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№3 (236) 11 - 24 February 2009

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Main theme: the land is my wealth     Frozen hectars
Parcels of land that for a long time have served an instrument of investment , are being plaughed again and returned to farmers. Price is not overblown anymore. Land restores its real value. While banks and investors are suffering losses , the state is trying to tidy things up in the legal sphere and sort out the mess on the free land market

Alexey Ikonnikov
Almaty

Steep decline

The market of free land is badly struck by recession. The value of the land is falling while it remains one of the main collaterals of banks against which they secure their reserves Today, banks are losing liquidity due to the steep decline in land prices. Housing market is critical for the bank industry. Fortunately the state can provide low rate loans, acquire block of flats and then sell them on the free market at fixed price. Houses can serve the collateral against the reserves of the banks. The state is able to ensure minimal liquidity injections into banks thanks to the houses as collateral. Thousands hectares of land located on the periphery within provinces is worth of practically nothing today. The state doesn't plan to ensure liquidity of banks assets collaterized by land either via low rate loans or via injection from the Fund of stressed assets. It is next to impossible to sell the land at fixed price in Kazakhstan since the land is available everywhere in Kazakhstan.

In late January 2008 the government reported that not working loans (no payment was made within 3 months) accounted for 7 % of the Kazakh banks portfolio. International Rating Agencies issued far more warning figures. From their point of view problem loans amounted to 15% of the total. Collaterals secured by land are disruptive elements in the banking sphere. Financial industry is closer to the brink of abyss than ever. 40% of loans granted by bankers are collaterized by real estate property. Some sources say even that bad loans account for nearly one third of the total. Speculative deals in the land market added to the mess. Analysts agree on one point: industry is deep in trouble not because of the loans collaterized by apartments but assets secured by land parcels. Market of land collapsed right after contraction in the housing market. Demand for land declined later than that for other forms of the real estate right on the peak of cycle, when housing priced hit record highs. The government survey conducted for a definite purpose namely developing of antic- crisis plan showed that by the mid 2008 banks accumulated many loans that sat as goods assets in the banks books. Non performing loans were collaterized by the land parcels. Debts of those entities that applied for loans reached 75% of the initial price of land parcels that served as collaterals. Houses have never been built in the aforementioned zones. According to official marketing survey conducted by Korgau - A, the collector company an expert in anti-crisis management (it handles collaterals), market price of land that secure banks debts fell and arrears banks amassed exceed the value of the land by 200-300%. Banks desperately try to convince us that the land prices declined only slightly. Meanwhile, figures are telling and the prospects of banks look far more bleaker than ever. Banks remain woefully under- capitalized.

Back to the plough.

Banks are living through hard times. It is interesting to note that in 2006 , when there were at least slim chances for land prices growth, banks preferred to keep the land just as tangible assets on hope to find buyers and get rid of their bad property. Recently, it has turned out that prices tended to decline instead of growing.. In the last few months banks changed their style of land management. They prefer to launch business on the land they own.

In 2007 the number of land parcels acquired by banks jumped nearly twice. Thousands hundreds of arable hectares were bought by different financial institutions as well as a right to rent them in the future for a long term to new owners , says Nurali Seisenbaev, manager of Bereke agricultural entity based in Talid- Korgan. People living in rural areas located in the suburbs of Almaty could earn a fortune, by signing a contract with the bank and selling their land. Simple farmers from rural provinces purchased expensive jeeps, acquired new apartments in Almaty and threw parties in fashionable restaurants. They got a chance not to think about work any more Meanwhile shareholders of agricultural companies were worried. They repeatedly brought to the agenda one issue: pleading the state to take measures and stop uncontrolled selling of land, which was turned into an instrument of investment instead of being used for sowing or raising cattle. Farmers were on the verge of being pushed out of their reign area.

Today this problem is not so urgent, noticed the employee from Min Zhilki, dairy producer and meat supplier. On the contrary, lands that were acquired before the crisis are being returned to farmers. Some investors, who poured money into speculative deals, had to sell their acquisitions or try to change their field of specialization. The had no choice except for buying agricultural machinery and equipment hiring people and getting down to farming. People who own 4-5 hectares are looking for partners in auls(Kazakh villages) in order to gain at least minimal profits from their land parcels.

Tamara Strokova , the village teacher told us a story. In 2007 her family sold 9 hundred square meters of land for $10 000. "It's just a beautiful field in the foothill area. Those people shared their plans for the future with us. They were going to build a sauna and small hotel there and then sell the land with all the facilities erected on it. Those days such a project could bring the sellers $100 000. When recession hit the market they put a shepherd dwelling there and started to breed sheep".

In Taldikorgan province land prices were gradually rising till autumn 2008. Land also was a target of speculators who gained tremendous profits by acquiring and then reselling land parcels to new owners. Today this land also serves for agricultural purposes only, mentioned our interviewee Slabek Karsakbaev. Much depends on the location of this or that land parcel. Slambek said that in 2006 he bought a small land parcel close to the main automobile road. Six moths later he got rid of his land. For this period the market value of the land he owned has increased threefold. He bought a bare land on the peak of cycle in the very prestigious area close to the center of the province. When prices plummeted Karsakbaiev didn't turned upset at all."We opened a shop there. Hotel and bus station that were situated nearby helped us to return the investments. I think my shop will pay off and business will prosper ", reckons Mr Karsakbaiev.

Many farmers have quite an optimist vision for the future, Saidahmet Karibai, the head of the local farmers association opines that the bankrupt landowners might give a new impetus to development of agriculture. They will be forced to put their money in agriculture." Many landowners will have to pour investments into agriculture in order to raise profits from their land. Otherwise, landowners would have never chosen to inject their capital into agriculture", considers Mr. Karibay.

On the peak of economic cycle a group of companies and people, who acquired vast fields of land, emerged. The logic is as simple as that: they have to get return on their investments in case they are unable to find buyers for their property. A large investments operation is at hand. Skeptics think otherwise: not all lands are arable. No other projects might be launched on the lands as landowners run out of money and cheap loans dried up.

There is other group of market players that should be taken into consideration, while making any forecasts. In the early 90s, when the law system was a total mess, people seized the land, without paying a single tenge for it and erected different buildings on the area they settled on. Such people and the land they acquired became main targets of legalization programs launched by the state between 2006-2007. The state was generous and people managed to retain what they acquired illegally.. As a result, even administrative units were formed from the seized lands in such big cities like Almaty or Karaganda. Legalization process is over and contours of the new districts were defined, fixed and recognized officially. No one can say for sure what the consequences of the land seizure were? Uncontrolled migration might have grave aftermath. No one can measure the risks migration and illegal acquiring of the land involved or estimate what damage might land seizor cause to Kazakh economy.

Did the proprietors of the illegally seized land make a mistake?

On January 14th, 2009 the parliament issued a draft law on procedure of introduction of amendments to the land code. The government attempted to respond to the threat identified by the department for anti corruption policies within the Kazakh leading parliament party- Nur Otan Thus, the draft law was elaborated as a natural reaction of the parliament to the initiative of Nur Otan. Simultaneously, the majilis (Kazakh Parliament) deputies considered amendments to the Land Code, approved by the government. They adopted more than 120 amendments regarding measures that were due to prevent corruption and administrative offenses in the sphere of land owing and relations of land owners with other legal entities. Omirzak Uzbekov, the Chairman of Agency of land resources of RoK also proposed several modifications that might help the state to combat corruption and decipher intricate corruption schemes. The law makers pursue only one goal. They work hard to prevent land related crimes and minor offenses. "What can fall into this category? Officials don't follow right procedure when they consider applications for land owing and land heritage. They don't issue permissions and licenses on time, in accordance with terms envisaged by the law. They take biased decisions and decide in favor of not eligible persons. They also fail to comply with the state requirements regarding general plan of development of administrative units. " pointed out Ertkin Ramazanov, the MP.

It is worth to note, that on January 13, the day earlier, the Parliament approved similar amendments to the laws, dealing with construction and general planning of cities and towns, allotments, land distribution. All acts of land abuse, like illegal seizure of land and construction on thus acquired land parcels will be considered administrative offenses. People and entities that fail to abide by the law are to pay heavy penalties. Penalties for enumerated offenses have been increased as well. New types of offenses were identified. One of the amendments introduced into the Land Code reads "representatives of the central authorized governmental agencies should be included into the land distribution comprised earlier of the representatives of the local land committees". The state raised the requirements for the land owners. It is forbidden to provide new owners with the land unless they deliver officially stamped detailed general planning and construction projects.

The government has learned a good lesson. Now the problem of the legalization of the land parcels is listed amongst top priorities of the state. The authorities have to define legal framework for the land management and finally sort out the mess. One of the officials Omirzak Uzbekov, put it rather bluntly. The agency he works for identified 2 400 of offenses committed by the local governmental agencies dealing with the land. 501 cases of offenses are due to be investigated by the law enforcement agencies. At the gathering presided by the representatives of the Agency for land management ,officials considered results of the 4 000 inspections and audits conducted by the authorized entities. Figures are shocking. The land that was a subject of offenses occupies an area of 93. 28 000 hectares. The infringement of right of the state, proprietor of the land account for 59% of all offenses, 17% fall into a category of the improper use of arable land. Most of the land was acquired illegally with the help of the corrupted officials. Unfortunately it is hard to find good evidence to make a case. Shadow schemes are easy to identify. Under the law of the republic, expatriates can't own a land to launch agricultural business on it. Sometimes such precedents took place.

Most shadow deals with land were concluded on the peak of economic cycle, when housing prices tripled. People just seized a land in the suburbs of big cities Almaty Shimkent Astana built houses there and then applied to the officials agencies, using their right to amnesty and legalization of their property. The state declared amnesty for the seizors. Formally the illegal proprietors of the land had to pay a tariff that accounted for 10% of the estimated average market price of their property. Corruption thrived as a result. To expedite the process of legalization the owners had to find an intermediary and share an expected investment income with the corrupt official that agreed to help. In the period of land legalization the corrupt officials and seizors of the lands turned million profits. The shadow schemes and technologies allowed the participants to seize and legalize several land parcels during a season. During legalization the land management agencies couldn't ,sometimes, cope with the amount of work that was burdened on them. One of our interviewees who worked in the center for public services on the Illy district on the outskirts of Almaty noticed that people who came to register their recently acquired property, those days had to stand in the long queues. They had to wait for months to get their documents back from the government entities. Our sources say that at the height of economic boom the bribe to speed up registration process reached sometimes 100 000 tenge. The same practice was common in all other districts located on the city periphery. In numerous small Kazakh towns such as Ayaguz, Tekeli, Ushtobe where the seizors couldn't get sufficient profits the land management agencies didn't work under stress at all.

To be fair, on the peak of the cycle seizors of the illegally acquired land tended to invest hefty sums in their business. That was purely shadow sector of people's economy. When land stopped to attract investors, they quit the market. The wave of land seizure receded. The state in fact didn't manage to respond to realities of the market on time as usual. It was to too late when they brought the issue on the rigid regulations for unauthorized land seizure. In the economic context, some things look ridiculous. Illegal investors, seizors managed to send up the real estate prices in big cities and their suburbs to rockets heights. Investors, who came from the distant provinces of Kazakhstan managed to fuel the demand for the land and the real estate. Even the good for nothing land was highly appreciated. Seizors built houses on the most unattractive places, where the residents of the cities would never decide to settle down. Proprietors of illegally seized land could count only on the desert territories with uneven soil, which is difficult to develop let alone construct anything there. One can seize the land which doesn't interest the majority which looks unattractive. The banks misinterpreted the reaction of the market they received a false signal that land was in demand. Investors such as banks developer companies, continued to pour cash into land. Housing and land sectors of the market entered vicious circle as a result.

Eventually, the pyramide collapsed, land and housing bubble burst the seizors of the illegally acquired land practically didn't suffered any losses. They didn't put their own money into the projects they executed. Those of the proprietors of the illiegally seized lands that managed to sell their property made tremendous profits. Those who didn't, acquired the real estate in big cities and their suburbs. So, after playing a trick with others owners of the illegally seized land weren't struck by the recession so badly. New generation of economists and financiers derived good lessons from the mistakes made by their predecessors. Soon while, trying to asses the future prospects of this or that opening and promising markets they will probably take into account the increased role of the shadow sector of the economy that can lead to a disaster, and cause troubles for other market players. Meanwhile the wild undeveloped investors are more flexible and shrewd than professional players. They can adapt to harsher environment faster and in a due way.

Forecasts and reality

Experts produce very controversial and vague forecasts for the future of the land market , in particular for those times when crisis will be over and investors resume their activity. The director of one of the leading Kazakh banks acknowledged that top management of his company decided to frozen land assets for three five or even ten years. According to analysis of banks experts', this time is critical for the prices to go up and return to the acceptable level. What price should be regarded as an adequate in the context of the market environment? That is a question. Today all attempt to predict the future fail. They are pure guesswork. Speculative factor is unlikely to have an impact either positive or negative on the land market. More realistic approach will be applied to define the real value of the land parcels that cover thousands hundreds of hectares on the outskirts of large cities." Much will depend on location of the land, engineering projects that are due to be fulfilled there ", noted Asel Karibjanova, the independent realtor, former employee of the realtor agency Almatijer(Almatyland)."Lands that cover considerable square on the periphery will be returned to farmers. The profitability of the agricultural business will influence the price of land parcels in the future. Migration to the suburbs of Almaty will also matter. These factor will define the supply demand ratio", adds she. This will fit nicely with the theory of free market.



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