Wednesday, December 8, 2010

Waiting for ‘ghost’ housing and real estate complexes in Nepal

Well, I am not talking about houses where real ghosts, if they exist, reside. I am referring to Nepal’s real estate and housing sector. The realty price is coming down and it is sliding down pretty fast.

Real estate dealers, who long resisted selling pressure for fear of a downward price spiral, have started to cut prices in a bid to lure buyers and recoup possible investment at the earliest. On Tuesday, Uddav Raj Bhattarai, chairman of Kapan Housing, placed an advertisement in a national daily offering to sell land at a lowered rate of Rs 350,000 per ana (342.25 square feet).

Just a couple of months ago, he had sold numerous plots of the same land at half a million rupees. "Not only that, I have slashed the rate of a 800 square feet stand-alone groundfloor house to Rs 5.5 million from Rs 6.5 million,” he informed Republica. Laxmi Neupane, chairman of Manakamana Housing, has a similar story. He recently reduced prices of residential plots at Hattigaunda which he had developed, to Rs 800,000 per ana from Rs 1 million. Till a month ago, he was adamant he need not review the prices even though transactions had nosedived.

In general, real estate dealers have slashed prices by as much as 30 percent in Kathmandu, said realty experts. “Unfortunately, most of them are failing to lure buyers even at the lowered rates,” said Neupane. As the realty market wore a deserted look, Raj Kumar Maharjan of Indreni Real Estate told Republica he is facing trouble managing cash even to pay his office rent whereas his monthly income was running at a million last year.

Owing to the dip, the government´s revenue collection from realty transactions in the month from mid-September to mid-October dropped to Rs 90.08 million. It had collected Rs 317.20 million in the same month last year. Although NRB in September 2010 relaxed its cap on housing loan exposure, it continued to tighten real estate loans, including loans issued for land plotting and procurement.

“As the directive seeks BFIs to limit their realty portfolio to 10 percent of total loans by 2011/12, most of them have stopped renewing loans in the sector,” said Sudhir Khatri, chief executive of DCBL Bank. Some financial institutions are even seeking parties to repay as early as possible. This has upped the selling pressure and some 75 percent of real estate dealers, who trade with loans and informally borrowed money, are under severe stress, said Shrestha, adding that he foresees many of them jumping into the selling current soon.

Thanks to easy loans from the banking sectors and multiple refinancing of the same piece of land and building, the real estate sector grew unnaturally in the past few years. In the last five years, construction and real estate sectors grew at an average of 4.5 percent and 7 percent annually, respectively. In real estate, credit flow doubled from Rs 7.71 billion to Rs 14.92 billion in the past two fiscal years. Unfortunately, GDP growth rate was around 3 percent and industrial sector growth just over 1 percent.

As this sector threatened to derail macroeconomy and the banking sector itself, the central bank and the Ministry of Finance started squeezing oxygen supply (i.e. loans, finance, and investment) to this sector. Now, it is cooling down. My hunch is that it will chill to the extent that the banking sector will feel the pinch. Real estate and housing prices, especially in the urban areas, will potentially come down even further.

Well, this is better than to put the whole economy in peril due to one particular sector. Remember what happened in the US, Ireland, Spain, Iceland, … housing markets? The existing Nepali real estate and housing sector bear similar hallmark. We might end up with ghost housing complexes if the rate of expansion of the real estate and housing sector continues at the same rate it is happening right now. The logic is that there is excess liquidity, thanks to the uber-generous banks aiming for quick return without properly valuing risks, in the real estate and housing sector. It has led to a situation where supply is fast outstripping demand in just a matter of few years. Now, when there is excess supply and no further absorption capacity, then prices falls down. Simple logic from the first few chapters of introductory microeconomics!

As prices come down the real estate and housing sector will start to hear an unpleasant music from the banking sector, who, for them, suddenly turn into a foe from a very friendly friend. The investors in real estate and housing markets will miss interest payments on loans and the banks themselves will see less return on investment on this sector. The banks will up interest rates and squeeze further funding to this sector. What will happen then? Easy guess. Loan default by investors in the real estate and housing sector, followed by bankruptcy. The banks will be left high and dry. A crucial and easy source of income for them will probably be the hardest sources of income. Then all they can do is to take ownership of ghost houses and real estate complexes on hope that they could be sold later at high prices. The entire economy could be affected by this. Fortunately, the policymakers are watching. Or, are they? 

That’s a preview of a disaster waiting to strike the Nepali urban economy under business as usual scenario!

Meanwhile, good news is that the paddy cultivation is going up. Its contribution to GDP has now reached 7.5 percent. It is pleasant to read agricultural sector giving a positive jolt to the economy than potential troubles by unproductive sectors!