By AZE.US
Home sales in Azerbaijan are slowing, but prices continue to rise. Economist Natig Jafarli says limited investment alternatives and the unusual financing structure of the construction market are distorting the normal relationship between supply and demand.
Under conventional market conditions, falling demand should push sellers to lower prices. Azerbaijan’s housing market, however, appears to be moving in the opposite direction: fewer properties are being sold while apartment prices continue to increase.
Economist Natig Jafarli described the situation as a consequence of an underdeveloped economic model in which standard market mechanisms do not operate effectively.
He presented his assessment in a public Facebook post.
Investors Have Few Alternatives
Jafarli said Azerbaijan offers relatively few accessible investment options for people seeking to preserve or grow their savings.
Investing in a business is considered risky, while the country’s securities market remains underdeveloped. Jafarli also pointed to tax, regulatory and administrative pressures that, in his view, have weakened the appeal of entrepreneurship.
As a result, real estate remains one of the few investment instruments widely understood and trusted by the public.
Apartments are purchased not only as homes but also for rental income or as a way to protect savings. According to Jafarli, this lack of alternatives continues to support property prices even when rental returns are relatively low.
A 200,000-Manat Apartment Takes Nearly 21 Years to Repay
Jafarli estimates that an apartment purchased as a rental investment in Baku typically takes between 18 and 22 years to pay for itself, assuming it remains continuously occupied.
Consider an apartment costing 200,000 manats ($117,650) that can be rented for 800 manats ($470) per month.
The property would generate 9,600 manats ($5,650) in gross annual rent, producing a yield of approximately 4.8%. At that rate, the owner would need about 20 years and 10 months simply to recover the original purchase price.
That calculation does not include periods without tenants, renovation costs, furniture, taxes or routine maintenance. Once those expenses are included, the actual repayment period could be even longer.
During that period, Jafarli noted, the owner is not yet earning a profit but merely recovering the initial investment.
Could a Bank Deposit Pay More?
Jafarli compared the apartment with a bank deposit.
If 200,000 manats were placed in a bank account paying 10% annually, the deposit would generate 20,000 manats ($11,765) in interest per year.
If the rate remained unchanged, the depositor would earn an additional 200,000 manats over 10 years while retaining the original principal.
This is a simplified comparison that does not account for changes in interest rates, taxes or inflation. It also does not include any potential increase in the apartment’s market value.
Nevertheless, the calculation shows that purchasing an apartment in Baku is not automatically the most profitable investment.
According to Jafarli, real estate remains popular largely because investors lack other familiar and accessible places to put their money.
Why Developers Do Not Cut Prices
Buyers purchasing apartments for rental income are only one factor supporting prices.
Jafarli said major construction companies in Azerbaijan may not face the same pressure to sell quickly as developers operating primarily with bank loans.
Under a conventional model, a developer borrows money, completes a building and must sell apartments to repay the loan. Weak sales therefore create pressure to offer discounts.
If construction is financed with capital that does not require rapid repayment, unsold apartments do not create the same urgency. Developers can maintain their asking prices and wait for buyers instead of cutting prices.
Falling transaction volumes, therefore, do not necessarily lead to cheaper housing.
A Market Disconnected From Demand
Jafarli described a cycle in which investing in businesses is difficult, the securities market remains limited and surplus capital continues to flow into real estate.
Rental yields may be low, but apartment prices remain elevated because investors have few alternatives and developers can afford to wait.
The result is a housing market increasingly disconnected from current sales activity and household incomes.
Jafarli warned that without broader investment opportunities and a stronger business environment, Azerbaijan will continue channeling capital into apartments instead of production, technology and new companies – while neighboring economies move ahead more quickly.
AZE.US