December has ushered yet another lockdown in Georgia. In the last week of November, the Government announced the closure of public gathering spaces as well as the temporary grounding of public transport. Shopping centres will remain closed until mid-December, when they will get a short reprieve. The lockdown goes on through January and may be amended providing the epidemiological situation improves by then.
The announcement has hit retailers the hardest. December is the month when the bulk of annual revenue gets generated due to Christmas shopping. Closure at a peak sales period when the bottom line has been hovering near the negative for an entire year is causing many to doubt whether they will recover in 2021 at all. Three international brands have already left the market and many operators are considering reducing their number of retail units around the country.
The attitude of retailers reflects the general pessimistic aura that has permeated varying business sectors in Georgia. As the daily number of cases continue to spike, everyone’s attention is on the speedy distribution of the COVID-19 vaccine.
The worsening COVID situation in the country has dampened hopes for a speedy recovery in the commercial real estate sectors. Retail and hospitality markets struggle to remain afloat as people confine to homes and international visitor numbers are dwindling with no recovery in sight.
Some of the most well-trodden shopping centres in Tbilisi have reported nearly a 60% reduction in footfall. Hotels in the city are operating at below 10% occupancy with majority of the non-brand boutique facilities temporarily closed. Office buildings are experiencing a flashback to springtime, as most tenants have opted to shift back to working from home.
In contrast to these, the residential sector, which was at a standstill during the Spring lockdown, is growing. Despite the marginal month-on-month reduction (-1%) in residential transactions in Tbilisi, it is apparent that there is both the willingness and the ability in the populace to make residential investments. The sector owes much to the subsidy program, implemented by the Government in June, to facilitate recovery of the market. The highest volume of sales is reported in the economy and mid-segments which are covered by the program. We expect a stable albeit slower upturn here in the coming months.
Markets are recovering somewhat unevenly given the COVID-19 situation.
Residential real estate has all but recovered in Tbilisi. September brought a 9% growth in the number of transactions compared to the same month last year. October transactions are also expected to exceed October ’19 numbers.
Conversely, Batumi - the second largest city in the country - has been experiencing a major drop in transactions ever since the Q1 lockdown. This is because the primary source market for Tbilisi residential real estate is Georgian nationals; the Batumi residential market on the other hand derives the largest share of its revenue from international visitors, whose entry to the country has been restricted since March.
Commercial markets are slowly adjusting. A few brands have left the retail market and the rest are putting expansion plans on hold, and only considering cases where the implementation timeline of a shopping centre exceeds two years. The office market is in stalemate - landlords are not lowering prices just yet but the reduction in demand is becoming apparent because more of the smaller companies have chosen to shift to coworking spaces.
With a second wave of COVID-19 rising, the entire sector may once again have to face an uncertain future.
August is off to a slow start as lockdown has been extended until 1 September. This does not bode well for the service sectors at large. Urban hotels report occupancies in single digits as well as increased operating expenses due to novel cleanliness guidelines and requirements imposed by both the Georgian Government and - in case of international franchises - by the brand HQs. Non-brand hotels in Tbilisi are remaining closed so as not to incur unnecessary expenses, until the flights resume. All the infrastructure supporting the travel and tourism sector is similarly in a stall.
Lack of international visitors is detrimental to the residential market as well. Tbilisi residential clientele is predominantly a domestic group. The same is not true for Batumi - the second largest residential market in the country. Batumi residential clientele is dominated by foreign nationals from Post-Soviet countries, the Americas and Asia. Various developers based in Batumi project anywhere between 30%-80% year-on-year drop in sales due to a lack of international demand. Nonetheless, residential prices in Batumi remain at pre-COVID levels.
In the short run we expect these prices to remain frozen. Reopening of the state borders will likely break the stall across all real estate sectors.
Post-COVID recovery is proving to be quite a slow process for most of the real estate sectors. Urban hotels are waiting for 1 August and the reopening of borders to receive international visitors; in the meantime, the majority of them have stayed closed. The retail sector is similarly reporting a slowdown in sales. Pent up demand has now subsided, and sales volume has dropped below the pre-COVID levels. Residential real estate transactions have started to recover slowly but have yet to reach the 2019 levels. In the meantime, in the office sector, increasing vacancy rates are boosting the tenants’ bargaining power.
The Government’s recovery plans include stimulus packages that are supposed to target loss of income due to unemployment. In the long run, ensuring stability of the population’s purchasing power is the most salient solution to the problem facing both residential and retail markets. Reopening of the borders is the remedy to the urban hospitality sector, however, the typical volume of peak season inflow is hardly expected. Finally, that which troubles the office sector, is benefiting the co-working spaces, as the latter are reporting increasing corporate demand. In the long term, the Tbilisi office market will be reshaped most significantly due to COVID-19.
Service sectors are gradually restarting operation in the wake of the Government’s COVID recovery efforts. A major beneficiary of the pent-up demand is the hospitality subsector consisting of rural and seaside resorts of Georgia.
Seasonal as well as pent-up demand has resulted in rural resorts in Kakheti (the wine district) the mountains and the coastal towns booking up incredibly fast. For their part, resorts are advertising discounted rates (20-35%) to entice guests. As the majority of the population is still working from home, hospitality demand that used to be concentrated on the weekends is now distributed to the whole week. A number of resorts have already reported full bookings for the entirety of July and August.
However, while rural/coastal hotels are thriving, urban hotels continue to struggle. Some hotels in Tbilisi have now permanently shut down; others have implemented marketing campaigns that invite domestic guests to substitute working from a hotel to working from home. But the panacea for urban hotels is international tourism. EU has opened borders to Georgia, but the Georgian Government has pushed the deadline for border opening from 1 July to August. This may instigate more rural hotels to shut down temporarily or even permanently.
The first wave of COVID-19 has now ended in Georgia and while few new cases still get discovered daily, the country is nonetheless going through a period of respite. Regulations that were imposed in Spring have now been lifted and society is adjusting to the life post-COVID-19. Face masks, social distancing and fever screening are being normalised at all places of social gatherings- restaurants, offices, retail stores, etc.
Because the Georgian economy relies heavily on service sectors, and since many of these sectors have not yet gone back to the pre-pandemic levels of operation, economic recovery still seems to be a long-term endeavor. Oxford Economics has forecast a negative 1.29% real growth in GDP in 2020. IMF has a bleaker projection of -4.0% - a position shared by the National Bank of Georgia (NBG). Recovery forecasts range between 3-6% in 2021.
One of the primary concerns of the Georgian developers, devaluation of GEL, has been curbed somewhat by the efforts of the NBG. Residential real estate is starting to look up, but expectations are low for the entirety of 2020. In spite of the uptick in transactions between May and April year-on-year comparison suggests greater than 60% drop in demand.
COVID-19 has severely affected the Georgian economy and its ramifications will likely worsen the longer the country stays in lockdown and under a State of Emergency. The country’s economy is heavily reliant on service sectors which have been hardest hit. Tourism, hospitality and retail are paralysed, while the office sector is plunged into a state of turmoil as tenants attempt to renegotiate lease terms.
Capital markets has experienced an expected slowdown. The number of transactions for both commercial and private properties took a dive in March and April is shaping up to be similar. The pricing impact has been immediate, with Developers projecting a 40-50% drop in annual revenue.
Some recovery measures have been implemented by the Government of Georgia as well as the private sector. The largest commercial banks have instituted a grace period on hospitality related loans and the Government is subsidising income and postponing VAT payments. Grants have been issued to help those made unemployed. Additionally, a plan for the reopening of public and semi-public spaces has been announced and will take effect on 27 April. If the epidemiological situation remains stable, the initial steps may be made on the path to socio-economic recovery.