Economy, Business And Markets

A Strategy, Not a Tactic

A Strategy, Not a Tactic A Strategy, Not a Tactic

Construction activity in Iran has been down for more than two years. The government is looking for solutions to help stimulate both supply and demand sides in the real-estate market and  subsectors.

Earlier this year, the central bank let commercial banks resume offering mortgage loans after a seven-year hiatus and encouraged an increase in lending, but the bank’s efforts fell short as commercial banks, already running out of capital, refused lending at interest rates strictly set by the regulator at “uncompetitive” levels.

Officials with the Ministry of Roads and Urban Development believe it will take Iran as long as 35 years to complete current construction projects if it only relies on domestic financing.

 According to Deputy Minister of Roads and Urban Development Hamed Mazaherian, Iran’s construction sector requires thousands of billions of dollars in foreign investment.

“Construction is among attractive industries for foreign investors and the administration is serious in drawing foreign investment into the sector,” Mazaherian said in an exclusive interview with Financial Tribune.  “Opening up the construction sector for foreign direct investment is a strategy for [President Hassan] Rouhani’s administration, not a tactic.”

To give a boost to the industry, the ministry has a roadmap that creates new cities in southern Iran over the next decade.

“One of the main macroeconomic strategies of the government is to increase concentration of population on the Persian Gulf coastline,” said the deputy minister, who holds a PhD in architecture and is a dean at the University of Tehran. “New cities could be developed based on tourism or industrial activities which have potentials to create hundreds of part-time and full-time jobs in the southern areas.”

He noted that a major gas pipeline is already under construction in the area which would connect the southern cities to neighboring Pakistan as well as India and China.

The project has a great potential for job creation, he said. Other projects can also be defined there. The neighboring Arab people have been living and working on the Persian Gulf coastline for years, while the Iranian side of the waters has remained underdeveloped, with a low population concentration.

“But both industrial and tourism-based projects need investment, and the core policy of the ministry is to get the private sector, including foreign companies, further involved in this process,” Mazaherian stated.    

 Gov’t Market Share

Rejecting the speculation that President Hassan Rouhani’s administration is deliberately sacrificing real-estate market for the sake of curbing inflation, the deputy minister said, “The government has only a tiny share—as much as 0.5% to 3%—in the housing market and therefore has little impact on the market’s dynamics.

“On the contrary, the government is urging private companies to handle more projects as the construction sector is a job creation engine in our economy. Private sector involvement can help government overcome high unemployment.”

Mazaherian highlighted the dual policy of the government in the construction sector, saying his ministry plans to lower its market share even further and wants to stick to its role as a facilitator.

With the nuclear deal in hand, ministry authorities hope investment opportunities, especially in the real-estate market, would become attractive for ambitious foreign investors.

“Of course,” he added, “the social housing project, initiated by the administration, is an exception and will be handled by the state to address the housing needs of the first two deciles of the society.

“We will not follow the previous administration’s [populist] policies. We won’t turn the ministry into a construction company, because we think the private sector is capable enough to handle such projects more cost-effectively. We are not planning to meddle in the construction cycle. But it’s a common policy among world states to protect the most vulnerable families by providing access to housing.”  

 Sanctions Relief

Mazaherian also pointed to the sanctions relief, saying, “As far as prices are concerned, I would predict no immediate change in the real-estate market since home prices are tightly tied to land prices and building costs, which both depend on inflation, hovering around 15%.”

The deputy minister added that in the long run, one can expect that the removal of sanctions would help improve macroeconomic indicators, leading to prosperity in the construction sector.

 On average, 100 housing units are currently available for every 105 households in the country. The gap is expected to be filled by 2026 if plans devised in the ministry’s roadmap are implemented.

“To that end, the government needs to help build 1.06 million housing units per annum for as long as 11 years,” Mazaherian stressed.

On the other hand, he said, worrying unemployment figures are a reminder for the government that it should largely invest in this sector which can create one job for every 250-300 million rials in investment. The figure is estimated at 2.5 billion rials in the petrochemical industry, making job creation relatively expensive.

 Financial Tools

The deputy minister also commented on the initiative recently proposed by some lawmakers in the economic commission of the parliament to open a “real-estate bourse”, apparently to provide finance for big housing projects.

He said his ministry is against the plan criticizing it as “odd” and “infeasible”. He said housing units are in homogeneous and cannot be offered in equity markets.

 “Furthermore, we already face a shortage of housing units. A real-estate bourse could provoke speculative activity. Maybe we can return to the issue in a decade or so, when an oversupply of about 5% would be possible. Then the idea can be raised once again, but not now.”

Among financial tools that could be applied now to help boost the supply side is a new solution introduced by the Ministry of Roads and Urban Development last year—the Construction Fund. The first fund of the kind, known as Nasim, already operated, and several more requests are waiting to receive operation permits.

Mazaherian said he believes the funds can help landowners with the capital they require for construction work.

“At the end of the project, the landowner could pay dividends to the fund’s shareholders. This could be an alternative solution to finance giant projects, which have always been dependant on the banking system.”

Creation of primary and secondary mortgage markets as well as leasing firms can also play a role in diversifying the financing sources, he noted. But the point is that “without foreign investors’ involvement in the construction projects, the sector will get nowhere.” @AlirezaTehran