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Construction and Land Use Change
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Construction and Land Use Change

For two years the construction industry has been of the descending order and it seems it will remain so in the foreseeable future. When the first symptoms of decline emerged in Tehran, namely the decline in real estate deals, experts warned that the problem was rooted in the preoccupation of the former government with the costly and controversial Mehr Housing Scheme. They, however, had believed that a change in the political environment following the departure of former president Mahmoud Ahmadinejad would inject new life into the key industry.

Now it turns out that that was more of an fantasy. After the Rouhani administration took over in mid-2013 there was some positive movement in the Tehran real estate business, but it was pretty short-lived. Industry leaders and economic observers were quoted as saying that "until new stimulating policies are clearly laid out the industry will continue to take a back seat."

After a year's delay, the minister of roads and urban development, Abbas Akhoundi, recently tried to boost the purchasing power of potential homeowners by pushing through a plan to increase loans. Still the market refused to budge only for anxious pundits to make another half-hearted forecast that the "industry would pick up in the next Iranian year" (starts March 2015).

One paradox, however, is that despite the wholesale stagnation in the buying and selling of residential units that are at nadir, the commercial sector is relatively untouched and demand for commercial estate continues to surge in the overcrowded capital. Unlike residential plots, which witnessed relatively stable prices for the first time in a decade, prices of commercial estate, especially in the uptown districts in megacities continued to grow steadily.

Land Use Change

As the torpor started looking like a permanent feature of the Tehran construction sector, most private builders lost interest in residential construction projects. As such, demand moved full speed toward the lucrative commercial estate, and manifested itself in land use change rather than real estate business.

In an interview with the Persian economic daily Forsat Emrouz, the secretary general of Iran's Mass Construction Center, Farshid Poorhajat said Tehran's Comprehensive Plan basically calls for prioritizing land use for expanding sports and service sectors. "As that did not prove attractive enough for having a lower added value potential, requests started increasing to switch residential areas to commercial use."

No sector in this industry yields higher profit than commercial estate. Although services, sports, and parks are essential components of a healthy city, when times are bad and the market is asleep, municipalities are tempted, and at times more than willing, to change land use (almost always from residential to trade and commerce).

 

The fact of the matter is that added value of commercial units normally does not decrease even when the market is dormant -- a clear reason why commercial estates are permanent favorites with investors and real estate developers.

The exorbitant and systematic upward trend in prices in commercial districts, malls, and shopping centers in Tehran has only intensified the urge to build more. With rates starting at $400/per square meter of shops in malls, investors are willing to pay whatever municipalities demand for land use change.

$400,000/Meter!

Real estate expert Mostafa Gholi Khosravi says that commercial estate prices for every square meter in "Tehran's main bazaar are sometimes as high as $400,000 per square meter; therefore it makes all the sense in the world for businesses to pay any amount municipalities seek for land use change."  Rates in the category of $200-650/ square meter depend on the number of customers and income the shops generate in different neighborhoods in the sprawling capital now home to almost 10.5 million people.

Poorhajat, however, says the rates are calculated using a specific formula and may vary between $65 and $1,500 per square meter.     

The monstrous growth in and around commercial areas has in recent times often been likened to the spread of wild mushrooms, and understandably so. The awkward growth continues despite repeated warnings from the media, environmentalists, physicians and the masses in general to city planners, especially the Tehran Municipality and the Tehran City Council. The pleas and appeals to limit the monstrous expansion of commercial districts have apparently fallen on deaf ears.

 

It has also been noticed that parking problems and traffic congestion are fast multiplying in commercial areas as a result of changes in land use patterns. Commercial land use has a high vehicular and pedestrian traffic generating capacity. Demand for parking spaces and other facilities is tremendous and the inability of the existing situation to cope with demand has led to a chronic and fast growing parking problem and traffic congestion, just to name a few.

 

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