Tehran’s Old Districts Trigger Housing Recovery

During the first two months of the new Iranian fiscal year to May 21, the number of new apartments built in 12 old districts of Tehran leaped by 56% compared with the corresponding period of last year.

According to a report published by Tehran Municipality on construction data in the capital, the surge in building new apartments in Tehran's distressed areas started when the construction growth of the whole city during the period declined by 15% year-on-year.

This is while the volume of construction in Tehran's old districts in last year's YOY comparison indicated a 32% drop in a nod to the housing sector's deepening recession, Financial Tribune's sister newspaper Donya-e-Eqtesad reported.

It looks like Tehran is finally getting out of its long-lasting stagnation by leading investments toward construction in distressed parts of the city via a number of stimulus factors.  

Four Years of Stagnation

A look at the statistics released by the Central Bank of Iran and the Statistical Center of Iran shows that the housing sector slipped into recession in the Iranian year that started on March 20, 2012.

The volume of constructions in Tehran fell by 59% during the year to March 20, 2015, which was followed by another 34% drop in the year after, until finally in June 2016, the housing sector turned a corner to mark a tiny YOY increase of 1% in Tehran's construction volume during the year to March 20, 2017.

The changing trend in Tehran's beleaguered sector plus a number of other positive signs convinced the sector's experts that Tehran’s housing market has entered a pre-boom phase and in line with the usual process whereby markets of other cities follow suit with a delay of one or two seasons, the sector in those cities will most likely stabilize as well and they will also move toward the pre-boom phase.

Stimulus Factors

As cited in the report, during the first two months of the new Iranian year (started March 21), a quarter of Tehran's construction projects took place in 12 distressed districts that are mostly located in downtown and southern parts of the city. The figure stood at 13.9% and 16.1% for 2012-13 and 2016-17, respectively.

The growth of construction in old parts of the city mostly followed stimulus factors that are set to encourage investors to boost their activities in those districts:

1. Applicants for the Housing Saving Account loans in distressed parts of the city are exempted from the rule of being a first-time homebuyer and interest rates pertaining to those loans are 1.5% lower at 8%.

2. Bank Maskan allocates loans without deposits of up to 500 million rials ($13,300) for construction in Tehran's old districts despite the fact that those loans are no longer given in other parts of the city.

3. The waiting period to sell a newly-built apartment has significantly reduced. According to the Donya-e-Eqtesad report, it takes less than a month to sell a new apartment in old parts of the city.

4. People favor pre-purchasing houses in those districts because of the following two factors:

i. Low fluctuation in prices in distressed parts encourages people to pre-purchase apartments since they have to deposit their money for a period and an area with stable prices is definitely a safer place to invest.

ii. Tehran Municipality's stimulus package reduces the cost of construction and increases the benefits of building houses in old districts. The package includes construction permit bonuses, 50-100% municipality construction duty exemption, special conditions for providing parking space, free separation of residential units in high-rise buildings and discount on engineering services fees.

The stimulus package significantly reduces construction costs, therefore it encourages builders to buy more than one old house and turn a number of them into one residential complex and derive even more benefits.

According to statistics, residential complexes accounted for 43% of all new buildings in distressed districts while the figure grew by 7% during the two months to May 21, 2017 to account for half of the construction projects in those areas.

The municipality's stimulus package in distressed districts reduces 25-30% of the construction costs so it makes investment in those areas more lucrative than in other parts of the city.

Pre-Boom Signs

According to a report published by CBI for the last quarter of the previous Iranian year, the number of construction permits issued during the period increased by 7.5% and 12.2% compared to the previous year's same period to reach 8,700 and 113,800 in Tehran and the entire urban areas of the country respectively.

This is while the Urban Renewal Organization of Tehran reports that during the two months to May 21, 2017, some 1,742 new residential units were built in distressed districts of Tehran.

Statistics have revealed that people's purchasing power has significantly decreased during the past few years and they can afford to buy an apartment in average and cheaper parts of the city.

Local realtors told Financial Tribune that the average price of newly-built apartments in old neighborhoods ranges from 20 million rials ($533) per square meter in southern areas to 50 million rials ($1,300) per square meter in downtown and central parts of Tehran, which is mostly lower than Tehran's average house prices.

Most of them noted that the market in these districts has been recently experiencing better days, especially in the past few months.