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COVER STORY |
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COVER STORY |
REAL
ESTATE 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. “There
Has Been A Shift Of Investment To Urban Areas”
— Dr.
Shankar Sharma Vice
chairman of National Planning Commission (NPC) Dr. SHANKAR SHARMA is a well-known
economist. Having had a long experience at the country’s apex planning body, Dr.
Sharma is also closely monitoring the economic progress of the country. Dr. Sharma spoke
to SPOTLIGHT on various issues regarding the present boom in real estate. Excerpts: How do you
see the burgeoning investment in the real state? There could be three
or four different factors that are helping to boost the real estate sector in urban areas.
Number one is economic growth of this year and the last quarter of the previous fiscal
year following the beginning of recovery process in agriculture sector as well as tourism.
Interestingly, the tourism sector is also growing at the rate of 37 percent in the last
six months. The export sector is also growing. There is certain growth, rise in income and
improvement in overall economic condition. What about
the role of remittances? It is another
important factor. It continues to grow in increasing rate. It is quite obvious that
remittance is a major part of economy. That also has probably contributed in increasing
the price of real estate especially in urban areas. Then, another important reason is the
conflict. Following the intensification in conflict in rural areas, particularly far west
region, there is a shift of investment to urban areas. There is also a cycle of real
estate boom and bust. If we talk about other countries, we find similar situation. Why are
people investing in land? If people cannot
invest in other areas like stock market, they will invest in real estate. Nepal’s
stock market is not doing well, it has stagnated and the capitalization rate has not
increased. This is one aspect that one cannot invest more in stock markets. The second
area of investment is the service sector and industry. We have seen certain improvement in
these sectors. Now people have the capability for investment in these areas but people
would like to watch and wait for a while. People are now investing in gold. The investment
in the gold is increasing significantly in the last few months. Now the gold market has
stagnated. Because the options available in the various sectors shrink, people finds real
estate as an option. Even in the foreign exchange, the US dollar has actually depreciated.
These may be some reasons for people to think that the real estate is best. What is the
economic significance of the investment in the real estate? Economically
speaking it is not very productive. If we had investment in the industrial sectors, it
would have been much more beneficial. This one is basically speculative since people
probably will like to make some money by reselling land in later stage. We have to analyze
this trend whether that is the case or people really would like to invest some money to do
the construction activities for example the development of residential areas or build the
house. We have to separate it out if second is the case, in which case, it will be
productive since it has certain value addition. But if the transaction has increased only
due to speculation and with the unavailability of other avenues in the investment, then
that is not very good. But in any case, it has not boomed like what we had seen seven
-eight years ago. The economy is also doing slightly better. So this is quite positive. How does it
benefit the government revenue? If there is higher
transaction in land and construction of residential area, local bodies as well as
government will increase tax and that will be beneficial to the country. If we see in the
construction sector, which is affected by number of factors, they can have multiplier
impacts to the overall service and construction industry in the country. Do you have
any plan to divert this investment from real estate to other more productive areas? We do have certain
plans. More investment are going in manufacturing sector, infrastructure areas since we
introduced BOOT Act (Build Own Operate Transfer). We are tying to do a number of things.
Even in the trade and industrial sector, the government has adopted a study called Trade
Competitiveness Study in Nepal, which opens up more avenues and scope for investing in the
manufacturing and trade sector. We are serious on this matter and have adopted it. We are
not in a stage where we have to worry too much about the investment that is going to the
real estate field. Economic
survey has indicated that there is high growth in urban area. Does it have any relation to
the investment in real estate? It will have strong
relations. We have also give consideration to the rural areas. If the majority of the GDP,
especially non-agriculture, is coming from only a few sectors, we have to give
consideration to its development. It will have the multiplier effects, too, in urban
economy. But gradually, we have to move away from those premises and that consideration
and try to attain the balanced growth in the country. |
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