Eying a Rebound

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Investors long for good time as unaffordability constrains housing growth

There is a ‘wait and see’ mood among investors and clients alike with growth in different sectors is not picking to an expected level. Stakeholders say the private sector construction industry, especially the housing market, has plunged, leaving fallouts in other sectors or maybe the stagnation elsewhere has seriously affected the real estate. Everyone in business wants a reversal to the trend. How and when?

Miraj Ahmed Chowdhury

Bangladesh witnessed a construction revolution in the housing sector keeping pace with fast-moving urbanisation. Surplus money generated from various sources instigated the growth so such an extent that prices of houses exceeded in many cases the ones in major cities of the developed countries. The boom created expectations of more value addition among all players in the business and also had spill over effects on a variety of sectors. Many now regret the situation.

Having a home, one’s own home, has always been a dream of almost every citizen in a metropolitan city. Ashfaq Amanat is not any exception to such longing. He has been planning to buy a flat for the last 3-4 years but couldn’t yet manage to secure any. At his late 30s, and as one of the top executives at one of the largest international apparel sourcing companies, he earns quite handsome. What is his problem, then? To him, the main constraint is the mismatch between his choice and the market reality.

Ashfaq is living in large rented apartment in Dhaka city’s posh Banani residential area. His crowds are also adjacent to his resident. He enjoys foods, places of get-together and shopping malls are there around. He is now habituated in this environment. With the current income and savings, he can of course buy a flat, but only in places like Mirpur, Mohammadpur and Uttara. But he wants to get settled in the area where he currently lives, where apartments are sold at a price of more than Tk 20,000 per square foot. Buying a reasonable flat in Gulshan or Banani is a matter of Tk 5 crore or so. So he is waiting. ‘The problem is that the price of the real estate is growing at a lot higher pace than my income growth. As I reach a better level of living, apartments get even pricier. Now I am waiting for some price fall.’ says Ashfaq, who is apparently a representative of the middle class of upper income threshold.

The case of Kazi Ashraf is a little different. He has given his Uttara land to a developer a few years ago. The contract was sharing of apartments at 50:50 ratios and the signing amount which is hefty. But now it seems the projects has come to a standstill. The company is already behind schedule. Kazi Ashraf is awaiting a handover but the company cannot complete the construction for lack of fund as there are no potential buyers and already there is a huge burden of loans from the bank to repay. ‘It looks like a never ending wait,’ he described the situation.

Mohammad Enayetullah is also waiting for a good time. It was 2009 when he started Motobi Properties, a small real estate firm. As he said, business was good then, but as the government decided to stop providing gas connection to new apartments the pace of sales started to fall. According to this businessman, the problem with electricity connection and subsequent capital market crash contributed to the plunge in the housing business. Now as the gas and electricity connection problem is less acute he believes only a capital market boom could revive his housing sales. Therefore, Enayet is going slowly with construction of a project in Mohammadpur area. He has signed four other contracts with land owners, but planned to move ahead with them only after a turnaround in the market.

The long wait

Recent data from the Real Estate and Housing Association of Bangladesh (REHAB) suggests, only 338 companies have more than 22,000 flats unsold that are worth around Tk21,500crore. This association has 1200 members. There are more active companies that are not with them. So this number of unsold flats would be much more.

REHAB collected this data before a meeting with the finance minister early this year. It said there are 7,000 flats yet to be delivered and the companies that responded are due to pay banks more than Tk 4,000 crore. The actual aggregate payable amount for the industry should be 3 times higher or even more. Now the entire sector is waiting for a rebound all respect.

Bubble trouble

Unregulated price of housing is one of the major reasons behind the sluggishness of real estate business. During the last decade prices of apartments had increased manifold. In 2001 one could by a flat in Dhanmondi at Tk 2,000 per square foot. Now it is more than Tk 15,000 per square foot. The same is the case with other major residential areas.

The lowest possible price for apartments in suburban areas is around Tk 6,000 or so per square foot. Now it is very hard to purchase any space to live in Dhaka at a price below Tk 1crore. This surge in price left apartments out of the reach of most of the aspirant middle class buyers, leaving a lot of units unsold.

Industry insiders say it is mostly the price of land that is behind this crisis. Along Gulshan Avenue in the city’s central business district, the price of an acre land is approximately $1,700 per square foot. By comparison, land in Manhattan, New York, averaged at the end of last year, according to New York brokerage firms. REHAB said the price of land rose by 344% in Mohakhali and Dhanmondi and 331%; and 300% in Banani and Gulshan respectively.

During the early stages of this business the land owners used to get 30% of the building and 70% went to the developer. In a decade it became a 50-50 deal and sometimes the owner’s ratio rose60% share. Therefore in places like Dhanmondi, Gulshan and Banani only the price of land stands at Tk 10,000 per square foot. And the ultimate result is the enhanced price of the flat – at more than Tk 15,000 per square foot. This how the apartment has gone beyond the reach of most potential clients. ‘We’ve priced ourselves out of the market.’ Said former president of REHAB Mokarram Hossain Khan.

So, can there be a rebound, an end to waiting for the housing industry, keeping the land price same? The answer is a ‘no’ to Dr. Ahsan H Mansur, executive director of private think-tank Policy Research Institute. He explained the scenario as a great mismatch and wondered how with a 6% growth in the economy this market could be sustainable with several hundred percent increase in price.

Bangladesh is a country where most of the lands are individually owned. Institutional buyers as banks or mortgage companies have minimal stakes in land ownership unlike most developed countries. Therefore the impact of this housing market slowdown cannot be felt that much. Otherwise, Mansur says, the impact could have been disastrous by this time.

One can easily recall the sub-prime mortgage crisis in the USA in 2007. Banks allowed unbalanced trading in the real estate market and lending to individuals with inferior credit ratings. These subprime mortgages pooled into securities known as Mortgage Back Securities were subsequently sold to individual investors, and due to infusion of funds the housing market bubble occurred. It sparked the global financial crisis in later years and gave birth to a prolonged recession. As a result individuals lost their income, the capability of buying and trading and even failed to continue the mortgage payments. On the other hand banks for their survival enhanced the mortgage rate, the prices of real estate dropped and the bubble crushed.

Price correction to continue

The real estate has become a popular investment avenue during 2009-10 when it was booming and prices of property went sky-high. Before beginning to nosedive from the last year, property prices had remained flat in 2011 and 2012. According to Ahsan Mansur, price is still absolutely beyond the reach and the demand side cannot meet the supply. He says, for any rebound price has to be corrected by at least 50% in real terms from the 2012-level or by at least 20% in nominal terms.

He thinks the correction process is underway. Price of real estate is not increasing. In fact in some cases it decreased. He explained, if one considers the rate of inflation the housing price is corrected already by 20% in real term. Mansur predicts it may take a few years or more to see any beginning of a potential rebound.

Monetary dilemma

During the three years between 2010 and 2012 Bangladesh had a highly expansionary monetary policy allowing huge inflationary pressures. It was that time the private sector credit grew at an unprecedented annual average rate of 23.2%. Inflation rate shot up, reaching a peak of 14% in March 2012. Stock price was at its peak just before the great fall. This allowed a heavily increased money supply of 20.3% per year. A great portion of this money went to the real estate market, enough to create a big bubble in price.

The correction in monetary policy starting with the MPS of January-June 2012 had been carried forward further since then through end of June 2014. Dr. Sadiq Ahmed, Vice Chairman of PRI has clearly shown the impact of this correction in an article published in July. He says, ‘On average the growth of money supply declined to 14.9% during FY2013-FY14. Inflation rate has fallen, the exchange rate has stabilised and stock market is stable, although the confidence factor that was shaken by the 2011 stock market crisis is yet to return. Land prices have normalised and even declined in real terms.’

In a more controlled monetary environment where allowing credit in speculative sectors like housing and stock is discouraged, the real estate sector started to face financing problem as well, which also contributed to the stagnation in the business. So, housing sector investors may have to wait for a return of the relaxed monetary policy if they wish so.

Yet opportunities ahead!

There are opportunities, too. Statistics show that during the period between 2000and 2015, urban population growth rate is projected to be at an average of 3.7% for Bangladesh. By 2015, Bangladesh is expected to have 34% people living in cities and towns. Thus in the South Asia, Bangladesh holds the second position in terms of urbanisation pace and proportion of urban population. This scenario tells us that, as India is a rapidly growing real estate market in the world, Bangladesh may also attract more real estate investments than before.

According to the industry leaders, Bangladesh will need to construct 4 million new houses to meet the future demand in next 20 years. The current demand in urban areas is 30,000 units annually, within next 5 years it is expected to cross 60,000 units a year. So far the companies can produce only half of it.



The overall contribution of the sector to the gross domestic product is around 7.5% now. A comprehensive study on the real estate sector of Bangladesh by REHAB says, compared to overall GDP growth, this sector expanded at a slower rate. That is why in overall GDP the contribution of this sector has seen a downward trend. Yet during the last decade, the total volume of Real Estate, Renting and Business service sector witnessed a positive growth every year. It also facilitated a fast growth in many linkage industries such as glass and glass products industry, brick industry, cement industry, ceramic industry and iron and steel industry over the last decade. Such consistent growth in the real estate sector is mainly due to a consistent demand at the consumer end.

For a sustainable rebound

Despite the opportunity lying ahead, REHAB’s. Mokarram is also skeptical about any quick recovery. He said there is a remote chance of returning to the golden trajectory of the last decade. He, however, can sense a slow yet steady comeback.

For a rebound, he feels, it is urgent to increase sales of flats. Industry leaders need to reassess the contemporary ways of marketing housing products. The sector needs long-term (2-20 years) mortgage loans at a minimum (4%max) interest rate so that even the middle class people can afford to purchase.  ‘We have to make buyers financially capable. When they are so, sales will rise automatically and the housing market wills eventually grow.’ said Mokarram.

Sector experts have further suggested a secondary market to sell real estate products. To facilitate such market they have urged to reduce the registration fee which is at least 30% higher than the rate in neighbouring India.

Dr. Ahsan Mansur says the current economic situation is also responsible for the slowdown in housing business. If the country could achieve a faster GDP growth of 7-8%, economic activities would be much higher, which would surely increase the people’s purchasing power and contribute to better sales of housing products, he adds. Therefore, he stressed on a need for developing growth-friendly infrastructure and to create a suitable environment for private investment.

However, Lamudi is a bit more optimistic than others. This global property portal has recently started its operation in Bangladesh and has 500 real estate developers and 13,800 real estate projects listed. Rajesh Grover, managing director of Lamudi Bangladesh, observes a slight pick-up in the market in recent months. He says ‘It’s slow but after a few months we may see things changing drastically.’




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