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Outpours of the Property Bubble Burst

The wait for the country’s Real Estate sector to turnaround appears to be a never-ending one. The expectation of people that is yet to be to be fulfilled, largely banks on the apparent political stability and price correction of property.
Thanks to the unstable political situation, the Real Estate sector has seen a downturn in the period between 2012 and 2015. The scarcity of bank loans at affordable rates, highly fluctuating stock market and problems in attaining commodities like gas and power also contributed much to the low growth of this sector previously.
Although a considerable improvement has been noticed in such factors in the later years, the real estate sector is still short in demand. The problem lies in the expectations of many who think that the apartments offered by the builders are over-priced and need further price-correction while builders claim it to be difficult to afford such a solution under the prevailing circumstances.
A number of factors add to the current moribund state of real estate market; some are beyond the control of the builders and some self-made.
The real estate sector first saw success back in the early 2000s. The increase in purchasing power and the emergence of the greater number of nouveau riche in the country led to a boom in the sector causing it to reach its peak during 2009-10. The overheated stock market back then also benefitted the real estate sector substantially.
The success of any particular sector in Bangladesh generally attracts many players who want to benefit from the situation. The real estate sector was no exception. During that period an estimate of 100 new builders entered the market and took up highly cost-intensive projects. However, the existence of too many builders in the market later led to the abnormal hike in land prices, which led to an unsustainable market situation. The collapse of the stock market also came as a death blow to both the existing and new builders. Simultaneously, the property bubble burst and political conflict centering the general elections in 2013 and 2014 made the situation even worse.

“The problem lies in the expectations of many who think that the apartments offered by the builders are over-priced and need further price-correction while builders claim it to be difficult to afford such a solution under the prevailing circumstances.”

An increase in the figure of unsold flats and apartments has been observed from the early 2011 and rose to nearly 15,000 during 2015-16. However, this figure only included constructions that belonged to the members of the Real Estate & Housing Association of Bangladesh (REHAB) and would have increased if other realtors were taken into account.
The property bubble burst has forced the builders to lower their prices notwithstanding the fact that land price in Dhaka City continues to be high on an average. One of the major reasons to trigger this is the scarcity of land. Besides, the builders have been following a sluggish trend for their huge backlog of unsold apartments and flats.
In today’s context, it can be said that the situation has improved lately but not up to the desired level. The builders have tried engaging with their customers through housing fairs where flats and apartments are offered at a discount. However, the number of visitors has gone up, but no notable change was observed in the sales.
Moreover, there exists an abnormal difference in property prices of different locations in Dhaka City. The sale prices of residential as well as commercial spaces in posh areas like Gulshan, Banani, and Dhanmondi are abnormally high compared to that of other areas. There is no denying that facilities and overall environment in posh residential areas are better than those in other parts of the city, but that cannot be the only justification for the high price. On the other hand, the small builders are now experiencing a good time as the demand for residential flats priced between Tk.3.0 million and Tk.6.0 million has gone up.
The price of commercial spaces in Banani and Gulshan had remained stagnant over the years despite the bubble burst, whereas it has gone down significantly in other areas. The builders having saleable spaces in commercial localities like Motijheel and Dilkusha have also lowered their price level, but the number of takers remained the same. The various opportunities to invest undisclosed funds in real estate offered in the past budget also failed to buoy up the sector as a whole.
The banks are now offering housing loans at a single digit rate of interest, which too, has not worked out as a feasible solution to the price issue regarding residential and commercial spaces.
While the problem with power generation is now over following the substantial improvement in the recent years, the availability of natural gas to households still remains a problem. However, people have now started depending on LPG cylinders for cooking and made peace with the unavailability of options.
According to an estimate, nearly 3.5 million people are involved in the housing sector and its linkage sub-sectors as a whole. This sector makes a notable contribution to the gross domestic product of the country every year. Besides, a number of sub-sectors are dependent on it as well. Experts feel that the demand for flats and apartments should have gone up by now; as the banks are offering housing loans at interest rates as low as 9 percent and prices of apartments have fallen to half in real terms in many areas of Dhaka.
The fall in inward flow of remittance for the last three years may have been one of the significant reasons behind the decline in demand of the housing sector. Investment in the real estate sector is one major choice for the Bangladeshi expatriates. Therefore, a downswing in remittance inflow is bound to have some impact on the demand of the housing sector.
Another important factor, it seems, is the substantial rise in capital flight. The annual illegal outflow of funds from the country now hovers around $9.0-$10billion. An affluent section of the population is involved in transferring wealth illegally to invest abroad; a substantial part of which is invested in the real estate. For instance, the investment by Bangladesh nationals in ‘second home scheme’ in Malaysia is now known to all.
The policymakers are yet to find out the reasons behind the abnormal rise in the flight of capital. Although, the increase in opportunities of attaining wealth illegally and the unwillingness of its holders to keep it at home, may have contributed much in this regard.
The government has still not taken any effective measures to retrieve the outflow of funds through various means, including trade transactions, or restricting the illegal flow of funds abroad. Such circumstances might enable the policymakers to consider offering people, the opportunity to invest funds in real estate, without being queried upon by any agency. However, many economists would oppose the proposal for considerable reasons. But a move made might help stop a chunk of the illegal fund from flying abroad.

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