Iran's Property Market Prospects for Foreign Investors

Iran's real-estate sector is in the doldrums, thanks largely to overcapacity in luxury housing and the wider economic downturn that ensued since the 2014 oil price crash threw the economy into a tailspin.

Sporadic reports pointing to an uptick in home sales notwithstanding, most experts agree that a full recovery is far from certain and perhaps way into the future. But the real conundrum–with possibly more dire consequences than the property downturn itself–is the double whammy of shortage of affordable housing and the glut in luxury apartments complicating government efforts to provide housing to young people.

Hossein Abdoh-Tabrizi, a member of the Securities and Exchange High Council, is a senior expert who sees a major opportunity for foreigners to fill the current gap by entering Iran's real-estate and construction market.

Abdoh-Tabrizi—whose council has been sought by successive governments in post-Islamic Revolution, except unsurprisingly by the administration of Mahmoud Ahmadinejad whom he blames for many of the current woes–is currently an advisor to the Minister of Roads and Urban Development Abbas Akhoundi.

In an interview with Financial Tribune, Abdoh-Tabrizi called attention to the gloomy state of the key housing market: In the year ending March 2016, the sector registered a negative 12% growth, which trend is likely to have continued into the current year as well–albeit with less severity.

He pointed to overinvestment in construction during the go-go years of $100-a-barrel oil and subsequently the growing interest of banks in the real-estate bubble that led to the current oversupply. And since that overinvestment was mostly in the form of luxury apartments, it did nothing to increase homeownership among lower and middle classes.

"While there were 620,000 vacant flats in the country in 2006-07, that figure increased to 1,650,000 in 2011 and currently there are approximately 2,000,000 vacant homes throughout the country," Abdoh-Tabrizi said.

"Only in the three years of high oil prices [2011-13], 600,000 building permits were issued, which are roughly 30% of the housing stock in the capital Tehran."

That puts the total spending bill in the construction sector during those three years at $300 billion which, according to Abdoh-Tabrizi, was a total "waste of money".

"For a country that needs every penny and is desperately looking for investment, this is a heavy cost that is a legacy of the former administration," he said.

Worst Conclusion

According to Abdoh-Tabrizi, the worst conclusion that one could draw from all of this is "that we do not need more houses" since a glut is already plaguing the market.

"But we need a lot of houses," he said, "because around 700,000 marriages take place annually, and apart from that since one in four marriages ends in divorce, that creates the need for extra homes as well."

As an aside, Abdoh-Tabrizi reminds that the real-estate glut is not limited to the housing sector and cites the northeastern city of Tabriz as an example.

The metropolis, with a population of 2 million has 207,000 shops, which means that there exists a retail store for every two households.

"It will take a long time before this overinvestment rebalances," he said.

Infrastructure Bonanza

The government, in its efforts to boost homeownership for first-time homebuyers, raised the ceiling for home loans significantly, offering mortgages with higher adjusted loan to value ratio, from 5-10% in the past to 30% at present.   

According to the expert, Iran needs a bigger mortgage market and foreigners can help this market.  

"A big opportunity has recently opened in Tehran exchange in the secondary mortgage market," he said.

As Abdoh-Tabrizi puts it, the market has potential for billions of dollars of loans with good securitization and collateral.

Next, there is need for the development of old and distressed urban areas where three million households reside. That, Abdoh-Tabrizi says, requires government subsidies which, given the low oil revenues and a gaping budget deficit, is a tall order.

All of this has created opportunities for foreign investors to grab. The country also needs big spending on the construction of roads and bridges.

According to Abdoh-Tabrizi, infrastructure spending can go on for years in Iran.

"Currently, $300 billion worth of infrastructure projects are up for grabs by foreigners," he said.