| Iran | Dec 01, 2017
Sanctions and surging prices have led to a lack of affordable housing in the Iranian market, but the country's re-entry into the global financial market should increase FDI and lead to more development.
After suffering through a recession in recent years, there is reason for optimism that Iran’s real estate and construction sectors can reach a new measure of stability in 2017. The housing and construction sector boomed in the mid-2000s, but a combination of domestic and external factors led to the bubble bursting in recent years, sending prices skyrocketing and curbing the construction needed to meet the demand of low-income housing. The end of international sanctions should allow for increased investment flows and corresponding growth, but considerable work remains to be done to meet the demands of the Iranian housing market and establish a housing system built upon construction to create jobs and wealth for the Iranian population.
An examination of the Iranian real estate sector shows that the downturn of the past few years can be attributed to a perfect storm of domestic and international problems. The boom in oil prices of the 1990s and 2000s led to a dramatic expansion in the housing sector, as oil money flowed into the housing market. Oil prices more than tripled over the first eight years of the decade, and Iran—at the time the third-largest oil producer in the world—reaped the benefits, with GDP growth not dipping lower than 4.2% from 2002 through 2007. The economy took a hit with the global recession of 2008, but GDP growth was back to 6.57% in 2010 as oil prices continued to rise. By 2012, a decade of strong growth had pushed the housing sector’s share of GDP to 20%, with housing investment responsible for 8% of total GDP. Yet the natural internal cycles of boom and bust suggested that a correction was due, and oversupply due to the decade-long construction boom combined with inflationary pressures led to market stagnation and a drop in construction activity. 2012 saw a 2.4% YoY decline in construction permits, but that drop quickly accelerated; by 2014, Iran saw the number of construction permits drop 32.1% over the previous year. Coupled with the drop in purchasing power due to inflation, the housing market saw activity stand still.
Compounding the issue was the arrival of international sanctions at a moment the Islamic Republic could ill afford them. Iran had been hit with sanctions over its uranium enrichment program before, but previous rounds had mostly focused on its arms exports and military activities related to its nuclear program. In late 2011 and 2012, however, the US led a new round of sanctions that surpassed all previous admonishments: the EU imposed an embargo on Iranian oil, and the US and EU states froze the Iranian Central Bank’s assets and removed them from the global financial industry, severing almost all financial ties. As a result, Iran lost all of its western FDI and saw its burgeoning inflation problems skyrocket as the government lost access to more than USD100 billion in foreign reserves and was forced to abandon its peg of the rial to the dollar. In the face of such domestic and international issues, Iran’s economy collapsed, with GDP falling 6.6% in 2012.
The passage of the Iranian nuclear deal in July 2015 gave the Iranian housing industry a much-needed reason for optimism again. In exchange for downgrading some elements of its nuclear program, Western countries agreed to lift their economic sanctions and improve the atmosphere for foreign investment. At the time of the lifting of sanctions in 2015, Iran’s real estate sector was facing a variety of issues with no quick fixes. The combination of slowed domestic growth combined with the international sanctions left the Islamic Republic with a housing market dealing high vacancy levels yet paradoxically unable to meet demand because of high costs. Data from the Iranian Central Bank has shown that spending on housing rose 30% in the past decade. One immediate effect of the rise in housing prices was an increase in rental properties; according to the central bank, the number of Iranians living in rental properties grew from 26.6% in 2011 to 33% in 2016. Yet while demand for home ownership was rising, many of the properties constructed during the boom remained out of reach for many Iranians due to their prices. As a result, the number of unoccupied housing units has risen 55% since 2011, and in 2016, one out of every 10 residential properties in Iran was vacant. 2017 has seen rents continue to rise, with the government reporting 7-10% YoY increases and some private sources reporting increases almost three times higher.
The sluggish levels of construction facing the sector—the World Bank reported that construction investment shrunk by 14.4% in the first three quarters of 2016—suggest that a lack of adequate supply of affordable housing remains the real estate market’s primary issue. To that end, the government is taking action to increase home ownership rates and provide new growth in the affordable housing sector, an area that has been underserved. The government has made efforts to increase the stock of affordable housing before, but some well-intentioned plans have only increased the Islamic Republic’s housing and economic difficulties. The 2007 Mehr housing project, for example, offered real estate developers free land to build low-income housing for first-time homeowners. Despite distributing more than USD10 billion in loans to developers, the project was a failure due to poor-quality construction in areas without adequate infrastructure and soaring costs that contributed to inflation and made the units unaffordable for those they were meant for. Determined to build Iran’s stock of affordable housing, President Hassan Rouhani proposed, in 2015, a social housing program that would add 570,000 residential utilities by 2022. Rouhani’s plan aims to avoid the mistakes of the Mehr plan by funding construction of 100,000 residential units per year through fuel subsidies and loans distributed through banks.
Rouhani’s plan is a promising first step, though critics believe it still falls short of meeting Iran’s full housing demand. Significantly, however, Rouhani’s actions should make the sector considerably more attractive to foreign investors. Ayoub Haji Valizadeh Shabestari, Managing Director and Deputy Chairman of Tanavob Company, considers the sector’s appeal to foreign investors an essential part of its rebuilding. “Foreign companies are interested in investing in Iran but are still worried about the political consequences of doing business here,” Shabestari told TBY. “We are currently negotiating with some companies to close partnerships.”
Political questions may remain, but with an estimated USD200 billion in investment expected to enter the country with the lifting of sanctions, major construction projects should soon be underway. Major projects like a USD140 million solar plant are the reasons why the World Bank projects Iran to grow at around 4% in 2017 and 2018, good news for those who wish to see the Middle East’s second-largest economy take on an even larger role.