REAL ESTATE Boom Like Bubble

March 5, 2004
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With the mounting population pressure, the price of real estate has, of late, increased by as much as 100 percent in the capital valley. From inner to core areas, the land price has shot up ranging from nominal to high. At a time when country’s other economic sectors are yet to show any progress, the real estate, which had crashed following the boom in early 1990s, is once again picking up rapidly. How long would it last? And what is its economic significance? These questions are yet to be analyzed. Uncertain share market, lack of new avenues for investment, lowering of the interest rate and intensification of conflict, all have contributed to concentrate investment in real estate triggering its boom, which, many believe, is a temporary phenomenon

By KESHAB POUDEL

Krishna Khanal, a land broker, has suddenly found so many buyers for his small piece of land. Khanal, who had bought a land in Koteswor two years ago at a price of Rs 100,000 per ana or (346 square meters), is now demanding Rs 250,000 for the same.

Till two years ago, one could have bought the land around the main road in Kathmandu Valley for Rs.250,000 per ana. Now the per ana price of the land adjoining the main road ranges from Rs 1 million to 1.5 million. Not only in the commercial hubs in Kathmandu city, the prices of land have gone up in sub-urbs and outer fringes of the valley as well. From outskirts of Lalitpur including Godavari to Thankot of Kathmandu, and Dubakot of Bhaktapur, the land prices have hit the roof.

Thanks to the intensification of conflict, burgeoning foreign remittances and low interest rates in commercial bank, people have found that investment in land, particularly in Kathmandu and other cities, makes more sense these days. Even though the infrastructures of cities, particularly the capital valley, have been stretched to their limit, with even basic services like drinking water supply shrinking, the prices of land is going up due to the absence of other avenues for investment.

Because of job opportunities, the relatively safe atmosphere and the education opportunities, rural people continue to migrate to the urban areas like Kathmandu valley.

According to Nepal Population Report 2002, published by the Ministry of Population and Environment, the valley’s population has nearly doubled in the last one decade. In span of the last four decades, the population of Kathmandu valley has increased by many folds. The linking of Kathmandu city with other areas have also encouraged people to buy a piece of land in the valley.

Growing Transaction

The transaction of land ownership transfer continues to increase and there is a rush of people in different parts of the valley to reserve a piece of land for themselves. Although there is no record of the number of organized real estate brokers, most of them act only as middlemen between a buyer and a seller.

According to the Department of Land Reforms and Management, the number of land registration has suddenly gone up by many folds in the valley. The revenue from the land registration alone increased by 41 percent this year compared to the previous year.

This indicates that the real estate price could continue to go up until the population finds a reliable and alternative sector for investment. There is a common feeling in the minds of people that the land is the safest bet for their investment in the prevailing circumstances.

Whether a Nepalese worker returning from foreign country or a rural farmer, they prefer to buy a piece of land in the valley with their savings. The situation right now is that every one is in a rush to buy a piece of land to secure themselves. Poor farmers even go to the extent of selling everything they own back in their villages to buy a land in city.

“This is not an economic phenomenon but simply a rush of uncertain population or due to the migration from one area to another,” said Dr. Bishwambher Pyakuryal, professor of economics at the Department of Economics at Tribhuwan University Central Campus. Dr. Pyakuryal is also the president of Nepal Economic Association.

The twin factor – increasing population and worsening security situation in villages – have helped in the current boom of real estate business in Kathmandu valley and other urban areas of Terai and hill. People are selling their lands in throw-away prices in their villages while buying them at high values in cities. “There is a forward swing in urban areas and downward swing in rural areas,” said Professor Pyakuryal. “The real estate prices have gone up not because of increase in employment opportunities or income of people but simply due to the influx of rural population.”

Whatever the conditions, the real estate prices might have reached to their saturation point. It will bounce back to crash sooner or later. If the country witnesses normalcy again, the real estate business could come crashing down.

Contribution of Remittances

Dhruba Khatiwada, 28, has recently returned from South Korea where he stayed for more than five years. When Khatiwada, a resident of Morang, saw no safer place for investment, he bought a land in Lokanthali. “I find land is the best place for investment of hard-earned money,” said Khatiwada.

Despite stagnancy in the employment opportunities in the country, Nepalese labor working in different parts of the world are investing in the land triggering their prices. There are many Nepalese, who after returning from foreign country, rush directly to a real estate agent to buy a land in valley.

There are more than half a million Nepalese who are currently working abroad, their first choice will be to buy a piece of land so that they can build a house on it. In social terms, the boom is natural since the first desire of every person is to have his/her own house, preferably in Kathmandu valley, and second is marriage.

“When a large number of Nepalese young population are going abroad for work, their first wish will be to possess a house to live in,” said professor Rishikeshab Raj Regmi, professor at the Sociology and Anthropology Department at Kirtipur Campus. “If foreign employment continues to flourish, the next round of boom will be the building construction.”

Even official estimates put the annual remittance value in the excess of Rs 72 billion. A big chunk of this money is being injected in the real estate.

Real Estate Price

From core city areas in Kathmandu to the outskirts, there is an upward swing in the value of land price. The prices range from Rs 2 million for (346 square meter) an ana to Rs.15,000 per ana in the areas like Dahachowk.

One thing is certain that the prices of land within ring road (whose circumference is around 27 kilometers) ranges, on average, around Rs. 200,000 per ana. If the land is attached to the main road, the price shots up to Rs 1 million.

“There are very few vacant lands remaining within and in the immediate vicinity of the ring road; the importance, therefore, on the location of the piece of land rather than money. The piece of land adjoining the ring road is precious since every body prefers to buy a land in such areas,” said Kumar Lama, a real estate agency owner of Maharajgunj. “There is a high demand of land in all the corners of the valley.”

History of Real Estate Swings

Following the restoration of democracy in 1990, the real estate business had seen an unexpected upward swing. The empty lands within the ring road were on high demand. The first phase of that swing lasted for six years. After the formation of the CPN-UML minority government, the prices of land crashed and many investors and real state business groups had to suffer heavy losses. Many small-time land brokers even went bankrupt.

The upward swing of the first half of 1990 was understandable since the carpet export, tourist arrival and other economic activities had opened up many new job opportunities in the valley. “It was linked to the economic progress of the valley,” said professor Pyakuryal. “ At present, however, there is no strong positive relationship between real estate prices and health of economy. On the basis of its transaction, it will be pretty risky to make further prediction of Nepalese economy.”

With the conflict intensifying, many people rushed to the valley hoping for personal security. For them also the real estate provided the safest bet.

Since the share market is yet to take off, only a few people have put their money in it. Had the country’s capital market shown its credibility and potentials, the money would have been diverted there. Even the reduction of the (bank) interest rates has forced people to invest their money on land.

Land Revenue

According to the Economic Survey 2003, the revenue from registration of real estate and land revenue has increased by 24.9 percent from Rs. 574.2 million in the review period of the previous year and has reached Rs.717.3 million. Of the revenue collected under this category, 99.6 percent or Rs.714.3 million came from real estate registration only.

The record of Department of Land Reforms and Management shows that the land transaction in the urban areas continues to go up particularly in Kathmandu valley, Pokhara, Bhairahawa, Biratnagar, Dharan and other cities. “We collect over 40 percent total land revenue from Kathmandu valley,” said director general of the department. “There is a tremendous rush in the Kathmandu district.”

Three units of District Land Reforms and Management office in Kathmandu collect about 20 percent of the total revenue. “There is virtually no transaction of land in the rural areas. Since the Local Self Governance Act has given the right to collect land revenue to the local bodies, contribution of land revenue to central treasury has been negligible,” said the director general.

If the lands are transacted in the real existing prices, the revenue generation would double. Since the government price tag of the land is much lower than market value, the government cannot charge the revenue more than that fixed by its land committee.

Although the market prices of lands in New Road area are around Rs 2 million per ana, the department has fixed its prices, which is less than half the market price. “We cannot charge revenue more than what is fixed by law,” said the director general. According to the department, the highest price of land has been fixed at Rs.300,000 per ana in the New Road area. The government charges between 3 to 10 percent as tax in the land transaction.

In other areas of the valley, the price of land is very low compare to the existing market. “The government must tag the real prices of the land so that the revenue collection can increase,” said an analyst. “There is a trend to devaluation of land price.”

Economic Performance

According to the Asian Development Bank Nepal Resident Mission’s Quarterly Economic Update released on December 2003, following a sharp downturn in FY 2002 due to a decline in agricultural output and escalation of the Maoist insurgency, Nepal’s economy recovered moderately and grew about 2.6 percent in FY 2003. Aided by January-August 2003 cease-fire, the industry and service sectors, both of which had contracted in FY 2002, registered a positive growth. The cease-fire particularly helped the manufacturing, and trade and tourism sectors recover from negative 10 percent growth in FY 2002. Transport and communication also grew strongly and contributed significantly to the overall growth.

The fiscal position improved in FY 2003.Revenue collections increased more than expected while regular expenditures remained in check. However, development expenditure fell sharply due to the security environment, helping to achieve a historically low budget deficit. The decline in development expenditure will undermine medium-term growth and poverty reduction prospects.

ADB also predicts that Real GDP is likely to grow about 4 percent in FY 2004 despite the breakdown of the ceasefire in August 2003. Continued recovery of the manufacturing, trade and tourism, and transport and communication sectors together with a strong rebound in agricultural output are likely to lead the economic recovery in FY 2004. Strong growth in remittances will strengthen the external payments position.

Agriculture grew only 2.4 percent compared to 2.2 percent in FY 2002, but it provided the bulk of the additional output, accounting for 35 percent of the total increase in GDP. Trade and tourism contributed 15 percent, while finance and real state and transport and communication contributed 11 percent each.

Despite certain stagnation, Nepalese economy has seen certain progress in many different sectors playing an important role to increase the real estate price in the valley.

Haphazard Growth

Most of the real estate business is under the control of small middlemen, but they don’t have any long-term vision for the urban development. The land is divided in a very ordinary manner; mostly they have a plan for a narrow road for small vehicles but without any idea on the sewerage, drinking water and other facilities.

With the aim to make urban areas become productive, healthy and employment oriented, the government has recently announced a policy to control haphazard urbanization process. Government’s policy is to gradually implement plans for physical development, land development, physical infrastructure development, development of service and facilities with the participation of local bodies.

Since the government is too slow to respond to the growing population pressure, it seems inevitable that the valley’s unchecked urbanization would turn this beautiful place into an ugly city.

At a time when the country’s rural sector is badly suffering, increasing transaction of the real estate has helped to change the pattern of national economy. How long it will sustain, however, remains to be seen.