How Real Is The Real Estate Sector Crisis

The country's ailing real estate sector is mirroring the broader economic slowdown, and seeking favourable fiscal and monetary policies to revive itself.

The sector's contribution to the gross domestic product (GDP) had been seeing a steady increase annually and its multiplier effect was benefiting industries producing construction materials like rods, cement, steel and crushed stones, as well as transportation services and job creation.

Bhesh Raj Lohani, Immediate Past President of Nepal Land and Housing Developers' Federation, believes that the country's economy is suffering from a decline in demand and consumption and links it to and decline and loss on income in the general population. He emphasised the importance of job creation to address the ongoing economic crisis.

The Federation has been advocating for a higher Loan-to-Value (LTV) ratio in the real estate sector. Real estate developers have been seeking more accessible and affordable financing from banks and financial institutions (BFIs). Lohani said, "This could have a multiplier effect on the economy, as the construction sector is labor-intensive and has extensive backward linkages. Additionally, accessible financing arrangements will benefit buyers."

Land and housing developers have emphasised the urgent need to establish a property exchange (similar to a stock exchange) to facilitate transactions between buyers and sellers. It is believed that a property exchange would streamline broker activities, property listings, and the overall sale and purchase process. This arrangement could also generate revenue for the government through brokerage fees and capital gains tax, which is currently underreported.

When credit surged exponentially due to subsidised and cheaper interest rates, Nepal Rastra Bank abruptly urged BFIs to focus on recovery from the next fiscal. Housing and land developers are since advocating for rescheduling and restructuring facilities for loans over a certain period.

There is a significant discrepancy between disclosed and actual prices in property transactions. Establishing a property exchange is expected to address this critical issue. Amending relevant laws such as the Land Act of 1964 is crucial for the development of a property exchange market.

The collapse of cooperatives in Nepal has also been correlated with the declining property market. Overfinancing by BFIs has adversely impacted this sector. Now, land and housing developers have become less eager to avail loans due to allegations of creating a real estate bubble by excessively utilising financing from BFIs and cooperatives.

The post-pandemic credit boom in Fiscal Year 2020/21 witnessed a surge in land and house prices in the Kathmandu valley and urban areas across the country. During this period, Nepal Rastra Bank had implemented flexible measures such as an additional Rs 150 billion in refinancing for borrowers, along with loan restructuring and rescheduling facilities.

Nara Bahadur Thapa, economist and former Executive Director of Nepal Rastra Bank, noted that a significant portion of the credit growth to the private sector during that time was channelled into the real estate and stock markets leading to an asset price bubble rather than fuelling growth in the real sector. A record-high 27% credit growth by BFIs had a substantial impact on property prices.

An exponential credit growth against the average annual loan growth could not sustain inflated property prices. Nepal Rastra Bank's directive to BFIs to focus on recovery not only led to a significant decline in property transactions but also increased the debt burden of developers, pushing them into a deeper crisis.

Initially, the central bank provided numerous facilities and flexibilities without a thorough evaluation of the impact of the Covid 19 pandemic. When credit surged exponentially due to subsidised and cheaper interest rates, Nepal Rastra Bank abruptly urged BFIs to focus on recovery from the next fiscal. Housing and land developers are since advocating for rescheduling and restructuring (R&R) facilities for loans over a certain period.

While a 100% risk weightage on real estate loans might be rational from a regulator's perspective, real estate developers argue that there is room for a downward revision.

While property developers are seeking solutions from the monetary policy, Nepal Rastra Bank has stated that the monetary policy cannot be a cure-all.

In previous fiscal years, due to the rapid expansion of private sector credit and the subsequent economic slowdown over two consecutive fiscal years, the central bank has been forced to implement restrictive monetary policies to address the emerging challenges that have affected every sector that benefited from excessive credit from BFIs.

NRB Governor, Maha Prasad Adhikari, has urged developers to think creatively and implement innovative ideas. He suggested that developers reevaluate their business models and align them with current market demands. However, developers remain adamant about getting their numerous challenges addressed including cumbersome bureaucratic procedures, high-interest rates, low loan-to-value ratios in the real estate sector, and volatile market conditions.

"We are advocating for policy reforms that streamline processes, introduce a more transparent land market system, remove land ceiling limitations, increase loan-to-value ratios, alleviate financial burdens, attract more investors to the real estate sector, involve realtors in land and house pooling projects, discourage owner-built systems, and ultimately establish a more stable market environment that benefits both developers and consumers," said Lohani. “Government policies hold immense influence over our operations, and we eagerly look forward to forging collaborations that promote affordable housing, sustainable development and an investor-friendly climate," he added.

Is this stalemate real or just the inability of both government and developers and realtors to find solutions that would enable the sector to move forward.