Armenia Property Markets Scorecard - International Property

32 Pages·2012·1.68 MB·English

Capital Legal
Markets Protection
Professional Registries
Services
Fair Tax Formal
Regime Ownership
Appropriate Property
Regulation Rights
Data
Banks
Standards
Armenia
Independent Financial Access to Other
Property
Asset Valuers Transparency Credit Sources
Markets
Market Credit
Stability Bureau
Rational
Dispute Effective
Resolution Governance
Democratic
Commercial
Representation
Dispute
Resolution
Armenia Property Conditions for
Contract Lack of
Markets Scorecard Enforcement Small BusinesCsorreupstion
Rule of Efficient
Law Administration
© Center for International Private Enterprise and Association for Foreign Investment and Cooperation.
All rights reserved. 2011
Project Director Anna Nadgrodkiewicz, Program Officer, Center for International Private Enterprise (CIPE)
Consultant William Endsley, Principal, World Citizen Consulting, LLC
Project Implementer Association for Foreign Investment and Cooperation (AFIC)
in Armenia
Author Gagik Poghossian, Deputy Chairman of the Board, CEO, AFIC
Armenia Property Conditions for
Markets Scorecard Small Businesses
Acknowledgments
CIPE and AFIC would like to thank the Public Council to President, Real Estate Exchange, “Cascade Investments” CJSC, Union of Banks of Armenia, “Paradigma
Armenia,” IFC– Armenia, “Farm Credit Armenia” (UCO), Transparency International – Armenia, Equal Opportunities Endowment Fund, Armenian British Business
Chamber, as well as individual entrepreneurs, bankers, lawyers, property market professionals, and non-governmental organizations who participated in focus
group discussions and interviews in Yerevan and Dilijan, as well as in the expert roundtable in Yerevan, for the generosity in sharing their views. CIPE and AFIC
would also like to thank the members of the Business Advocacy Network (BAN) for their participation: Foundation for Small and Medium Businesses, Yerevan
Chamber of Commerce and Industry, “Dilnet Service” BSO, “Labor and Motherland” BSO, Association of Armenian Freight Forwarders, Community Finance Officers
Association, Foundation for Civil and Social Development, “Armenian Entrepreneurship” SME Association, Armenian Young Lawyers Association, Greenhouse
Association, Association of Taxi Service Companies, “Araza” NGO, Credibility Rating Caucasus Bureau, Stepanavan Farmers’ Association, EBRD Business Support
Office Armenia, Equal Opportunity Endowment Foundation, Center for Social-Economic and Legal Reforms, “Lusastgh” NGO, XXI Century Leaders’ Forum, “Artig”
NGO, “Barekamutyun” SME Association, Modus Consulting, Gegharkunik Chamber of Commerce, Association of Armenian Winemakers, Lori Chamber of Commerce
and Industry, “Ruz-Dan,” “Protection of Consumer Rights” NGO, “Protection of Taxpayers’ Rights” NGO, and “Benefit Consulting.” This study would not have been
possible without their cooperation.
The Center for International Private Enterprise (CIPE) The Association for Foreign Investment & Cooperation (AFIC)
strengthens democracy around the globe through private is an Armenian non-profit, non-governmental business
enterprise and market-oriented reform. CIPE is one of the four association devoted to the promotion of foreign investment,
core institutes of the National Endowment for Democracy development of international economic cooperation and private
and an affiliate of the U.S. Chamber of Commerce. Since entrepreneurship. AFIC was established in 1998 in recognition
1983, CIPE has worked with business leaders, policymakers, of the need for adequate support to foreign investors and their
and journalists to build the civic institutions vital to a Armenian partners, and consolidation of the efforts of business
democratic society in more than 100 countries. CIPE’s key associations in advocacy on behalf of the business community.
program areas include anti-corruption, advocacy, business AFIC supports the implementation of policies oriented
associations, corporate governance, democratic governance, at democratic reform in economy, development of private
access to information, the informal sector and property rights, entrepreneurship, strengthening business associations, and
and women and youth. www.cipe.org. attracting foreign investment in Armenia. www.afic.am.
Table of Contents
Capital Legal
Markets Protection
Professional Registries
Services
Fair Tax Formal
Regime Ownership
Appropriate Property
Introduction . . . . . . . . . . . . . . . . . . . . . . . . .4 StaDnadtaar ds Regulation Rights Banks
1. Country Context . . . . . . . . . . . . . . . . . . . . .5 AInsdseetp Veanldueenrts TraFninsapnacrieanl cy PAMrroamprkeeenrttiasy AcCcreesdsi tto SOotuhrceer s
Market Credit
Stability Rational Bureau
Dispute Effective
2. Urban Commercial Property Markets . . . . . . . . .7 Resolution Governance
Commercial Democratic
Dispute Representation
Resolution
Contract Lack of
Enforcement Corruption
3. Key Scorecard Findings. . . . . . . . . . . . . . . . . . 8 Rule of Efficient
Law Administration
4. Overview of the Fieldwork . . . . . . . . . . . . . . . 11
5. Expert Roundtable Findings . . . . . . . . . . . . . . 13
6. Conclusion and Recommendations . . . . . . . . . . 15
Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Appendix: Armenia Property Markets Scorecard . . . 20
Introduction
Property rights are among the most fundamental principles enshrined place in China, Kenya, the Philippines, and Russia.
in Article 17 of the United Nations’ Universal Declaration of Human
The Scorecard consists of two major levels of inquiry – desktop or
Rights and constitutionally protected in most states. Despite this
secondary research and field assessments of actual property market
worldwide legal recognition of the importance of property rights to
conditions. Desk research is conducted using established indexes from
building peaceful, democratic, and prosperous societies, access to and
multilateral development agencies such as the World Bank and the World
protection of property rights vary greatly in practice. What is more, in
Economic Forum as well as other publicly available sources. To maintain
many countries understanding of property rights often remains limited
consistency and comparability the desk research remains consistent
to property titles, without deeper appreciation of the underlying and
across each country. Given the unique character and background of each
interconnected institutions that make property rights meaningful and
country, field assessments are more flexible.
allow property markets to function.
AFIC tailored the fieldwork in Armenia through a mix of focus groups
The International Property Markets Scorecard is a tool jointly developed by
and interviews to obtain the most accurate snapshot of the conditions
the Center for International Private Enterprise (CIPE) and the International
entrepreneurs face in dealing with the government, banks, and
Real Property Foundation (IRPF) in order to map the institutional
professional services providers in the property sector. Although
components of property markets and evaluate their effectiveness. The
necessarily subjective, these views from small businesses have a unique
Scorecard provides a methodology for property market system analysis
power to illustrate key problem areas in property markets precisely
to investigate the six core elements necessary for sustainable property
because of the real, personal experiences they reflect. The result
market development – property rights laws and enforcement, access
presented here is a report that explains and supplements the Scorecard
to credit by small businesses, efficiency of governance, rational dispute
findings, and provides reform recommendations.
resolution, financial transparency, and appropriate regulations.
This approach not only illustrates the linkages between property market
elements but also helps identify gaps where some of those important
institutions remain weak, either due to the lack of a proper legal and
regulatory framework or its weak implementation. Such gaps represent
key areas that countries should prioritize when considering reforms to
strengthen institutions that support healthy and inclusive property
markets.
In Armenia, CIPE and the Association for Foreign Investment &
Cooperation (AFIC) have been working together to use the Scorecard
methodology to examine the strength of urban, commercial property
markets in two major cities and highlight barriers that small businesses
face, with the particular focus on property rights and access to credit by
small businesses. Similar efforts by CIPE and local partners are also taking
4 Armenia Property Markets Scorecard / Conditions for Small Businesses
Section 1 Country Context
Property Rights in Armenia The legislation regarding Armenian real estate is likewise quite
liberal. Real property buying procedures have undergone numerous
The ability to accumulate and productively use private property is the liberalizations in the past few years, making buying real estate easier.
main driving force in a market economy. Secure property rights are an Armenian citizens, locally registered businesses, as well as foreign
important component of economic development and social stability, citizens of Armenian descent have the right to buy and own land in the
giving citizens the confidence to undertake commercial activities, save country. Foreign citizens have no right to own land (they can only lease
and invest their income, and make long-term plans. In contrast, insecure it) although they are allowed to buy apartments and offices or lease
property rights limit both economic growth and democratic governance properties for a term of up to 99 years.
by denying citizens equal participation as stakeholders in a society.
Going forward, development of the competitive and transparent
Addressing property rights issues and the development of well- commercial property market sector that supports operations and growth
functioning property markets is particularly crucial in countries such as of businesses of all sizes and small businesses in particular requires more
Armenia that are in a transition stage. The overall system of real property, than legally protected rights to income-producing properties such as
including a legal framework, implementing regulations, and supporting offices, restaurants, retail shops, hotels, or manufacturing facilities. It
institutions, has been one of the most important areas of reform ultimately requires strengthening of the broader institutions of good
for Armenia, with efforts intensified in the past ten years. Although governance and market economy that well-functioning property markets
Armenians had been deprived of property rights for more than 70 years depend on. This is the challenge – and opportunity – that Armenia faces.
under the Soviet system, the desire for secure property rights was never
extinguished, only suppressed. Protection of Property Rights in Law and in
Practice
Property rights were established in the Constitution of Armenia, adopted
shortly after independence in 1991, as the new government began Armenia has implemented a wide range of structural reforms addressing
moving state property back into private hands. The Constitution, in the private sector, including measures for the enforcement of commercial
Articles 8 and 31, guarantees the protection of all forms of property and contracts and registration of real property. Efforts to establish a modern
the right of all citizens to own and use property.1 registry have been successful, resulting in a combined cadastre and
registration system under the State Committee of the Real Property
Today, property rights and the acquisition of property are well defined Cadastre of the Republic of Armenia (SCRPC).
owing to that initial reform focus on private property during the early
stages of Armenia’s transformation toward a market economy. Most The 2012 World Bank Doing Business report ranked Armenia very highly
urban and rural land is privately owned and many formerly state-owned as fifth in the world with regard to property registration, given that the
enterprises have been privatized. The initial phase of the privatization regulations specify that property registration can be completed in only
process was one of the first such efforts in all of the former Soviet three procedures and seven days.3 Still, there is room for improvement.
states. It was, however, tainted by serious incidents of privileged control The full implementation of an electronic searchable database on property
and corruption that partially co-opted the efficacy of the privatization transfers, liens, and tax values will enable Armenia to further improve the
program.2 protection of property rights.
5
During recent years, the government has also made some progress in example was the flawed implementation of the Law on the Alienation
the easing of state interference in business formation and Armenian of Property for Public and State Needs. Adopted in 2006, this law dealing
legislation provides a basic framework for secured lending, collateral with expropriation was used to force hundreds of central Yerevan
and pledges, and mechanisms to support modern lending practices and residents to vacate their properties to allow for construction of a business
property transfers. district. Many felt that government compensation was below the market
value of their properties. In April 2006, the Constitutional Court ruled that
All in all, the legislative aspect of providing a strong private property
the government’s assertion of eminent domain was unconstitutional. In
regime is on track. However, even though Armenia has adopted modern
August of the same year, the government announced that the income
laws and rules governing property markets, these are often not applied
tax deducted from the compensation paid to those evicted would be
effectively. Private property is guaranteed by law, but neither legal
refunded, but also stated that no additional compensation would be
enforcement nor the judicial system provides adequate protection.
paid, despite the Constitutional Court’s decision.
Property rights are generally enforced, but the courts are overburdened
and slow, and judges are not well trained for commercial cases. In addition to the underlying structural and institutional problems,
Armenia like many other countries has been adversely affected by the
The protection of private property requires an effective and
global financial crisis. Economic instability and a lending freeze added
honest judicial system that is available to all equally and without
to the considerable challenges in strengthening property markets, and
discrimination. Yet, the Armenian judiciary is still largely subordinate and
more broadly to the challenges in implementing and enforcing the laws
overly compliant to the influence of the executive branch and cases of
upon which Armenia’s successful full transition to a market-oriented
corruption are common. According to Transparency International’s 2010
economy will depend.
Global Barometer, the judiciary in Armenia is perceived as the second
most corrupt institution in the country, together with the police.4 This
is a substantial impediment to the effective enforcement of contractual
rights and obligations, thereby keeping business risk high.
The abuse of power among Armenian officials also remains rampant.
Reflected in the authorities’ “arrogance of power,” such abuse is matched
by the entrenched level of corruption within state institutions. One
Private property is
guaranteed by law,
but neither legal
enforcement nor the
judicial system provides
adequate protection.
6 Armenia Property Markets Scorecard / Conditions for Small Businesses
Urban Commercial
Section 2
Property Markets
Well-defined property rights and effective contract enforcement The combined financial and economic elements of the crisis have
characterize a business environment that is conducive to competition affected all aspects of the commercial property markets. Assets under
and commercial transactions. Investors, from small local businesspeople construction faced not only the prospect of a problematic lease-up
to large companies, will not fully commit their resources if they do not (finding tenants), but also the more immediate difficulty of securing
trust in the institutions that safeguard their property. In Armenia, as in adequate financing. Many real estate projects across the country were
most countries, small and medium-sized enterprises (SMEs)5 account frozen without having secured full construction financing. The market
for a significant share of employment and a substantial portion of Gross has fallen to a practical standstill, with construction halted where finance
Domestic Product (GDP). Creating a robust property rights environment is lacking, tenants delaying their rental decisions or withdrawing from
that enables them to invest and grow will increase the overall rate of existing commitments, developers starkly reducing their projects, and
economic growth. investors hesitating to commit to new transactions.
In 2009, the SME share in Armenia’s GDP was 42.5 percent – twice as Prior to the crisis, the increased availability of financial capital fuelled
much as in 1999 – and the SME share in the country’s export volume real estate investment growth, especially in the capital city of Yerevan,
reached 17.7 percent. As of January 1, 2010, there were 132,923 SMEs in which has the costliest real estate in the country. Yerevan, with its
Armenia. They comprised 97.7 percent of the registered legal entities and approximately one million inhabitants, accounts for one-third of the
sole proprietors, and accounted for 42.2 percent of total employment.6 country’s population and in 2009 produced almost 60 percent of its GDP,
Such great economic importance of SMEs was the basis of making them up from 42 percent in 1999.7 As a result of this imbalanced growth, the
the center of this study with the focus on two cities: Yerevan and Dilijan. equal development of other Armenian regions became one of the goals
of the government.
It is difficult to accurately estimate the overall size of urban commercial
property markets in Armenia because of the fragmented and opaque In particular, since 2009, the government has been implementing a plan
nature of real estate information, especially in the aftermath of the to turn one of the cities in northern Armenia – a resort town Dilijan in
global economic crisis. Commercial property values have sharply declined the Tavush province – into a new financial center. Dilijan is well-poised
after the large increases in previous years. to assume this role, with its highly developed property markets and
tourism infrastructure. According to the government plan, a considerable
Armenia real estate prices rose significantly from 2001 to 2008, when
amount of the operations of the Central Bank of Armenia will move to
the property markets sector benefited from two-digit economic growth
Dilijan starting from 2013.8 Currently, many significant financial and
driven by the rapid development of the construction industry and the
educational institutions are under construction there, such as the Dilijan
appearance of a large number of new commercial properties. This trend
Regional Financial and Banking Research and Training Center that will
fueled demand for new, high quality real estate. As the global financial
host regional academic forums, seminars and training projects, and the
crisis progressed, however, the pressure on the country’s economy
International School of Dilijan.
depressed purchase and rental rates and demand for real estate space,
as existing and potential buyers and tenants became more wary of risk. Because of the growing importance to the country’s economy, AFIC and
CIPE selected Dilijan as the second city, together with the capital Yerevan,
for conducting field research under this project.
7
Key Scorecard
Section 3
Findings
The following summary of key findings on the six Scorecard elements is Credit Supply-Side Barriers: Securing a loan in Armenia is very difficult
largely based on secondary sources (see the Appendix for details). Those because property rights are not properly protected in practice despite the
international survey and rankings were subsequently supplemented existing legal provisions. As a result, lenders over-secure loans and impose
by on-the-ground focus groups and interviews with SMEs and experts onerous requirements and costs, particularly on newly established start-
conducted by AFIC in Yerevan and Dilijan. The main barriers for small ups and small enterprises. Commercial banks are conservative and
businesses related to property rights and access to finance identified remain focused on large companies. These challenges are compounded
during the initial research, which led to an in-depth focus in the two by a weak credit culture between lenders and borrowers, upon which
target cities, Yerevan and Dilijan, can be divided into three groups: trust and efficiency are based. The problems include:
institutional/policy level barriers; credit supply-side barriers; and credit
• Financial sector inefficiencies: The lack of appropriate innovative
demand-side barriers.
financial tools (e.g., venture and angel financing) tailored to SME
Institutional/Policy Barriers: Legal and regulatory constraints lending needs hinders the development of the small business
faced by Armenian SMEs in property markets are partly a function of sector. Banks prefer to finance already operating large companies
the overall institutional capacity deficiencies. The judicial, legal and rather than small businesses or start-ups that cannot prove their
regulatory frameworks are weak and poor enforcement of existing laws financial solvency.
further weakens the protection of property rights. In addition, the legal
• High loan interest rates: When small businesses do obtain financing,
environment for secured transactions is weak, institutional mechanisms
interest rates are often high. This is partly due to risks associated
for credit risk evaluation remain underdeveloped, and dispute resolution
with the borrowing firms. Difficulties and costs related to loan
mechanisms are slow or unreliable. Key factors in this area are:
recovery have substantially added to the risk. High interest rates are
• Bureaucratic system: Bureaucratic barriers and the lack of a also related to the risk of currency devaluation. Banks that receive
supportive institutional environment create various obstacles and dedicated funding from donors in foreign currency for SME lending
risks for small businesses. make the actual loans in Armenian drams, and at significantly
higher rates, due to exchange rate volatility.
• Corruption: Public and private sector corruption prevents the
effective functioning of small businesses in property markets. • Poor risk valuation and loan pricing mechanisms: Local banks and
non-bank financial institutions (NBFIs) often lack the expertise to
• Monopolies: Unequal competition and strong concentration of
evaluate inherent risks and appropriately price small business loans.
control in certain industries prevent small business development.
While the economy is broadly market-based, monopolies benefit • Constrained secured transactions and collateral: There are inadequate
from protectionist measures in some sectors.9 This has sometimes provisions for use of moveable properties (inventory, equipment,
resulted in charges of collusion and price-fixing. etc.) as collateral. Pledges are recognized by banks, but retention
of title upon sale, financial leases, and other forms of security are
• Tax administration: The tax burden and tax administration are
not recognized.
increasing time and costs of compliance for small businesses.
8 Armenia Property Markets Scorecard / Conditions for Small Businesses