2020-05-28
Main purpose of the Anti-Crisis Plan of the Government of Georgia in Support of the Development Sector is to encourage the crisis-affected industry, which will ensure that people employed in the sector keep their jobs and difficulties witnessed in the real estate market do not hamper other sectors of the economy. It was stated by Beka Liluashvili, Adviser to the Prime Minister of Georgia on Economic Affairs when presenting the Anti-Crisis Plan in Support of the Development Sector today.
According to him, Anti-Crisis Plan does not only cover social and economic considerations, but constitutes to a none-the-less important segment of the national economy, which was growing before the pandemic at a rather high rate.
"Share of this sector in the Gross Domestic Product (GDP) is almost 9 percent, which means that quick recovery and post-crisis operation of the sector is a significant pre-requisite for the advancement of the national economy in the post-pandemic period. This sector directly employs almost 120 000 people, however many other economic activities are related to the success of this industry - starting from the production of construction materials and finished with a trade of household appliances. Hence, all the steps made by the State in support of this sector will help 120 000 people directly and another lot of this magnitude in maintaining their source of income. This sector has encountered significant problems during the crisis as a result of the events witnessed in the tourism sector. Many people were buying apartments and renting them out to tourists. Thus, reduced inflow of tourists has led to additional problems" noted Beka Liluashvili.
Adviser to the Prime Minister of Georgia stated that almost 1.7 million square meters of residential space are constructed throughout the country at present, which means that this is a main source of income for people engaged in the construction process.
"About 25 000 citizens of our country have mortgage loans to buy apartments. They have made down payments, repayments in several initial installments, along with other expenses. Thus, it is important for us to facilitate the sector for an uninterrupted engagement of these people in the construction process, who will be earning and incurring financial expenses on their loans and acquiring real estate. We will be helping them to prevent the loss of these expenditures, i.e. money injected in the completion of the construction" noted Beka Liluashvili.
Adviser to the Prime Minister of Georgia elaborated on the challenges witnessed in the development sector, which has been scrutinized by the Government of Georgia through multiple sessions of communication with stakeholders and consultations with the National Bank of Georgia (NBG).
"First challenge is manifested in the reduced volume of sales, second one - in the risk of completion and commissioning of construction and every crisis is characterized with such occurrences. Third challenge is the price fluctuation and it is essential to note here that fluctuation of prices on apartments leads to difficulties not only in the development sector - which is a challenge on its own - but it may grow into a significant problem for the sustainability and stability of the financial system. Fourth challenge is access to finance by development and construction companies" noted Beka Liluashvili.
As noted by the Adviser to the Prime Minister of Georgia, Government together with NBG and development sector have come up with measures in support of this industry.
"We agree that the main challenge today manifests itself in the reduced sales. In response to this challenge it is essential to increase demand in the development sector, which means that acquisition of residential units should become more accessible. Government of Georgia will be subsidizing the interest on mortgage loans to increase the access. It means that people intending to improve their living conditions by buying apartments, will benefit of significant concessions if they apply for mortgage loans by the end of the year to acquire the real estate. As for the specific subsidy, Government will cover 4 percent of the interest rate on loans, which currently means a reduction of interest expenses on mortgage loans to about 7 percent, which is a historic minimum. Never before has the interest rate on loans denominated in GEL been so low" noted Beka Liluashvili.
According to the explanations given by the Adviser to the Prime Minister of Georgia, subsidy will apply to all the Loan Agreements below the threshold of 200 000 GEL and it will last for 5 years from the date of such Loan Agreements, i.e. from the moment that loans get disbursed.
"Why during 5 years? Irrespective of the fact that loan may have a maturity of 10 or 15 years, first 5 is the time, when the borrower incurs most expenses on the interest of the loan and State is helping in easing the burden" stated Beka Liluashvili.
Second measure, which is offered by the Government to the sector implies underwriting of mortgage loans.
"Any financial crisis leads to increased risks of lost or reduced income and default on repayment of loans. Of course, we do our best to avoid such occurrences due to the crisis and all the measures designed by the State are aimed at the mitigation of risks. They include a social security package. Increased risks, as a rule, lead to an increase of down payments when buying a real estate, which means that citizens are required to pay more upfront and spend their savings on the housing. In general, to avoid an increase of upfront payments, interest rates should not be increased. Government is underwriting all mortgage loans issued till the end of the year in the volume of 20 percent. With this measure, State is actually acting as a co-borrower for its citizens. It means that in the conditions of such guarantee, down payment will not only stay unchanged, but may significantly get reduced. Respectively, it is an additional measure for making the acquisition of a real estate more accessible by people. Guarantee applies to loans, whereby the co-participation - the down payment - will not be less than 10 percent of the house value" noted Beka Liluashvili.
According to the Adviser to the Prime Minister of Georgia, when the Government talks about turning the crisis into a significant opportunity, it inter alia implies more benefits to more people in the country as a result of each measure carried out by the State. As noted by Beka Liluashvili, it is exactly what is meant by this measure. On the one hand it aims to support the development sector to solve the problem of sales and on the other hand it helps the internally displaced persons (IDPs) in accelerating the speed of their housing.
"With this aim and apart from the resources, which have already been allocated in the State Budget and with which we support the IDP housing, we have designed a tailor-made program in the volume of 150 MLN GEL to be used for buying residential units from the development sector by the end of the year in the amount of 150 MLN GEL. It is about 1800 apartments and respectively 1800 additional IDPs under roof. It means that 1800 IDP households will get apartments 3 years before the original intention of the plan, which we had developed for IDP housing" noted Beka Liluashvili.
Adviser to the Prime Minister of Georgia explained that within this process State will make procurements absolutely transparently, through an auction and invites the development companies to get engaged in the process.
Beka Liluashvili also noted that Government has designed a tailor-made program, which proposes underwriting for completion and commissioning of the construction process.
"We have had a very daunting experience in experiencing problems in the completion and commissioning of constructions during crisis. Increased risks means that people employed in this sector will be laid off, while those, who have purchased real estate in the process of construction will be losing money paid as down payment or loan service. We still have people affected by incomplete constructions and State continues to care for them. That is exactly why such risks will be underwritten in the process of current crisis. We have designed a tailor-made program, which implies State underwriting for the completion and commissioning of constructions. It is a program in the value of almost 200 MLN GEL, which tells the developer that if 30 percent of the space envisaged in the construction project will be left unsold at a free market, State will acquire them to meet the housing needs of the IDP community. It is a guarantee, which enables our citizens on the one hand to continue their operation without interruption and keep their jobs and sources of income on the one hand, while giving a guarantee to the sector that 30 percent of the units in their residential blocks will be bought in any case by the State. Hence, access to finance is made easier. It is a significant pre-requisite for the sector to continue its operation without interruptions" noted Beka Liluashvili.
Adviser to the Prime Minister of Georgia spoke about the temporary measures targeted at incomplete constructions, which were launched by the Municipality of Tbilisi in May 2019.
According to him, after honoring 30 applications, which were filed to the Municipality, almost 4000 affected people will get their residential units as a result of completing constructions.
"We took a significant decision on extending the deadline for applications under these temporary measures for one year. We are also working to make it applicable not only to the Municipality of Tbilisi, but the rest of the country as well. We need support of the Parliament of Georgia on this as the initiative requires amendments to the legislation" noted Beka Liluashvili.
Also according to him, Government is not oriented only at short-term aims and goals. It tries to turn this crisis into various opportunities and carries out measures with this spirit to make a long-term contribution to the systemic recovery in various sectors and in this case - development industry.
Beka Liluashvili noted that Government has agreed with the sector to introduce an escrow account as a mandatory measure from 2020-2021 by considering certain conditions.
"I am referring here to the escrow account, which failed to be introduced historically into this sector. We have decided and agreed with the stakeholders to make the escrow account compulsory from 2020-2021. It is a bank account, which will be used to protect people buying apartments with borrowings from incomplete constructions according to the scenario, when a development company buys the land with down payments. Later, if the development company gets challenged by various risks and fails to complete the construction, escrow account will be there to accumulate all the payments made by the borrower and in parallel with the construction process or after the completion, such development company will be able to use the accumulated funds. This scheme has been practiced in many European countries and we will establish a standard, which will make the situation in the sector healthier. It will not be mandatory for every development company. It will apply to a certain category of vendors and size of sales. We continue our communication with the sector on this topic" noted Beka Liluashvili.
Adviser to the Prime Minister of Georgia stressed that budget required for each measure will be primarily used for making it possible for people directly or indirectly employed in the construction sector to keep their jobs and to thereby encourage the development sector in completing their projects. Citizens, who have already incurred expenses, will be indemnified by the Government from losing their money.
According to him, 200 MLN GEL is an indemnity fund for procurement, which is fully accessible for the sector. Hence, real estate purchased by the State within the scope of this project will be used for meeting the housing needs of the IDP households.
"Four measures amount in total to 434 MLN GEL. State subsidies on the interest of mortgage loans require 70 MLN GEL, while 14 MLN GEL is the value of the state underwriting of the mortgage loan portfolio. Our IDP households will benefit of additional 150 MLN GEL. Indemnity fund for procurement amounts to 200 MLN GEL, which is fully accessible for the sector. Hence, real estate acquired by the State within this project will be used to meet the need of IDP housing" noted Beka Liluashvili.
Presentation of the Anti-Crisis Plan in Support of the Development Sector was officially launched by Giorgi Gakharia, Prime Minister of Georgia and Kakha Kaladze, Mayor of Tbilisi. Presentation was attended by members of the Economic Team, Governor of the National Bank of Georgia, MPs, CEO of a Co-Investment Fund, Secretary of the Investors Council, Business Ombudsman and representatives of the construction and development sector.
Press Service of the Government Administration