An analysis of the real estate market in Tbilisi shows that prices have risen faster than rents in recent years. As a result, property owners earn less rent per U.S. dollar/Lari of investment today as compared to several years ago. This trend may be due to improved political and economic conditions, strong economic growth and rising incomes. Another factor may be that speculative property buyers are driving up prices based on very optimistic expectations about future price increases. This paper presents a framework for analysing Tbilisi’s real estate market that is based on standard real estate economics taught at Western business schools. Future analysis is needed to quantify the factors that drive the recent boom. Real estate prices in Tbilisi have risen faster than rents and building costs. After strong increases in recent years, real estate values significantly exceed marginal building costs, which are the long-term drivers of real estate prices according to standard economic theory. Developers are taking advantage of rich prices by building large volumes of new real estate. The stars were aligned for Tbilisi’s real estate boom. Pent-up demand, strong economic growth, relative political stability, the legalization of economic activity and lack of investment alternatives were powerful drivers of the recent boom. But supply could overshoot. There is a risk that developers may overbuild, because they may have over-optimistic expectations of future demand. Market participants should be prepared. Real estate buyers and investors should not expect prices to rise forever. Real estate developers need to realize that ultimately, prices are likely to move closer to building costs, reducing profit opportunities. Banks need to evaluate the credit risk of commercial real estate lending and residential mortgages. If price increases slow down or even reverse, credit losses are likely to increase. Governmental authorities need to be watchful, as every boom creates opportunities for questionable behavior. I. KEY FOCUS AND CONCLUSIONS The authors aim to provied an independent analysis of the current real estate boom in Tbilisi and the Republic of Georgia overall. The try to analyze this remarkable phenomon within a standard theoretical framework as it is tought on Western business schools. This independent research report aims to contribute to a better understanding of Tbilisi's real estate market. To this end, the authors first develop a general model of supply and demand in real estate markets; then they apply this model to the Tbilisi market. Furthermore, an attempt is made to outline possible future trends. Finally, recommendations are made as to how different groups – investors, real estate developers, banks and governmental authorities – may best prepare for the future. The key prediction is that real estate prices in Tbilisi appear rich relative to rents and building costs –two fundamental factors that drive real estate prices in the long term. Theory and past experience in many countries with market-driven real estate markets suggest that real estate prices in Tbilisi are currently elevated. This does not mean, however, that real estate prices must drop. The current valuation can also be changed by a longer period of stagnant property prices, while rents catch up. Or rising inflation could erode the inflation-adjusted value of real estate prices, while boosting building costs. To some extent, this process is already well under way, as building costs have increased dramatically in recent years.