The real estate sector in Iran has been experiencing stagnant growth the past few years owing to the large overcapacity in luxury housing and the downfall of global oil prices since 2014.
While most experts agree that a full recovery is far from certain, the real hurdle in the property sector is the double whammy of affordable housing shortages, where the glut of luxury apartments has been complicating government efforts to provide housing to the lower and middle classes.
In the year ending March 2016, the sector recorded a negative growth of 12%, which trend is likely to have continued into the current year as well–albeit less severe. Over-investment in construction during the time when the price of oil was $100 a barrel, combined with a subsequently growing interest of banks in the real-estate bubble, led to the current oversupply of luxury apartments.
Between 2006-2007, there were about 620,000 vacant flats in Iran. That figure increased to 1,650,000 in 2011 and currently 2,000,000 vacant homes are present throughout the country. Meanwhile, only 600,000 building permits were issued during the three years of high oil prices (2011-2013), which is roughly 30% of the housing stock in Tehran.
According to Hossein Abdoh-Tabrizi, a member of the Securities and Exchange High Council, putting the total spending bill in the construction sector during those three years at USD 300 billion was a total waste of money. “For a country that is desperately looking for investment, this is a heavy cost that is a legacy of the former administration,” he commented.
In order to fill in the current gap, foreign investors are encouraged to capitalize on opportunities in Iran’s real estate and construction market. While Iran does not need more houses due to the glut already plaguing the market, the country is still in need of houses.
To mitigate the issue and ensure stability in the sector, the Iranian government has raised the ceiling for home loans significantly as an effort to boost homeownership for first-time homebuyers. This move offers mortgages with higher adjusted loan to value ratio, from 5-10% in the past to 30% at present.
Recently, a big opportunity has opened in Tehran exchange in the secondary mortgage market which has the potential to garner billions of dollars in loans with good securitization and collateral. Moreover, the need to develop old and distressed urban areas require government subsidies which, given the low oil revenues and a gaping budget deficit, is something foreign investors must take note of.
With Iran continuing to spend more on public infrastructure such as roads and bridges, it becomes apparent that new opportunities are up for grabs by foreigners.
