Does IKG have plans to expand significantly into cities beyond Erbil?
IKG already covers the entire Kurdistan Region, as well as parts of southern Iraq, without a physical presence. Within the next 12 months, we intend to have people on the ground in both Slemani and Duhok, in addition to Erbil. We are certainly also looking at the situation in southern Iraq, but we do not believe that security and the development of the markets in Baghdad, Basra, Najaf and Karbala are at the level to which we can have a physical presence. Nevertheless, we cover these areas from Erbil with the intention to expand into southern Iraq when the situation permits.
Many foreign firms in Kurdistan seem to be attaining permanent office and residential space. How will this affect Kurdistan’s commercial and residential real estate sector in coming years?
This shift has already largely taken place. The way this will change the dynamics is such that the market eventually dictates to developers how and what they should be developing. Some of the office space which is imminently due to go on stream still does not adhere to international standards for global organizations, be it from security issues, efficiency, or the quality of the build itself. The market is currently indicating these issues to developers in Kurdistan, and we can already see quality shifting upwards. We advise many of the developers that are building new office space regarding these issues, and many of the developers are now applying the advice. One example of this is the Erbil Business & Trade Tower. The developer came to us before construction started, and we went through a very rigorous process of advising them on what international clients would expect from the building. This guarantees that elements of the structure and design already address the concerns that clients demand.
What will these changes mean for the gated communities that IOCs are moving from?
We will see a slight segmentation of the market. When the large corporations, which can afford to pay larger sums for office space in the new builds, vacate their offices in English and Italian villages, there will be a correction in the rents in these developments. We will then see a second wave of small to medium sized enterprises come into those properties. So, while there might be a slight correction, we do not see it having a severe impact on occupancy. Like in any other market, then, we will see clear segmentation, where there is graded office space for the large corporations, and others will fill the void that they have left.
What are the major challenges related to creating stricter standards?
The challenge is to create a structure within the bureaucratic institutions to create the leverage, capability and mandate to insure the proper implementation of these standards across the board and without exception. There must be sufficient teeth in the process, enabling them to suspend construction or fine developers that do not adhere to standards. They are building the reputation of the country and the sector. There must be a level playing field between all developers, so that no one feels that they are left out or focused on negatively. This will bring improved standards of living and better quality construction companies. If the basics are established, then there will be huge increases in quality in the sector.
With the maturity of the market and increased competition, and even the balance between supply and demand, short-termism quickly begins to weaken. People will become more long-term in terms of their views and visions, and more concerned about reputational risk, which is informed by the quality and credibility they deliver.
Have you seen any movement from the public or private sector to address these concerns?
It is hard to believe that the private sector will police itself properly to enforce such standards. The KRG must take a strong stand on this. At the end of last year, PM Nechirvan Barzani called on this to be a top priority of his government when it comes to the construction sector. The government has, unfortunately, had higher priority things to worry about in recent months, but I am certain that this will become a very vital part of the nation building exercise that the KRG is doing, and will become a priority for the government in months to come. At IKG we have submitted our views and made presentations to the government. We are happy to participate at no cost to the government as consultants, helping to create these structures and standards, bring in the groups like the Royal Institute of Surveyors from the UK or elsewhere to create a real standard, structure, process and procedure which can be implemented quickly. This, for us, is very important.
Is this something that can be overcome, through policy channels?
With the maturity of the market and increased competition, and even the balance between supply and demand, short-termism quickly begins to weaken. People will become more long-term in terms of their views and visions, and more concerned about reputational risk, which is informed by the quality and credibility they deliver. This is normal and has happened in several other countries. The challenge is to find ways for the government to regulate the process so that it happens in a quick and structured way.
What effect has limited access to finance and insurance had on the real estate market?
This has a huge impact, both positive and negative. The positive effect is that you cannot create a bubble, which would have happened had debt finance existed. But because everything is cash driven, development either gets delayed or stopped in the developer runs out of finance. The positive side, unfortunately, does not outweigh the negative side. Negatively, growth is very limited. For example, the fact that there is no proper mortgage market here means that a large chunk of the population cannot afford to take advantage of new units and new supply of real estate coming onto the market. So, the lack of a mortgage market and the lack of project finance to help investors and developers take on more risk has meant that the market has grown to invest in quick return projects, rather than industrial development and other longer-term ROI projects. Regarding insurance, most people here do not know how insurance works, but this will change. Businesses want to know that their buildings are insured, even if they are coming in as tenants. Once assets are insured, investors can then look towards monetizing the assets and releasing cash to reinvest in other projects or sectors. It is certainly an aspect that has slowed growth, and it is critical that it is implemented in the near future.
How is the real estate market changing as Kurdistan’s economy matures?
In terms of real estate, opportunities exist across the board, but there has been a change in the game itself. No longer can you invest in real estate and guarantee major returns on investments. You must now be much more cautious in the types of real estate you are investing in. You must formulate your investment strategy on sound feasibility studies, cash flow projections, and business plans. Numbers, everywhere in the world, are very important in this regard; they are transparent, and will lead investors to ask the necessary questions before investing. This has not been the case in Kurdistan in the past; returns seemed almost guaranteed. Now that there are far more players in the market, more competition and more saturation, this has changed. You must look at what will satisfy demand in both current and future demand; you must look at what clients want now as well as 20 years from now.