Real state of real estate

With urbanisation and massive internal migration into Kathmandu (39.65 percent of Kathmandu population is migrant), real estate business in Kathmandu has witnessed an uptrend in the last decade. One reason for the migration is security concern in the villages and the other is the remittance inflow that is still growing though recently at a decelerating trend. As a result, population in Kathmandu has been expanding at an annual rate of 6.67 percent according to a data from Nepal Land & Housing Developers’ Association (NLHDA).To accommodate the expanding population and to furnish the wish of the people to own their home, providing credit to be repaid, while living their dreams, is the name of the game. This is despite the ongoing global recession which was sparked by the bust in the real-estate sector in the USA.

But the real estate developers maintain that Nepal is not in the risk of US-style failure in the real estate business. The credit culture is not that pervasive here and there is no over-the-edge project financing till now by the banks. All the loans transacted, as claimed, are on the basis of collateral and the loan is below 60 percent of the value of the property. However, the business insiders also point out that this rather optimistic outlook has a tint of grey in it due to land prices now staying flat (if not falling down), while the prices of construction materials are rising and also because of the fact that Kathmandu lies flat on a seismic zone, prone to earthquakes.

Over the last five years, land prices in Kathmandu soared an unprecedented 300 percent, according to industry sources. They also accept that the overall occupancy rate in the apartment projects is not more than 30 percent except in case of a couple of projects -- mostly stand-alone houses. It means the rest 70 percent is held as speculative investment for secondary transactions. Though most developers like to send out the news of higher occupancy rates at their respective projects, facts at ground don’t hint that way. “I find it oriented more towards urban fashion than requirement,” says an architect commenting on the trend of almost mushrooming apartment projects. “There are no need-based studies carried out. Government negligence, starting from granting permission to developers for high-rise buildings, implementing rules and regulations, regulating the prices and letting Kathmandu turn into a concrete jungle has made people wonder about risks and benefits.”

Size of the sector

Almost all the developers are unanimous that the size of the real-estate sector of Nepal is currently worth Rs. 70 billion with Rs. 50 billion on land and the rest Rs. 20 billion on construction. Market indicators show that about 6000 housing units, including stand-alone houses and apartments, are spread across the capital - some already built, some under construction and some nearing completion. According to government officials, about 3,385 housing units were given approval last year, compared to 1,088 the year before. All this signals high growth in demand but whether that demand estimate is reliable or not is a matter of serious consideration given the fact that the national economy is hardly showing complementing growth figures while the remittance inflow is showing signs of deceleration.

Developers expect the sector to grow by 200 percent for the next few years. But now the remittance inflow is showing signs of deceleration due to the ongoing global economic crisis due to which the growth in bank deposits is likely to slow down. This in turn may slow down loans to developers and home buyers. So, experts believe that the growth projection made by developers to be speculative. Also to be considered here is the fact that only about 10 developers have their second projects running out of almost 74 companies registered to develop community residence, combined residence and land development projects. It is a notable indication that all that is being stated out in the public is somewhat different than reality.

Moreover, as in many developing countries, Nepal too does not have an effective means by which a lender could foreclose on a mortgage. Therefore, the mortgage loan industry, as such, either does not exist at all or is only available to members of the privileged social classes. In case of Nepal, the regulatory body does not have a strong control on the business, so brokers and investors have manipulated the market.

According to the recent data available from the Town Development Committee, altogether 2,319 housing units have been licensed. Among them, the largest project till recently was Park View Horizon at Dhapasi which has 185 units. But this is going to be the thing of the past. Sun City, a project of Shangrila Housing Pvt. Ltd. at Gothatar, promoted as Global Township and Satellite City, is coming up with 1000 apartments. Another project called Vegas City of Kohinoor Hill Housing Pvt. Ltd. is building more than 796 units. This increase in housing companies and growth in the number of units under a single developer might appear logical in view of the population explosion in Kathmandu but whether there are prospective customers for these units being built is again a matter of contemplation. Developers seem to zero in on remittance money but the nation has been experiencing a situation of capital flight though detailed study on it is not carried out. In retrospection, whether this spurt in the size of real-estate sector is going to be sustainable or not is an issue being looked at with concern from all quarters.

Three Ps: population, pricing and purchasing power

Population

Let’s consider some vital stats. The urban population has been growing at the rate of 6.6 percent annually against the national average of 2.1 percent. Out of the total population, 12 percent live in urban areas and the concentration is much higher, 54.5 percent, in Kathmandu, which indicates growing internal migration. It is no wonder then that with Kathmandu adding to its population with internal migrants, the need for shelter is anything but apparent. For some, real-estate serves as an organised area for retail and housing while for others, it is safe investment bet under the current run of events when no other sector seems stable enough to soak investment and yield returns. Since it deals with land and Nepalis have their emotions attached to it, developers have been feeling confident enough to call their ambitious shots. Though the organised real estate development business here is not as old as a decade, developers have started bringing in the modern housing concepts such as green and energy-efficient a partments. But financial experts believe that if this sector goes bust, just like it did in America, our national economy as a whole won’t be able to bear the downfall.

“Urbanisation is inevitable,” explains Om Rajbhandary, CEO, The Comfort Housing Pvt. Ltd. and Vice-President of Nepal Housing & Land Developers’ Association (NLHDA). “Urbanisation is inevitable. People want to add up to their living standard and we should let them decide what they want. It is a sector for the Nepali diaspora to invest in and keep their money safe and yielding ascertained returns till their arrival back home. They look forward to come back to Nepal and live an organised life and real estate here is something being built for the future.”

Last month alone, five projects were launched and if market gossip is to be believed, almost 50-60 of them have been sold out. “There is an immense craze for real estate among people,” adds Minman Shrestha, Executive Director of Downtown Housing Pvt. Ltd. “Financial crisis come and go but real estate business is here to stay for long. There is an impressive demand in the market no matter for what purposes the customers buy them – personal use or secondary transaction. Either way, they have nothing to lose, at least for the time being.”

Pricing

A stand-alone house or an apartment has been generally priced between Rs. 3000-9000 per sq. ft. There are three methods of payment in practice. Under Plan ‘A’ (Down Payment) the customer receives a rebate of 4 percent in most apartments but he has to fork out 10 percent at the time of booking, 81 percent within 30 days of booking and 5 percent at the time of legal ownership. Plan ‘B’ (Construction Linked Plan) is the next under which a customer needs to pay 10 percent at the time of booking, 20 percent within 30 days of booking and another 20 percent within 60 days of booking, the rest is payable with the progress in the floor plan – like 15 percent on the commencement of laying the floor slab for the booked unit, 15 percent on the commencement laying the roof slab on the booked unit and 10 percent on the commencement of plastering and flooring. The Plan ‘C’ (Bank Financing Plan) entails 10 percent at the time of booking, 20 percent within 30 days of booking and 70 percent through the bank. A combined living project (vertical housing) is given 24 months to complete the construction and community living project (stand alone housing) is given 3-5 years for the same depending upon project size.

Purchasing Power

The prospective customers, so far, for the most part, are Nepalis living and working abroad, that again in countries other than Malaysia, Gulf and Middle East. “I have been to several countries and have learnt that Nepalis want to return home once the country has political and economic stability. In that connection, I don’t see any threat whatsoever for real-estate business in Nepal. I have been there at the helm of this business for long and it has gone through all sorts of situations but the growth momentum has always been there,” Rajbhandary says confidently about the prospects, backing it up with his extensive exposure in the field with successful stand-alone and vertical projects. There is perhaps no denying for the prospects but middle-class and even upper middle-class customers still find apartments expensive, let alone maintaining them and paying for the monthly community bills – for security, common lightings, gardener, electricity, water, elevators, so on and so forth. “At the end, it becomes much more expensive and due to that very reason, many people have dropped the idea of living in apartments after living there for a couple of months,” says Upadhaya. “I know some of them who are now looking for selling their apartments. Developers lure customers showing them Chinese kitchen sets and American toilet accessories but customers are seldom told that even if a small nut loosens out of these accessories, the entire set has to be replaced. Now, how can a middle-class customer with a constant run of cash maintain his place?”

It is arguable that to make this sector sustainable, developers need to make sure that people live in them, rather than building apartments just for the sake of building them, relying on customers that may or may not come, thus creating clutters of concrete resembling urban disaster. Physical occupancy is the heart of this sector.

Changes without Notice

It is rather interesting to note in the brochures of developers that project prices are variable and are subject to change without any prior notice to customers. The perspective housing project shown on the paper, its floor plans, finishes, specifications, facilities and other amenities are also kept tentative in nature and are subject to revision without prior notice. To this, a fellow journalist once remarked, “Doesn’t it feel like developers have so clear plans to get their share of the deal while leaving the customers under the shadow of ‘changes without prior notice?”

The real-estate sector is also rife with the stories of developers putting up their project plans without even receiving land ownership certificates. As soon as a project design is hoarded up at a certain location featuring all the astonishing features and facilities, bookings are made open. “Under the construction-linked plan, developers feel the urge to finish their projects as soon as possible so as to receive the pending amount from customers,” shares Sishir Upadhaya, a consultant architect, who has been working in the same sector for many years now. “This leads to negligence in construction and there is no government organ to inspect into it. There is unimaginable negligence right from the registration process through construction to possession.”

Value and Investment

Real estate, in most of the countries, is project-based, thus involving a lot of credit money and prone to sub-prime crisis. But as developers maintain, it’s mostly collateral-based in Nepal and banks issue only 60-70 percent of the distress value of the collateral proposed. The distress value has 70 percent of commercial valuation and 30 percent of government valuation. While banks and other financial institutions maintain that their exposure to real estate is not more than 15-30 percent, our insiders report that in the lack of investment opportunities in other fields, some banks have up to 60 percent exposure in the field. Added to that is the fact that most of the other loans too are backed by a collateral of real estate.

Developers use bank’s equity in the development of their respective projects. As can be seen from the project brochures, banks are tied up as project partners in many of the projects. This has made land procurement a major problem. “We carry out our development projects under limited bank equities and that is why real estate projects so far are smaller in Nepal,” shares Shrestha. “Had there been rich developers shoving in their personal finance, the size would have been much more bigger.” Drawing construction capital from banks, land procurement in the best possible prices becomes difficult. This poses difficulty in making the projects cheaper for the customers. Land procurement is an ordeal here with so many middlemen involved in the trade who inflate the real value of the land by manifold. As a result, the end project, as Shrestha shares further, ends up to be more expensive than expected at the outset. Since the price of land fluctuates wildly from one location to another, the prices of the projects also differ accordingly. This is why an apartment at Lazimpat may cost so much more than another with the same features and facilities at Baneshwore. Developers usually add 8-10 percent of the total land price and construction cost when they put up their projects for booking.

The above mentioned difference in price can also be attributed to the absence of land leasing and land pooling system by the government. “In properties leased by the government, there are lower chances of unnatural price hikes. Under the lease system, the price for the land is arrived at by subtracting the construction period from the total leased period (upon the completion of which the property comes under the fold of the government) and dividing the total rental for the land by the number of the remaining years,” informs Shrestha. The government then can remodel the infrastructure and build sustainable new cities and towns on the same property. Since the age of concrete is not more than 50 years, the remodelling will depend on after how many years of the construction the property is handed back to the government. But the government authorities concerned have been playing mute spectators to the anomalies present in this sector. “There is a 20-ft service road inside the green belt, within the ring road, but the government hasn’t opened that yet. It could ease traffic congestion a lot but no one seems to care,” laments Shrestha.

LIST OF REGISTERED STAND ALONE HOUSING PROJECTS (AFTER 2004)

Sn	Name of Project	Address	Area	No of Units
1	Star Holding Limited	Sitapaila - 3 Kha	27-1-0-1	52
2	Housing and Prudential Joint Venture	Layku - 2 , Kirtipur	27-1-3-2.97	103
3	Kohinoor Housing Pvt. Ltd.	Bafal - 13	36-12-1-1	81
4	Star Investment Co. Pvt. Ltd.	Tankeshwor - 13	21-9-1-0.1	55
5	Amarawoti Co. Pvt. Ltd.	Matatirtha - 7	46-6-1-1	90
6	The Comfort Housing	Ichangu - 9 Kha	36-9-3-2	76
7	Oriental Co- operative Ltd.	Kalanki -14	5497.19m2	27
8	Home Land Developers Pvt. Ltd.	Jorpati - 6 Gha	71024.7m2	36
9	Shengyong Housing Pvt. Ltd.	Sorakhute	2-10-3-2	31
10	Padhama Merchant	Sitapaila - 6 Gha	29-13-3-2	53

(Source: Kathmandu Metropolitan City Office)

LIST OF REGISTERED APARTMENT PROJECTS (2065)

Sn	Project	Address	Address	Area	Units
1	Indreni Apartment	Suvakamana	Bhatbhateni	9-8-3-0.7	30
2	TCH Tower II	Impro Hosing Pvt. Ltd.	Lazimpat	3-9-2-1	36
3	Sunrise Homes	Oriental Construction	Balkumari	1-0-0-0	19
4	Dhmbarahi	Oriental Construction	Dhumbarahi	10-12-3-3.7	154
5	Surise Towers	SunriseDevelopers	Lalitpur	15-14-1-0	160
6	Signature	Lifestyle Housing	Tahachal	1-11-0-3.5	22
7	Bhatbhateni	Road Show Real State	Bhatbhateni	3-0-3-1.7	34
8	TCH Tower III	Anju Shah	Panipokkhari	4-5-0-2.2	51
9	Signature PhaseII	Lifestyle Housing	Tahachal	1-5-0-0.5	20
10	Park View Horizon	Barun Developer	Dhapasi	22-7-2-0.06	185
11	Guna Colony	Stupa Housing .	Sinamangal	7-11-1-1	160
12	Metro Apartment	Ambe Housing	Chabahil	5-6-2-0	48
13	Indreni Phase II	Subhakamana Housing	Bhatbhateni	4858.42 m2	26
14	Prestige	Prestige Developers	Chandol	3-7-2-3.5	36
15	Grand	Apartment the Grand	Soaltemode	2-15-0-0	34
16	L .L .P. Apartment	Comfortable Housing	Sinamangal	3-10-1-0	48
17	A . N . Apartment	Mrs. Pramila Shakya	Anamnagar	1-4-0-0	32
18	Sunrise Towers	Sunrise Developers	Dhobighat	2-15-3-0	40
19	Landmark	Shiva Shakti	Tahachal	6-0-2-0	48
20	Sunrise City	Sunrise City Homes	Bijuli Bazar	3-14-3-3	50
21	Ambe Residence	Ambe Housing
22	Status Enclave	Lifestyle Housing	Sanepa	2-12-1-0	28
23	L .P . Apartment	Stupa Housing	Lazimpat	4-15-1-0	50
24	Orchid Holding	Orchid Holding	Rabi Bhawan	4-4-0-0	48
25	Mercury Apartment	Mercury Apartment	Sanepa	3-13-1-0	36
26	Binayak Apartment	I.S.M.E. Housing	Baluwatar	2-1-1-1	20
27	Lazpa Apartment	Guna Shopping	Lazimpat	2-15-1-3	80
28	Bhatbhateni	Road Show Real State	Bhatbhateni	Additional Floors	6
29	Sisco Apartment	Stupa Housing	Lazimpat	2-8-0-0	40
30	Indreni Apartment	Suvakamana Housing	Bhatbhateni	Additional Floors	2
31	Dhumbarahi Towers	Oriental Builders	Dhumbarahi	3-4-0-.77	29
32	TCH Tower IV	The Comfort Housing	Sitapaila	5-0-0-0	67

(Source: Kathmandu Metropolitan City Office)

REMITTANCE AND ITS USED BY RURAL/URBAN MARKET CENTER

	Rural/Urabn Market Center				Overall Market
Use of Remittance	Amount	%	Amount	%	Amount	%
Repay the Debt	19,762,77	31	18,680,840	21	38,443,117	25
Buying of Land & House	28,831,521	45	46,537,600	52	75,369,121	49
Saving in Bank	3,138,900	5	13,349,050	15	16,487,950	11
Cash in Hand	1,372,402	2	603,500	1	1,975,902	1
Education, Health & Other	7372,722	12	6,457,740	7	13,830,462	9
Social Work	2,282,400	4	1,896,810	2	4,179,210	3
Other Investment	848,000	1	2,471,000	3	3,319,000	2
Total	63,608,222	100	89,996,540	100	153,604,762	100

Source: Nepal Rastra Bank

Housing & Government elsewhere

India spends 4 percent of its annual budget on housing and housing related facilities. Sri Lanka has also implemented successful plans to bolster real estate development across the nation. 'The Million Houses Programme' was implemented from 1984 to 1989 which carried the slogan “minimal intervention, maximum support by the state and maximum involvement of builder families”. Then from 1989 to 1994, another similar project titled 'Million Five Hundred Thousand Houses Programme' was run with two sub-programs in each of the initiations — Rural Housing sub-programme and the Urban Housing sub-programme — targeted at the rural and urban poor respectively. The rural sub-programme successfully provided shelter to 231,752 poor families and the urban sub-programme helped out 33,564 poor families. Similar initiatives need to be carried out in Nepal as well to seed the beginning of public housing across the nation, thus making housing more affordable, manageable and accessible to the middle-class and the poor without lim iting the whole sector within the grasp of the affluent few or the Diaspora that are earning big in the foreign lands waiting for the situation suitable to their liking to come back to Nepal and assume their properties.

Growth and Sustainability

Nepal is one of the few countries where private housing began earlier than public in such a scale and speed. As developers and people associated with this sector complain, the government authorities concerned have done little except making tax-oriented policies. "The soaring brick prices," as Shrestha explains, "is an attempt by the government to squeeze more money out of developers that will hurt the ordinary people who want to build their normal houses." “Since this is the only sector showing good signs, all eyes are set upon it. Everybody wants his share of the pie but fails to realize that developers are not making fortune out of it. We are struggling to make people aware about it,” Shrestha adds, complaining that people who have been playing in between (those who have been building individual houses without following building codes and by-laws, and selling them off as apartments) are, in fact, eating out of the hands of established developers, who follow all the government instructions and play safe for , at least, for the sake of their name.

Real estate is taken as a sensible business area elsewhere in the world and governments act stiff on people who try to play with state rules and regulations. In the USA, the state governments check the projects thoroughly, make regular inspections, keep pricing under control and require real estate agents to complete diploma-level studies in the same field. But though we have laws and by-laws at place that, for example, prohibit building commercial houses in area smaller than 2 anna 2 paisa, there are scores of these mini-developers who have been breaching such laws and building houses and apartments without even meeting the basic requirements. “It is due to our ineffective and rather vague legal provisions. During the registration process, even an individual can walk off with the right to build and sell commercial apartments on a land smaller in size than 2 anna 2 paisa. We have been insisting on the government to stop this but in vain. In such a situation, such unsustainable practices are bound to occur,” says Bishnu Panthee, Vice-President of Society of Nepalese Architects (SONA).

Real estate development, in principle, should be futuristic and should complement urban growth ratio, including economic and social growth, for the next fifty or hundred years, say the architects. But the current building spree is totally contrary to this principle, they point out. Commercial complexes and residential units are popping up in the middle of nowhere and the eventual sufferers are, as always, the general people. “It is such a sorry state. Suppose a high-rise residential unit comes up in the middle of Putalisadak. Such a prospect can’t be denied outright. It is not forbidden in law. Imagine an individual living just behind that building in a single-storey house. He is doomed in terms of sunlight and all. Who is going to compensate his loss?” questions Panthee. Though the government has necessitated developers to spare 4, 6 and 8 meters of space from all directions of buildings to address the situation, that is not a sustainable idea, not at least to architects. Panthee argues that the government needs to chalk out clear provisions, rules and regulations on urban development on the basis of population density, environmental state, population growth ratio, bearing capacity of the soil and overall economic situation. “We don’t even have ‘land-use map’ of the valley and there is no concept of zoning, which means separating different parts of the valley into residential area, shopping area, official complexes and so on. Sparing a few meter of roads around projects is not enough. The bearing capacity of roads adjacent to the housing projects, traffic volume, sewage system, water supply and power conditions should also be ascertained,” reasons Panthee.

It is the duty of the government to offer lands on lease or on sale to developers and to ensure infrastructure like water supply, electricity, sewage system and connecting roads. In the present scenario, developers themselves are boring deep into the earth to find water and building sewage channels according to their requirements. “Sucking water out from the earth creates vacuum somewhere down which raises the geological risks. I don’t think the bearing capacity of the soil in the valley allows us to construct buildings higher than 10 storeys. This is also because the rocks found around here are sedimentary rocks, which are immature rocks with low bearing capacity. On top of that, we don’t have strict monitoring committee that checks all the raw materials used. We don’t even have skilled labor to build an earthquake-proof building which requires an efficient use of raw materials and technologies available,” adds Panthee.

Fire is another important issue to mention here. “Our fire department doesn’t have the capacity to cater to more than 6-storey buildings. It is a serious issue. Though developers try to convince us that the fire escapes will provide the safety, it is still a big concern. We need to install fire-hose cabinets to ensure safety but this is an expensive proposition. Also expensive is the building of the required foundation, pillars and the like for an earthquake-proof building. I have been doing freelance work for a couple of housing projects but haven’t found anyone addressing the concerns, which is the reason why you won’t probably find an architect or civil engineer living in those high-rise apartments,” Upadhaya adds but maintains that not all developers are so careless. “There are some reliable and reasonable projects as well – mostly the old ones from the established developers. Some newcomers coming up with their maiden projects seem to care less about safety, social and environmental issues.”

Regulations and Anomalies

“Though it is clearly mentioned in the housing regulations, I don’t think the government asks for the soil-test report from developers before granting them developing permissions,” informs Upadhaya, commenting on government apathy towards this booming sector in urgent need of proper regulations and favourable policies. “They look for structural details but don’t care about basic calculations. On top of that, architects need to work under the instructions of developers in Nepal, which, as imaginable, breeds anomalies.” Upadhaya further mentions that due to the internal rift between developers and their real estate firms, some customers have been facing acute problems during registration and procurement process. “It happens when a real estate firm is unable to pay its developer on time which makes the latter irresponsible towards the whole construction. I have seen it,” he adds further. “I believe that the sewage coming out of these projects presently going straight to some ditches or rivers should be processed through bio-plants to generate energy and to keep the environment clean. The government should include such a provision in its housing regulations as well.”

In the absence of leasing facilities by the government, developers hand over the complete project to the owners’ committee, which, subsequently, collects monthly payments from individual owners to create a pool of fund to run maintenance activities in the common areas. Since the government doesn’t own the land, it rests on the owners to decide their own fate after the physical age of the building expires. Though customers are legally handed over the ownership certificates registering them under the record of the government, which includes insurance coverage and other specific details, weak government monitoring has left many of the customers in despair. “There is no system of remodelling of infrastructure. We don’t have footpaths and pavements,” stresses Panthee. “The ultimate sufferers are the public so they need to be aware about these things. They need to check all the details - structural, technological and financial - before going all out on buying apartments or stand-alone houses.”

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