Uncovering emerging real estate markets in Central Asia: Azerbaijan

May 6, 2021 10 Minute Read

By Charles McCloy MRICS



In the second part of our Uncovering Central Asia series, we look at Azerbaijan. The country is home to the largest economy in the Caucasus region owing to its rich reserves of oil. In this blog we look at the real estate market of its capital, Baku.


With a population of 10.02 million people, Azerbaijan's economy is the largest in the Caucasus region. Since becoming an independent state after the fall of the Soviet Union in 1991, political and economic stability in the country was overshadowed by the Nagorno-Karabakh War with Armenia, as well as inequality and rampant corruption at all levels of government. Indeed, the political situation is a major factor that has influenced the country’s economic development. It was only in the late 1990’s that the country started to stabilise under President Heydar Aliyev and subsequently under his son, the incumbent President, Ilham Aliyev in power since 2003. Under Aliyev, high rates of inflation were bought under control in the early 2000’s which led to the launch of the new currency, the Manat, in 2006 to stabilise the economy. At the same time the country witnessed a dramatic oil boom which transformed its economic development. To put this into context, oil exports amounted to only 10% in 1994 and reached highs of over 90% in 2010. Thanks to high level oil output along with rising prices, Baku witnessed an influx of foreign investment in the 2000’s. Success in the oil industry was very much reflected in the boom of Baku’s real estate market which in the early years of Ilham Aliyev’s rule underwent a number of changes to meet the demands of a 21st century capital city.

Office market

The construction of modern office space only started at the end of the 1990’s following the initial entrance of Western companies to meet their demand. ISR Plaza was one of the first office schemes in Baku along with Landmark I. Caspian Business Centre followed soon afterwards.

The graph below provides an indication of how supply has increased since the 1997:

Azerbaijan - Uncovering emerging real estate markets in Central Asia graph_v2

As the graph suggests, since 2010 a number of Class A schemes have completed, namely Port Baku Tower, Marina Plaza, Bayil Plaza and White City. Such schemes are home to major companies such as Cisco, Deloitte, BP, Shell and SOCAR.

However, these schemes have had varying degrees of success and are intertwined with fluctuations in oil prices. As oil prices started to decrease in 2015-16, this severely affected the country’s economy as negative GDP growth (2016: -3.8%, 2017: -1%) was mirrored by volatility in the office market, leading to excessive supply as vacancy rates across Baku reached as high as 25-30%. 

For example, the most high-profile office project – Flame Towers – consists of three towers which dominate Baku’s skyline and completed at a cost of $350 million in 2012 when oil prices were above $100 a barrel. One building is occupied by the Fairmont Hotel and a number of residential apartments, the rest provides office space. Yet, despite its attractive exterior design, the poor configuration of the floor plates and outer CBD location have led to a poor leasing record, resulting in the scheme being relaunched in 2020.   

This has been the case at a number of schemes, as rental rates decreased by approximately 27% in premises where space was quoted in USD. Indeed, this is exemplified in the Landmark buildings where rents which were previously quoted at over USD 40 / sqm are now in the region of USD 25 / sqm; a common theme across the market.

Reforms and Recovery

Since the presidential election in April 2018, the government of Azerbaijan has undergone significant changes. These include the appointment of a new prime minister and several key ministers as the new government has been tasked with continuing reforms in key sectors to recover economic growth. 

This has led to a recovery in the real estate market, albeit with a correction in pricing. Demand has returned to the market and it has consistently displayed stable performance since 2019. Indeed, current trends indicate show that we should consider today’s Baku office market as being broadly Landlord favourable, despite a slight increase in the vacancy rate in 2020 to 10% due to the pandemic.

There are no new business centres on the market, except for Crescent Bay which offers 72,000 sqm of premium office space. There are no significant new Class A or B schemes expected to come to market in the near future, other than the planned completion of Port Baku Tower Phase II in 2021.

Owing to the state of the market, landlords have become more selective when choosing tenants to ensure the right occupier mix in their schemes. However, to ensure this is maintained amidst the pandemic, some Landlords have offered individual discounts to Tenants, particularly those from the oil industry, receiving rental discounts of 10-20%.

Still, Tenants are facing a somewhat lower supply of quality office premises, especially those that have a professional management team in place. Of 56 business centres in Baku, only 8 are classified as Class A and 13 as Class B.

Across Class A offices rents range between USD 23-25 / sqm / month. Despite the higher price for Class A space it is expected that from a safety and quality point of view demand will remain strong, particularly from multi-national corporations. In comparison, rents for Class B offices range from USD 12-15 / sqm / month. So far across the market in 2021 rental rates have remained stable with nil growth and this is expected to remain. There has been little activity, although it is possible businesses may seek to compromise on quality in exchange for a lower rent as they seek to re-evaluate their office space.


On paper the future of Baku is exciting. As part of the city’s masterplan, the government plans to transform 22,000 ha of oil producing lands into parks and forestry, whilst a further 34,000 ha will be landscaped with recreational areas. There are further plans to undertake infrastructure improvements through upgrades to the road network, a planned reconstruction of low-rise buildings and former Soviet residential blocks. The master plan estimates that by 2030 some 3.9 million sqm of old housing will be demolished and over 55 million sqm of new housing will be built. Likewise, the population is expected to increase of 745,000 by 2030 to c. 3.3 million inhabitants. 

This is coupled with plans to boost economic growth over the coming years following the announcement of a $5 billion extension to the Trans-Adriatic Pipeline. However, in reality a number of risks remain. The oil price shock together with the pandemic led to negative GDP growth of -3% in 2020 which is problematic in a country hugely dependent on fossil fuels, contributing to 87% of total exports in 2020. Likewise, corruption and the conflict in the Nagorno-Karabakh region have been and remain limiting factors in the development of the country and deter foreign investment.

Should such plans to modernize Baku come to fruition, it is reliant on increased performance of its oil industry, as well as a degree of harmony with its neighbours. Whilst the boom years of the early 2000’s are over, given sensible reform and growth stimulus after the pandemic the city will remain a key trading hub in the region. Already the forecasts suggest a bounce back of GDP growth of 2% and 2.7% in 2021 and 2022 respectively (Fitch Ratings). This very much plays into the future of the office market, which whilst buoyant currently due to competition for prime space, may suffer long term should the economy not diversify. For now, given expected economic progress, the real estate market should remain stable.

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