Oct 10, 2010

Georgia: Trump Takes on Tbilisi Real Estate Market

The announcement that American real estate mogul Donald Trump intends to build in Tbilisi has many Georgians hoping that the country’s foreign-investment woes are over.

On September 22, Trump signed a letter of intent with the Silk Road Group, a multinational development company founded by Georgians, covering the construction of a residential building in Tbilisi.

In a phone interview with EurasiaNet.org, Trump’s special counsel, Michael Cohen, would not disclose the amount of the investment, the nature of the financing or the size of the planned building. He did, however, “personally congratulate” President Mikheil Saakashvili and The Silk Road Group for choosing Trump as a business partner. “[I]f Michael Jackson is the king of pop, [Trump] is the king of real estate,” said Cohen, an executive vice-president at the Trump Organization.

At first glance, compared with New York or Las Vegas, Tbilisi, a city of 1.1 million, might appear an unexpected choice for the “king of real estate.” The city’s recent real estate boom has cooled, and Georgia’s per capita income of just $4,400 per year, the lowest in the South Caucasus, falls far below the typical Trump customer income. [For details, see the EurasiaNet.org archive.]

Cohen, however, maintained that the "[t]here are people in Georgia who realize, just as in any democratic … country, that status is important.” Personal interviews and surveys led to that conclusion, he added. Trump’s venture would be his first-time entry into the former Soviet Union, a region often known for cut-throat competition, fuzzy tax codes and wobbly legal protection for property owners.

Saakashvili worked feverishly to help close the deal, twice visiting Trump at his New York headquarters during the run-up to the announcement. [For details, see the EurasiaNet.org archive.] The president’s efforts were understandable when placed within the context of Georgia’s recent experience. Over the past two years, the country experienced a massive drop-off in foreign direct investment (FDI): in 2009, FDI fell by nearly 58 percent, while total investment so far this year -- $272 million -- is 6 percent lower than last year. The decline is widely attributed to the world financial crisis that erupted in late 2008, as well as the country’s ill-fated August 2008 war with Russia. [For details, see the EurasiaNet.org archive.]

Georgia has generally garnered praise for attempting to set itself apart from other post-Soviet states, in that Tbilisi has taken steps to foster a favorable business climate for Western investors. The World Bank’s Doing Business 2010 report, for example, ranked Georgia 11th in the world for its business environment, the highest rating among all former Soviet republics.

As it basks in the glow cast by the Trump deal, the Georgian government is pressing ahead with an initiative designed to stimulate investment in Georgia’s tourism industry. Specifically, the government is offering hotel developers 27 plots on 11.3 hectares of undeveloped, state-owned Black Sea-area land for $1 per plot. Under the program, overseen by the Autonomous Republic of Achara, any investor willing to invest at least two million lari (approximately $1.1 million) in a beachfront hotel zone will qualify for an array of business incentives, including free utilities and no sales or income tax for 15 years.

To qualify for the tax holiday, participating hotel projects – each having a requirement that a building cannot be taller than seven stories -- must be completed by August 1, 2011.

Announcing the plan on September 11, Saakashvili promised investors the chance to “increase your money by two or three times.”

“In banks and [hidden] in your pillows, your money will not increase,” Saakashvili, sporting gold-ringed sunglasses, said during a televised event in the Acharan village of Kobuleti, the site of the prospective hotel zone. Market prices for similar property range from $60 to $300 per square meter, according to the online real estate guide Makler.ge.

Tengiz Doidze, a top official at Achara’s Ministry of Economy and Finance, asserted that the government is willing to forego sales revenue in the hope of attracting investors who will increase employment. “The long term perspective will bring in a lot of investment and revenue,” Doidze forecast.

The proposed land is nestled in a pine forest a few meters from the Black Sea and approximately 25 kilometers from Batumi, the center of Saakashvili’s plan for Black Sea coastline development. No trees can be cut down during the construction project – a requirement that does not appear to faze interested investors.

Irkali Matkava, head of the Georgia National Investment Agency, said there has been a lot of “buzz” about the government’s offer since its announcement. Doizde said that his office has already received 10 applications -- nine from Georgian investors and one from an Armenian investor in Yerevan.

Kobuleti, a small town of about 18,566 people that straddles the main highway from Tbilisi to Batumi, has traditionally been more of a locals' getaway, passed over by large investors in favor of Batumi. Family hotels and cafes jostle for valuable space along a mile of beachfront property; cars clog the roads during the two-month tourist season.

One Tbilisi-based independent investment consultant believes that Kobuleti’s location could add to the project’s appeal since it gives investors the chance to “latch on” to the ongoing property boom in Batumi, while sidestepping market entry obstacles of property prices and taxes. “There is so much investment going into Batumi, and [it is] developing … as the Atlantic City of Georgia, the metropolitan place to go,” commented Stephanie Komsa.

Komsa, who researched Georgia’s hotel and tourism markets while working for a private investment fund, cautioned, however, that government support for the Kobuleti zone could not ensure success. Opening 27 new hotels in such a small space, and with only a two-month tourist season to work with, has inherent risks, she cautioned. “I wouldn’t say ‘Well, the government is initiating this, let’s do it.’ You have to do the same type of analysis” as for a regular property development investment, she said.

Source: Eurasianet.org