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Tbilisi Real Estate Market Watch - October 2020

30 Oct, 2020

Tbilisi real estate market drastically improved in September 2020 along with strengthening economic recovery. Key takeaways from the report include
  • Apartment sales were up in September (+14.4% y/y) after sales contracting in July (-14.9% y/y) and August (-16.3% y/y). Suburban districts dominated sales in 3Q20 as mortgage subsidy scheme supported transactions in budget/economy segment. As a result, the 4 suburban areas accounted for 56.1% of total residential sales in 3Q20 vs 52.0% in 3Q19.
  • New apartment prices were down in July (-8.6% y/y) and price reduction slowed in August (-7.6% y/y) and September (-5.9% y/y). However, this reduction was most likely driven by dominance of economy apartments in total transaction mix rather than market price correction. This means that the government’s 4% mortgage interest rate subsidy program supported real estate prices in 3Q20. 
  • We expect apartment sales to moderate in 4Q20, from September 2020 highs, as rising COVID cases and GEL depreciation may weigh on house buying decision.
Please see the full note here, which brings together real estate sale and price analytics for 3Q20, Covid-19 impacts and other statistical information available in the real estate market.

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Georgia's Energy Sector - Electricity Market Watch | 1H20

13 Aug, 2020

Electricity consumption was down by 4.5% y/y to 6.1TWh in 1H20, caused by lockdown and related decreased economic activity due to Covid-19 pandemic. The decrease was most significant in 2Q20 (-10.7% y/y), as lockdown started in mid-March. Ministry of economy and sustainable development forecasts 5.8% y/y decrease in annual consumption of 2020, according to the updated (as of Jul-20) annual balance of electricity. Notably, Abkhazian region’s electricity consumption increased in both quarters by 8.0% y/y and 27.8%y/y respectively, while for the rest of Georgia drop in consumption was 0.7% y/y in 1Q20 and deepened to 16.7% in 2Q20. In 1H20, the Abkhazian region’s consumption was up by 15.2% y/y, while consumption by rest of Georgia was down by 8.8% y/y.

The energy market will undergo significant changes from July 2021. The GNERC adopted the day-ahead and intraday market rules, as well as the balancing and ancillary services market rules, and appointed the relevant market operators. The day-ahead market will start operating and an imbalance settlement mechanism will be introduced in Jul-21. The full launch of the intraday market and ancillary services market is scheduled for 2022. Relevant platforms are in the test mode, and trainings of market participants will start from Sep-20. 

Market reforms follow the planned timeline. In 2Q20, following regulatory changes were made: Parliament of Georgia adopted laws on energy efficiency and energy efficiency of buildings; Government of Georgia adopted national renewable energy action plan for 2020 (NREAP) and national energy efficiency action plan for 2030 (NEEAP); Government also adopted new support mechanism for hydropower plants and made some changes into the newly adopted energy law; GNERC adopted rules for: day-ahead and intraday markets, balancing and ancillary services markets, licensing and unbundling of distribution system operator. 

A new incentive mechanism has been introduced for hydropower plants with a capacity of more than 5 MW. During the first 10 years of operation, for each September-April period, ESCO will assist HPPs in market risk insurance. If the market price for any hour falls below USc 5.5/kWh, ESCO will cover the difference between the market price and USc 5.5/kWh. Maximum limit of this assistance/insurance will be USc 1.5/kWh. Before 2017, the Guaranteed Power Purchase Agreement (PPA) mechanism was used to encourage renewable energy investments. The instrument was terminated in 2017 because it was considered to pose high fiscal risk to the state and to be the possible disruption to competitive markets. The new mechanism limits fiscal risk of the state to USc 1.5/kWh, while effectively guaranteeing the investor income of USc 5.5/kWh, as market prices are not expected to fall below USc 4/kWh in the long run.

The sale of more than 5% of the shares of the licensed companies must be agreed with GNERC. According to the Jun-20 amendment to the new Energy law, distribution and transmission system operators must notify GENRC in advance regarding the terms of sale (or change in ownership) of over 5% of company’s shares. The Georgian National Energy and Water Supply Regulatory Commission is authorized to cancel the transaction or request change of terms, if it considers that the terms of the transaction impair the quality of service or affect the tariff of the system operator.

The Partnership Fund handed over ESCO and GSE to the state, while its shareholding in JSC Telasi (24.5% of shares) was put up for auction. The State owned Partnership Fund has transferred two subsidiary energy enterprises, the Electricity System Commercial Operator (ESCO) and distribution and transmission licensee Georgian State Electrosystem (GSE), to state ownership. The transfer did not lead to a change in the management of the companies, as the companies have already been monitored by the Ministry of Economy and Sustainable Development. Moreover, as part of the reform, the Partnership Fund also plans to sell a 24.5% share in JSC Telasi, for which a public auction has been announced. The starting price at the auction is US$ 10.5mn and the final sale price will be announced in Sep-20. The remaining 75% of Telasi shares are owned by Inter-RAO.

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Tbilisi Real Estate Market Watch – July 2020

30 July, 2020

In 2Q20, real estate fundamentals were negatively affected by Covid-19 with double digit contraction in GDP in April-May, weakening GEL and inflationary pressures. Apartment sales contracted sharply in April and May, however with lockdown measures being lifted reduction slowed in June, highlighting first signs of recovery. Importantly, drop in sales was more pronounced in new apartment category as market was waiting for government’s mortgage interest rate subsidy program, which became effective from July 2020.

Please see the full note here, which brings together real estate sale and price analytics for 2Q20, Covid-19 impacts and other statistical information available in the real estate market.

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Georgia's education sector

28 July, 2020

Georgia's education sector revenues totaled GEL 2.0bn or 4.1% of GDP in 2019, with private sector generating GEL 0.5bn. The private education sector enjoys growing revenues and strong financial performance, recording a 20.4% net profit margin in 2018 – 3x higher than that of total business sector in Georgia. Even though, government expenditure on education has tripled over 2010-19 standing at 3.6% of GDP in 2019, the indicator is still low compared to Western European countries, where education expenditure accounts for over 5% of GDP. The government plans to increase spending on education to 6% of GDP from 2022 to enhance human capital and support economic development. We expect the education sector to grow at a high single-digit annual rate in the medium term, backed by increased state financing and strong demand for educational services.

General education is the largest sub-sector, accounting for 78% of total enrollment (excl. pre-school) and 46% of total industry revenue. General education in Georgia is still concentrated in public schools, but the private sector enjoys rising enrollments and tuition fees due to a higher perceived quality compared to public schools. We believe this trend will continue, backed by increased disposable incomes, urbanization and positive demographic trends in the medium term. M&A activity is heating up, enhancing operational performance. Quality of education is still a challenge; however, a planned increase in teacher salaries and other reforms in the sector will hopefully improve educational outcomes.

VET programs are not prestigious among Georgian youth, with only 15.6k registered students or 6% of the eligible age group as of 2019. Vocational education enrollments are concentrated in public institutions. Despite improvements, state expenditure on vocational education remains low, accounting for only 3.2% of total state spending on education in 2019. The low geographic coverage of institutions is another factor limiting accessibility. With planned reforms and an increase in public spending, enrollments in vocational education are expected to grow.

The higher education sector has seen a strong and improving financial performance. Our outlook on the sector is optimistic, sustained by (i) increasing household incomes (ii) rising intakes from older age groups and foreign students; and (iii) low penetration compared to peers. We believe large players in the private market will keep gaining share versus smaller players and continue growing above the market due to their superior operational practices and economies of scale. We expect consolidation in the sector as it is still highly fragmented. On the one hand, the sector can benefit from a rising number of international students and older age groups; on the other, the stable level of high school graduates and limited affordability may drag growth down. Tuition fees are a heavier burden on students in Georgia compared to peer countries, as they are mainly financed by households, while public financing remains low and students have low or no self-earned incomes.

Higher education in Georgia has low economic return. It barely improves employability and adds a low salary premium to degree holders compared to peer countries. The reasons for the poor payback are complex: 1) the higher education system continues to provide an excessive number of graduates to an economy with a high job concentration in low-skill, low-wage sectors; 2) school and higher education graduates make uninformed career decisions; and 3) general and higher educational institutions in Georgia provide inadequate technical, cognitive and social skills. As a result, the unemployment rate is high for Georgian youth, there is a significant mismatch between professions and occupations and self-employment is widespread.

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