Beware of low prices: The appeal and perils of the real estate market.

The Georgian real estate market is actively developing and growing. Over the past two years, the volume of transactions on the market has almost tripled. Favorable investment conditions, growing market potential, high demand for real estate from tourists make it increasingly attractive. The market offers both good opportunities for investors to earn capitalization and rental income and risks and dangers. And the biggest risk lies in its cheap segment, negatively affecting the market's reputation and disappointing buyers who were attracted by the low price rather than the quality and benefits. Let's look at this situation on the example of Batumi market.

Why can apartments, apartments and rooms in hotel residences be a problem if they cost less than $2,000 to $2,500 per square meter?

The Batumi market offers options of different price categories, from apartments at a record low price of $800 (or even $600) far from the sea to luxury options for $4.5 thousand for 1 square meter. m. What are the reasons for such a difference in prices and why low-price real estate can be both a joyful purchase and a real headache for the buyer.

What is included in the price of a condo at 2023 prices:

• Construction Costs.The cost per square meter in a new building is at least $800 per square meter at 2023 prices. This amount includes the cost of land, paperwork, construction and installation work, and design work.

Expenses:

• Cost $ per 1 square meter of area
• Cost of land 120
• Formalization of documents 30
• Project cost 40
• Construction and installation works 35
• Monolithic work 135
• Construction with blocks 65
• Facade work 90
• Installation of windows 70
• Electro Lines 45
• Water supply and sewage 35
• Completion of public areas 70
• Equipment rental 25
• Greening 40
• Total: 800 (including VAT)

The developer has to account for the value-added tax, which is 18%. There are also marketing expenses and agency commissions. These costs for attracting buyers add an additional 20% to the budget. The financial interest of the developer averages another 20%. Among regular Georgian developers, it is not customary to work below the estimated markup.

It's important not to confuse properties with rough finishing and those with fine finishing, and not to compare the prices of one with the prices of the other - after all, these are two different products.

As a result, we get $1,264 per square meter for regular housing without interior finishing in rough condition - that is, without repairs and finishing, without furniture and appliances.

Under what conditions can the price be lower?

There are different reasons for the low price:

• Discount on the earthworks stage.The developer needs money. This is not necessarily a bad reason. Perhaps the money is needed for development, and that's why the developer lowers the price below cost, but they still have funds for construction. This situation is easy to identify: the price decreases in the early stages of sales (up to 20% of the sold area), and then, as the project gets closer to completion and the number of apartments left for sale decreases, the price will rise. This way, the developer will achieve an optimal average price for themselves after the project is completed.
• But there is another scenario:The developer has no money.And that's why he tries to attract them with low prices. The developer will start construction with discounted sales, and then won't be able to finish it, leaving you with an unfinished apartment.
• Poor construction quality.If the developer cuts costs on construction, they may lower prices, but you probably wouldn't want a discount at such a price. For example, the house may lack heating and waterproofing, low-quality finishing materials or construction blocks may be used. The house will deteriorate, there will be mold and dampness, and repairs will need to be done every year. Even in this case, a price below $1,000 per square meter should raise concerns.
• The developer sets an unprofitably low price to sell the property, and then lacks the funds to complete the construction due to incorrect cost calculations. The developer can cover the expenses by selling the next building. This is how a pyramid scheme is formed. If you buy the property before the pyramid collapses, you will be lucky; if not, you won't be.

What about "turnkey"?

"Turnkey finishing" and a complete set of equipment means a new price increase.

The average cost of repairs for a developer, as a wholesaler, is $350 per square meter. If you do the repairs yourself, you will have to pay more.

The furnishing of the apartment will cost an average of 150 dollars per square meter. As a result, it comes to 1864 dollars per square meter. Add to this the developer's interest in these works, which is 100 dollars per square meter, and you will get 1864 dollars per square meter.

Expenses for the interior finishing of the apartment:

• Expenses
• Cost $ per 1 square meter of area
• Plumbing and sewage installation 60
• Wiring 75
• Heating 55
• Strap 20
• Plastering walls 35
• Painting work 50
• Floors 45
• Consumables 10
• Total: 350

Furnishing the apartment with furniture and appliances:

• Expenses
• Cost $ per 1 sq. m
• Furniture 40
• Household appliances 55
• Plumbing 30
• Curtains 15
• Consumables 10
• Total: 150

The price may be lower if low-quality materials and cheap equipment are used, along with unskilled labor. However, living in such an apartment will turn into a complete disappointment and a constant search for solutions to problems.

If you are buying an apartment

Buying an apartment implies the presence of minimal infrastructure within the complex. It is sufficient for the developer to provide only a paved parking area. At a minimum, it is necessary to equip the following:

• Reception
• Pool;
• Restaurant.

The cost of this infrastructure is also distributed per square meter of living space. The minimum cost of infrastructure is $100 per square meter.

Expenses for apartment equipment:

• Expenses
• Cost $ per 1 sq. m
• Reception 20
• Pool 30
• Restaurant 50
• Total: 100.

At the same time, the rent for a regular apartment in Batumi does not exceed 40 dollars a day. They are rented out for a maximum of 90 days a year. That's 3600 dollars a year, from which you need to deduct booking service fees (up to 29%), property management company or broker fees (up to 40%), utility bills, cleaning, and maintenance. It cannot be guaranteed that such a "business" will be profitable. It will be very challenging to recoup or make a profit from an apartment at that price, because currently, the market for apartments in Batumi is oversaturated with cheap offers that exceed the demand for them.

Hotel residences of international hotel chains

A new product of hotels/residences from leading global hotel chains has appeared in the Batumi real estate market: the rental prices for rooms in such hotels are already significantly higher, several times more than those of non-chain hotel rooms, and on average four times higher than regular apartments.

The advantages of a room in an international hotel chain include high investment attractiveness and profitability due to high occupancy rates year-round, marketing support and promotion, high recognition, and capitalization. For example, in Georgia, the rental of a standard hotel room costs about 50 dollars a day, while a branded room ranges from 200 to 1000 dollars and above.

International hotel chains are managed by accredited international management companies that take care of room rentals, high-quality guest services, and overall hotel management. This ensures high occupancy rates and compliance with high network standards. International chains are the most cost-effective in renting out and professionally managing their properties because they have decades of experience or established partnerships with the best property management companies.

What determines the price of a room in an international network residence?

The developer of the international hotel chain residence incurs additional expenses:

• International brandIt has its own high quality standards that the developer must strictly adhere to, and this requires additional costs. After all, a door handle model can cost $20 or it can cost $70. International brand standards will require more expensive repair and equipment solutions. This adds at least an additional $200 to the cost of finishing and equipment.
• Mandatory engineering networks in a hotel. This concerns not only standard communications but also quality ventilation, heating, split systems, low-voltage networks, fire safety systems, and much more. They are implemented according to high international standards, as the safety and comfort of the hotel depend on them. Installing an air conditioning system in one hotel increases the cost by $100 to $200.
• Technical support and supervision. A very expensive part is technical supervision and the development of the concept, design, and layout of the hotel. This is carried out by an international management company accredited by an international hotel chain. Without it, it is impossible to create a hotel that will operate efficiently and generate income. The experts from the management company and the brand are aware of nuances that an ordinary person outside the industry may not even know about. This adds another $50 per square meter.
• A hotel under a global brand requiresmore developed infrastructureUnlike a residential complex or apartment building, at a minimum, a spa center, fitness area, lobby bar, restaurant, technical rooms, and special requirements for kitchens and service areas are needed. All of this must meet international standards. This will lead to an increase in infrastructure costs by an additional 150 dollars.

Expenses for room equipment in an international network residence:

• Expenses
• Cost $ per 1 sq. m
• Spa Center 50
• Fitness 40
• Lobby bar 20
• Additional requirements for the kitchen and service areas 25
• Technical buildings 15
• Total: 150.

As a result, one square meter in an international hotel residence costs no less than $2,464 per square meter.

If this is a room in an all-inclusive hotel

Some hotel complexes promise buyers an "all-inclusive" format. It sounds enticing and offers many advantages to those purchasing a room in such a hotel - the opportunity to relax and live in a place with hotel infrastructure or to hand it over for management to generate income.

But when it comes to "all-inclusive," the infrastructure will be larger - with pools, restaurants, and other services, which means that the increase in cost will be twice as much, amounting to not 150, but 300 dollars. Thus, the price will be at least 2614 dollars per square meter.

What if I found a cheaper offer?

If you find an offer cheaper than the specified price of 2800-3000 dollars per square meter, there could also be several reasons for that:

• You are in the early stages of construction with a limited number of apartments sold. This means you are in luck; prices will soon rise as sales of more apartments increase.
• The developer miscalculated the cost, and there is a high risk that the housing will not be completed.
• The developer is experienced and has completed projects, but the price is still low. It could be a pyramid scheme. You might get lucky, and the pyramid collapses not on your project, but on the next one.
• You're buying a problem - if the developer cuts corners on quality, then that's an issue.

The Batumi market offers good real estate options in both the apartment segment and the hotel segment - from international hotel chains that provide buyers with both hotel rooms for investment and hotel residences for living and leisure. Since this is a growing market, you can find properties that are more advantageous for investment than developed markets that have already peaked and are now experiencing a downturn. However, it is important to understand that when you buy cheaply, you are often not buying real estate, but rather problems associated with it. The only free cheese is in the mousetrap.