June 2005
COVER STORY

Housing Growth:
IS IT FOR REAL ?

By Gaurav Man Sherchan & Madan Lamsal

After a major slump, the market for residential facilities has again been witnessing an upward trend over the last three years. This has witnessed the growth of a new industry—housing companies. The development of this new industry was long awaited as it attempts to provide well planned residential bungalows and apartments meeting the needs of urban dwellers of all classes. Moreover, it does away with the hassle of having to ‘do it yourself’—a major relief for the busy working class.

Those entrepreneurs who sought attractive investment opportunities have taken up this new development with much enthusiasm. With the work in big infrastructure projects coming to almost a standstill, the construction entrepreneurs were quick to see the opportunity in producing and selling housing units to fulfil the pent-up demand for such products. Furthermore, the financial institutions have found this sector as a major investment opportunity. While energy is running high among all these players in the marketing chain, the question in the mind of the developers, those planning on becoming developers and financial institutions is as to how long the growth will last. However, looking at the various factors that affect the growth of this industry, it can be said with certainty that a huge potential does exist.

A Few Bare Realities

Let's now turn our attention towards some facts. Over two-fifth of the population (44%) in Kathmandu and Lalitpur district live on rent (Population Census 2001, National Report, CBS) and the urban population is growing at a rate of 6.4 percent relative to the national population growth rate of 2.4 percent. A survey conducted by Orion Associates for New Business Age to evaluate the market potential among SEC A, B and C population with a personal monthly income of more than Rs.10,000 per month in Kathmandu also points out that the growth is here to stay in housing development as 93% of the respondents stated that they were planning on acquiring a new residential place although 44 percent of them already had family owned and 17% personally owned houses. To own one’s property is deeply ingrained in the psyche of a Nepali under the traditional value system.

While the dream of owning a new house is not new, the form of the dream has changed for some with changes in the way of life of urban dwellers. 'In today's dynamic environment, working class people cannot afford to take a year or two off to build a house. But we had to convince people to buy rather than build. I feel that the market now has accepted this, says Om Rajbhandari, CEO, Comfort Housing. Traditionally, all Nepalis dreamed of owning an independent house that included a kitchen garden, if not a garden. Taking after developed countries, urbanisation has also prompted some Nepalis to now dream of owning an apartment, though owning an independent house would still be the first choice. In the survey, only 39 percent of the respondents stated that they would build a house on their own. The first important development to be noted is that Nepalis are now ready to hand over the construction work to professional developers breaking the old tradition where people have to take up all the responsibility while building a house. Almost one-third (30 percent) of the respondents stated that they were planning on purchasing a house in a housing colony and interestingly, over one-fourth (27 percent) of the respondents stated that they were planning on purchasing an apartment.

As the market is still at its formative stage, many of the developers are still exploring various strategies and learning from experiences. Though they are sure that a huge market exists, they are yet to ascertain where the market lies. Ganesh Chandra Baniya, CA, Oriental Builders & Developers says, "After Dhumbarahi Apartments, we will not be developing any apartments for the next one year. We want to see how the market for apartment evolves before we start another apartment project. We are, however, developing independent housing in Tahachal for the time being."

What guides the buyers?

Analysing the key drivers, it was found that good residential environment (73 percent), better facilities (72 percent) and security (72 percent) were found to top the list of key considerations that guide buyers; all factors in favour of professional developers. People planning on building their house on their own were found to be largely price driven as two-third (65 percent) of them stated that they were doing so as it is cheaper (value for money) and can be customised as per one’s needs. On the other hand, the prime motivators for buying a house in a colony and apartment complex were security, hassle-free, good residential environment and better facilities. A higher percentage of those opting for apartments considered it hassle-free as they felt that living in apartments would not only get rid of the tension in construction but in living as well. While living in a bungalow, no doubt, is pleasurable, the hassle of maintaining it has posed as a big problem for many, a luxury not many can afford while maintaining a hectic urban life.

Among the various factors considered important when choosing a place for residence, good supply of drinking water was found to be rated as the most important (not surprising given the water scarcity and Melamchi still a tunnel dream). It was followed by security and a peaceful environment. However, one should note that all these factors were given high importance ratings. Still, the price of land was found to be the least important factor.

It is interesting to note that the land price was found to be more important than proximity to the city and the density of houses among those opting for self-built house as opposed to those opting for colony and apartment. Shyam Ghimire, a first generation Kathmanduite says, "Why should I buy an apartment costing two million rupees when I can build a house in four to five annas of land if I go a little further out? I wouldn't mind if I have to travel an hour to the office every day." As land prices in the main city centres shoot up, many households with a low purchasing power have been opting to build houses outside the Ring road where land prices are relatively cheaper.

The market for housing can broadly be segmented into two categories: independent housing and apartments. These two broad categories can be further segmented with purchasing power as a major basis. While a large chunk of the market for bungalows start at Rs. 2 million, the market for apartments end at Rs. 2 million. Households that have already planned on buying a house in a colony were found to have higher purchasing power compared to those planning to build their own house. The mean price range for households wanting to buy a house in a housing colony was Rs. 3.456 million as opposed to Rs. 2.241 million for self-builders. In the colony segment, the majority of the respondents (42 percent) stated that they were planning to buy a house in the price range of Rs. 2-3 million while another 37 percent were planning to invest Rs. 3-5 million.

With respect to apartments, one-third (34 percent) of the respondents opting for apartments plan to purchase apartments costing Rs. 1-1.5 million while another two-fifth (40 percent) plan to purchase an apartment costing Rs. 1.5 to Rs. 2 million. Oriental Builders & Developers had earlier sold apartments costing Rs. 0.7 to Rs. 1.2 million (Kuleshwor), which was targeted at the lower middle class segment. In Dhumbarahi, they, however, are selling apartments with the same specifications at Rs. 1.6 to Rs. 2.6 million. Bania from Oriental Builders & Developers claims, "It is not possible to sell apartments at Dhumbarahi at earlier costs as the cost of land and materials have dramatically increased." Despite increase in costs, can an increase in price by over 100 percent be justified? With the exception of apartments developed in Kuleshwor by Oriental Builders & Developers, the demand for Rs. 1 to Rs. 1.5 million apartments has been totally neglected. The majority of the apartments till date have been targeted at the middle class, which cost Rs. 1.5 to Rs. 2.5 million. Developers should note that only these two segments have the capacity to generate big volume in the longer run.

On the other end, there already are a few developers such as Shuvakamana Housing Developers developing Indreni Apartments costing between Rs. 6.5 million to Rs. 10.5 million that boasts of exotically designed apartments following international construction standards, swimming pools, gymnasium and more importantly, a central location.

When questioned about the demand for such high-end apartments, Engineer Dipak Man Sherchan, promoter of Shuvakamana Housing Developers says, "People who have reached their late 40s are already well established professionally and have high savings. At this age, children of most of such families are already working either in Nepal or abroad. Hence, the family size is reduced to only the parents who are also busy working. They like to move to apartments that provide security, safety and most important, the luxury of living with like minded people. With adequate purchasing power, such families are ready to pay a premium for apartments that are built under sound architectural standards that offer all necessary luxuries." Other players in the market are also of the opinion that there are approximately about 200 such families who can and will opt for such apartments.

The boom in the market is largely being pushed up by the easy availability of finance being provided by banks and other financial institutions targeted mainly at salaried people. Everest Bank Limited (EBL) witnessing a slump in the real estate business between 1998 to 2001 saw an opportunity to develop housing loan as an important loan portfolio and went about it aggressively though this business was pioneered by Standard Chartered Bank Nepal Ltd. Keshab Poudel, Manager-Corporate Credit, EBL remarks, "Home loans have grown to become a very important loan portfolio both in terms of loan disbursed and payback. At present, home loan contributes to 12 percent of our total loan portfolio. Till date, we have already disbursed Rs. 96 crores in home loans and default rate is almost nil (0.01 percent only). The growth rate is also very healthy and we feel that it will at least continue for the next five-ten years, if not more." A survey among 15 banks revealed that home loan disbursement has reached Rs. 3620 million and a healthy growth rate of 98 percent in 2003-04 over the previous year. Among the various financial institutions, the EBL is the number one in home loans (Rs. 925 million as of Baisakh-Jestha 2062) exceeding the Standard Chartered Bank Nepal Ltd. In the last one year, more and more financial institutions have entered the field due to the mounting demand for home loan and more important, an almost nil default rate.

Willingness to Pay

The market for home loans certainly shows no signs of slowing down as 60 percent of the household respondents were already found to have made up their minds to take home loans. Among the various segments, a higher percentage of respondents opting to build their own homes and respondents opting for apartments were found to be planning to take home loans from financial institutions (67 percent for both) relative to those opting for a bungalow in a colony (51 percent).

The amount to be paid as down payment was found to be very important while choosing the bank for loans, as the remainder amount could be spread over a long period of time, thanks to the flexible payment schemes offered by the banks and finance companies. As down payment, a majority of them were comfortable with paying between Rs. 100,000 to Rs. 500,000. While the desired down payment was highest among those opting for a colony (at Rs. 1.11 million), it was lowest for those opting for apartments (at Rs. 0.50 million). Though charging a higher down payment may seem attractive to the developers or financial institutions, the number of people who are able to make down payments above Rs. 1.5 million was found to be 13 percent only. None of the respondents opting for apartments stated that they were ready to make a down payment of more than Rs 1 million. A more in-depth analysis may be needed to understand the ability to pay.

Preferred monthly instalments were found to be between Rs.5,000 to Rs. 10,000 for all three categories; mean monthly instalments was Rs.15,000 for self-built, Rs.14,000 for colony and Rs.9,000 for apartments. One-third (35 percent) of those opting for apartments have mentioned that they would like a monthly instalment of less than Rs.5,000.

With real estate prices going through the roof, it has been evident over the years that the requirement of land has been decreasing in size. The majority of the respondents opting for self-built or colony stated that they would prefer four annas of land while the mean preferred land size was found to be five annas. The demand for three roomed dwelling unit seems to be highest for all types of residential facilities. While there is a demand for four roomed bungalows, respondents opting for apartments stated the need for either two roomed (46 percent) or three room (46 percent) apartments.

While two or three rooms are the basic requirements, a small percentage of the respondents also stated that they would require other rooms such as a separate TV room, study room, puja rooms. Such requirements, however, apply only for households planning to live in apartments costing more than Rs. 2 million. Dhum-barahi Apart-ments seem to have already realised this fact as they have increased the number of their three bedroom apartments with (puja and storeroom) from the initially planned four apartments to thirty-six. Keeping in mind the space limitations, 71 percent of the respondents stated that they would be comfortable with a kitchen-cum-dining room.

Even after all expectations have been met on paper, the experience of the customer who actually live in the housing units eventually decides the future of a developer. Rajbhandari, CEO, Comfort Housing, claims, "Our customers are the key to our success. As they are very satisfied, they act as ambassadors for our future projects." The industry seems to have matured considerably as the initial teething troubles are resolved, according to the developers. Though there was news about dissatisfied customers in a few residential complexes (namely Mount View Residency), we found that all such complaints have been amicably settled except for one: handing over of legal papers of the property to the house unit buyers. In the case of apartments, management of the public spaces seems to be major issue of concern among potential apartment buyers. The developers will have to hand over the land and the management of the facility to a co-operative formed by the apartment owners, but how such a co-operative would actually function is yet to be seen as none of the properties have been handed over to them as yet.

Though it is evident that there is a good market potential, developers will need to strategically evolve with the market needs with the necessary support by the financial institutions and the government. As the market is still in its early growth phase, all stakeholders will need to spend more time in evaluating market needs of the various segments and plan to meet those needs at reasonable costs.

As early adopters buy into the idea, many potential buyers are still in a "wait and watch" strategy. Sustaining a healthy growth rate for the industry would largely depend on how well it is able to address the needs of the various market segments and how the legal and other support services provided by the government help in promoting community housing. As Rajbhandari states, "The mission of Comfort Housing is not only to earn profits but also to contribute to the development of the housing industry, development of the economy by providing business to auxiliary industries, employment for the mass and better living conditions for the people." The contribution of the pioneer developers to the development of the industry needs to be commended and the government's responsibility does not end at providing adequate legal policy and regulations, it also has to provide necessary incentives to encourage developers and buyers.

Points to Ponder
While Buying a Community House

By G B Banjara

Community housing has just started in Nepal. There are over a dozen developers in Kathmandu alone, offering apartments and bungalows ready for settlement. As of now, there are probably more sceptics than enthusiasts regarding community living.

Banjara & his family

One can hear widespread misconceptions and scepticism towards such housing projects.

It is probably for the first time that in urban Nepal, working class people in their 30s and 40s can fulfil their dream of living in a community with world-class civic amenities and modern facilities. Most residents in a housing colony are professionals, who may be working in multinationals, corporate sector or INGOs and business people who want to live in exclusive communities with better facilities or they could even be retired people seeking a place to live with peace.

However, buying an apartment or a house in a colony can often be more tricky and risky than buying a plot of land and constructing your own house. Though most housing projects market their products as dream offers, the reality could be far from that. Most of our builders have none or very limited prior experience of developing and managing community housing. Government regulations and monitoring are weak and so it may not help you while selecting and buying a house. Some housing projects may have come up without any intention of long-term business, but only to reap the quick benefit from the boom in the property market. Chances are high that if one is not careful, he or she could easily be a victim of unscrupulous builders and property dealers, thus ruining the earning of a lifetime.

What things should we take into consideration while buying a community house? Here are a few suggestions for a prospective house owner, based on the first hand experience of the scribe himself.

1. Do your own survey. Explore your options. Visit as many housing colonies as possible before deciding on one. Do not get carried away by media advertisement and word of mouth. Many people buy house based on the recommendation of a particular friend about the location or design. What works for your friend may not work for you. Consider aspects such as distance between your work and house, availability of children’s school, availability of public transport etc. You can always take the second opinion from friends and family members, but the ultimate decision has to be yours.

2. Estimate your requirement carefully. Are you looking for a flat or an independent house? How big a space are you looking for? How many rooms do you require? What minimum facilities do you expect? Normally in community housing, one does not have the flexibility of creating more space at his will by raising stories or expanding space.

3. Work out on your budget carefully. How much money can you invest from your own sources? How much do you need to borrow? Now a days, many banks offer house loans with attractive interest rates. But it is usually more difficult to obtain loans from banks than one may anticipate. Banks may ask for all sorts of documents, which may be difficult to produce. They may have other issues such as transfer of ownership, income adequacy, collateral and credit terms, which may make it difficult to obtain a loan. Consult your bank, even before you decide to buy the house, whether you can secure loan for the purpose.

4. Ask whether, the builder has had the site design approved by the Town Development Authority and other concerned regulatory bodies. Ensure that the legal parameters such as open spaces, road width, floor area ratio etc. have been followed. For e.g. in some inner parts of Kathmandu, it is illegal to dig deep tube wells, which may result into water supply problem later.

5. As there is no effective third party mechanism to monitor the quality of the construction, it is recommended that you book the house before the construction begins. Ask for a schedule of major works such as the laying of the foundation, concreting etc. Monitor directly or appoint an engineer to supervise the construction. If you want to customise the design, communicate with the builder right in the beginning.

6. Work out the contract in detail with the builder. Do not forget to include terms such as payment schedule, completion of work etc. It is typical of Nepali builders to delay the handover of the property. Put in clear penalty clauses in case of late delivery.

7. There is a widespread practice of offering discounts while buying a house. Such a discount depends on the capacity to bargain by the specific customer. Thus use your network extensively to influence the builder for discounts.

8. Consider the return on investment (ROI) angle while selecting a property. One of the most important aspects to consider while buying a new house is whether there is going to be any value appreciation of the property. You can also have an option of selling back the property to the builder, in case you decide to withdraw your booking at a later stage. Specify this clause in your contract.

9. The builder should be liable for any defects and repair works on the building for a specified period. Ask what the builder’s policy on this issue is. Mention this in the contract.

10. Work out in advance with your builder, the services such as water supply, electricity, waste disposal, security etc. Who provides such services and manages them? What should be the service rates charged to the customers?

These are only some of the important points. There could be more. The key issue is- the customer has to be aware of the potential problems of buying a colony house or apartment.

We are yet to see big times for community living in Nepal. As the Kathmandu valley’s population continues to grow, we need many more housing projects to cater to the growing demand for houses.

Buying a house is a lifetime investment. Let us not make the mistake of choosing a wrong product in haste and regret it later. We do not have to go through the pain of constructing our own dream house any more as we can buy it from a builder. But that is true only when we have carefully analysed and made the right decision while buying such a property.

(Banjara is working in an INGO and is an expert in Management)