.9%.

To reduce the economy’s dependence on oil and gas, the government is trying to reform state-owned enterprises, the financial and banking sector and the allocation of oil revenues. According to the 2016–2021 plan, Iran’s economy is expected to grow by 8%.

The actions taken by the government in recent years have begun to show results. For example, with the lifting of sanctions, inflation fell from 40% in 2013 to 12.6% in 2017. According to the forecasts by Trading Economics, this will decline further to 5.9% by 2020. However, the figure still remains high, especially in contrast to euro zone countries, where inflation typically ranges from 0% and 2% per annum.

Unemployment in Iran also remains high. The unemployment rate stood at 12.7% (3.3 million people) in the middle of 2016, though this is expected to fall to 10.8% by 2020, according to Trading Economics.

Another risk is the country’s unstable currency. The rial has fallen from 9,200 to 41,600 to the dollar in the past decade, a depreciation of nearly 450%. The Iranian currency depreciated sharply in 2012, when the United States banned the world's banks from dealing with Iran, and the European Union imposed an embargo on Iranian oil.

In general, Iran offers interesting investment opportunities, particularly in the construction of affordable rental property, shopping centres and tourist infrastructure. However, investors should carefully consider the risks relating to the local economy and its dependence on the oil industry.

Yulia Kozhevnikova, Tranio

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