By Hemant Giri
The real estate sector of the country has seen a tumultuous ride in the past decade. A blistering innings, dispiriting low and prolonged stability, the sector has completed a cycle within a short span of time.
The sector which got its formal shape with the foray of a number of property developers around 15 years ago currently stands as a sector with significant investment and high potential. Though it is difficult to pinpoint actual stakes in the real estate sector, industry insiders say that investment today is estimated at around Rs 300 – 325 billion. An increment in price of land in major places including Kathmandu valley has contributed in escalation of its value in recent years.
If official statistics of Department of Land Reforms and Management (DoLRM) is anything to go by, the country’s real estate sector at current is struggling to live up to expectation. In the first eight months of the current fiscal year, Land Revenue Office (LRO) across the country have collected Rs 12.04 billion in registration revenue against government target of Rs 13.07 billion. The DoLRM has set a target of Rs 18.41 billion for the fiscal year 2017-18. However, achieving the target set by the government in the current fiscal year is unlikely says Ramesh Kumar Koirala, Officer at Planning Section of DoLRM, adding that the main reason behind the sluggish performance is the recent government provision that has barred segregation of land or further plotting of land across the country. This means those willing to sell or buy land cannot segregate it discouraging plotting of land into small pieces. “The policy has discouraged buyers with limited budget and the situation has direct impact on revenue collection,” Koirala elaborated.
The government, with a motive of discouraging land segregation in a bid to promote agriculture as well as discourage haphazard urbanisation, had introduced a directive imposing ban on land segregation in August 2017. The government decision, however, was challenged in court delaying the implementation process. In the third week of February, stay order was lifted paving way for implementation of the government directive.
Though revenue collection isn’t up to mark, officials say that the situation isn’t too alarming. “In normal circumstances, transaction would have exceeded the target by significant margin. The figure would stand at around Rs 22 billion,” Koirala said.
The recent past
The country’s real estate sector had seen exponential growth in the fiscal year 2008-09 collecting record one-year collection worth Rs 6.3 billion. The euphoric situation in the realty market didn’t continue for long as it then went into a downward spiral following intervention from Nepal Rastra Bank (NRB). The central bank had capped banks and financial institutions’ (BFIs) realty lending to prevent realty sector from witnessing a bubble burst. “Speculative investment had increased significantly during the time and hence it was important to put a curb in transaction volume,” Koirala said. The intervention from the central bank resulted in recession in the sector with revenue collection from land registration dipping down to Rs 4.18 billion in the fiscal year 2010-11 and Rs 4.79 billion in 2011-12.
After going through course correction, the sector again started making gradual improvement. LROs across the nation collected Rs 6.15 billion in fiscal 2012-13 followed by Rs 7.18 billion in 2013-14. Apart from correction in price to some extent, transaction of land in terms of fair market value too contributed to revenue growth. The DoLRM official informed that people, earlier, used to devaluate property to avoid registration fees. The situation changed after government authorities started seeking income source and gains made by paying lower fees. The following years FY 2014-15, 15-16 and 16-17 continued witnessing escalating growth, which, according to many in the industry is mature growth compared to the situation back in FY 2010-11.
“There is need of innovation in the property market to get the sector out of stagnation,” says Bijay Rajbhandary, Chairman of CE Construction one of the reputed real estate companies in the country. “We need to add value. Construction of houses or apartments alone won’t help.” According to Rajbhandary, though the government is recovering hefty sum in revenue from land transaction, it doesn’t indicate that the realty sector is enjoying a good time. For developers, the situation still isn’t encouraging.
Issues like change in land use policy, introduction of bylaws impacting use of land, liquidity crunch in financial institutions and overall shape of the country’s economy have been hindering the growth of real estate sector. While government effort will be necessary in mitigating such issues, effort from the private sector too is important for the business to take a gigantic leap, Rajbhandary said.
Increment in tax on land transactions in metropolitan cities to 5% from 4.5%, to 4.5% from 4% in sub-metropolitan cities, and to 4% from 3.5% in village councils and metropolis has a role in the upward spiral in revenue collection in recent years.
According to Rajbhandary, the time has come for the private sector to broaden their perspective in the real estate market. He feels that destination development can be a new avenue for developers. “The concept is to develop a new destination altogether. We can fuse housing with hospitality,” he said adding that CE Construction has already started the initiative with a first of its kind project in Lumbini which has been named as Hub Lumbini. The CE Construction head honcho feels that developers need to plan projects near leading hospitals, big hotels and even Special Economic Zones (SEZ) to ensure that there is immediate momentum.
In the absence of innovative ideas and prolonged stagnation, a number of developers, according to a leading property developer, have started divesting investment from the sector.“The growth is limited and this has prompted builders to divest investment. Most of the investment has been diverted to other sectors like tourism and hydropower,” he said.
Apart from this, foray of online platforms like – 1ropani.com, gharjagganepal.com, therealtors.com and gharbazar.com among several others have helped the breezing relationship of sellers with potential buyers. Not just this, there are a number of pages on social media where people can look for property to buy, sell or rent. “Given our market is conservative and people still prefer purchasing property after physically visiting the site, the job of online medium is basically to connect buyers and sellers,” one of the property developers said adding that the platform will be of great use in the near future as the sector is witnessing gradual growth in sync with the growth rate of information and technology.
Though prospects for real estate seems to be getting better, the sector is full of challenges that need immediate attention. The most pertinent issue of all, according to developers, is land price that has skyrocketed by leaps and bound in the past decade. “The price of land has increased in a speculative manner,” Bhesh Raj Lohani of Green Hill City project said. “Developers cannot afford buying land at such prices and develop properties.”
Not just Kathmandu, speculative pricing has taken over in all major cities across the country. Realty developers have stated that the price of land in prime locations inside ring road of Kathmandu starts from around Rs 4 million per anna (342.25 sq.ft). The equivalent amount of land costs Rs 600,000 to Rs 1.2 million in places that lies around 2-3 kilometers away from ring road. Properties in places like Baluwatar, Naxal, Sanepa, Chhauni and New Baneshwar, according to builders, are considered to be the most expensive in Kathmandu. In case of houses or apartments, design and amenities too play a crucial role in determining the price. Lack of scientific appraisal for indicating price of real estate property is to be blamed for the haphazard situation.
“The price of land which has become so expensive due to speculation has not just irked buyers but also sellers. There’s no movement as it is beyond the buying capacity of many,” Rajbhandary said, adding that for developers buying land in prime locations and developing projects leaving at least 30% open space by acquiring a loan at high interest rate from financial institutions does not make business sense.
The other challenge for realty sector is government apathy towards planned urbanisation. While proper development of city falls among the top most priorities of the government in developed economies, the situation in Nepal seems to be completely opposite. “Even top realty developers are treated like brokers. The government should have rather promoted us for helping build planned cities,” one disgruntled property developer shared.
Federalism adds spike to realty market
While growth rate in the property market for realty developers is limited in Kathmandu valley, the adoption of federal system by the country has given a much needed spike to the sector. Leading players in the sector have already started making their presence felt in major cities across all seven provinces. Provincial capital as well as first and second tier cities are witnessing significant surge in property transaction.
Major places like Jhapa, Biratnagar, Itahari, Dharan, Pokhara, Chitwan, Nepaljung, Surkhet and Dhangadi have witnessed significant surge in real estate transaction.
“The real estate price has seen a momentous growth following announcement of provincial capital. Interest of businesses in particular has witnessed a big growth,” Uttam Giri, a broker in Surkhet, the capital of Karnali Province said. The DoLRM record justifies Giri’s statement. The LRO based in Birendranagar, Surkhet collected land revenue worth Rs 24.65 million in mid-December 2017. The amount increased to 31.51 million in mid-January when the city was announced temporary capital of Province 6 and Rs 34.17 million in mid-February when Birendranagar was designated as the permanent provincial capital and the Province was named as Karnali.
“The impact of federalism is getting visible gradually. Public concentration in provincial capital and major cities have increased,” Rajbhandary of CE Construction added stating that the designation of capital cities will definitely bring a new wave in realty market.