Cheaper borrowing mechanism for revitalising real estate sector

The real estate sector plays a pivotal role in the economy, environment, people's lives and society as a whole. Societies and businesses cannot function efficiently without the services of residential and commercial properties that provide facilities to offices, shops, factories and shelter to people. Real estate sector stimulates the economy by supporting growth, employment, shelter and sustainability.
 The efficiency of the process through which the real estate industry invests, develops, supports and maintains the built environment and services its clients is of crucial importance to policy makers of developed and developing countries alike. Although there are many factors that influence the well-being of the citizens and the economy, a well-performing real estate sector provides the basic platform for all these other factors to deliver their full potential, and for the  economy to bloom and remain competitive.
The global financial crisis has caused a significant drop in the volume of activities in real estate sector in the European Union (EU) and the Unites States (US), and many other countries around the world. According to the Global Financial Stability Report (GFSR) published by IMF in April 2011, the financial crisis generated by the collapse of the housing market may be more severe and persistent than other types of crisis. Crisis triggered by the collapse of the housing market is not a new phenomenon in the economy as they affected many countries in the previous decades. Periods of boom and bust on the housing market may be prompted by excessive competition between the financial institutions, inadequate regulation and supervision, massive flows of foreign capital, low monetary policy rates for long periods as well as the increase of the population's average revenues.   
     The policy-makers of a country, especially the government and the central bank, play a crucially important role in the real estate sector. The role of these two institutions can improve or degrade the real estate sector, by their real estate-friendly or non-cooperative policies. For development of any economically sensible sector, policy support of the government and the central bank is highly reinforcing.
Real estate sector was a solid performer in the economies of EU countries and US over the past several years. US Real Estate Investment Trust Price Index jumped 15 per cent over the past year and about 50 per cent since the beginning of 2011. This growth in real estate sector was driven largely by sustained low interest rates. Recently, US Federal Reserve has been planning to hike the interest rates and the economists have expressed their concern. There's no doubt, economists said, higher interest rates would damage real estate investments, given that most of real estate business relies on financing costs. In fact, many real estate indexes have already trended lower over the past month amid speculation that the central bank would act to increase interest rates. "Very low interest rates were supporting the Australian economy despite "strong headwinds" keeping a lid on growth" said C Kent, Assistant Governor of Reserve Bank of Australia.
Real estate sector has been playing a dominant role in the economy of not only the developed countries but also the developing countries. In India, economists call real estate sector the propeller of development and growth. The matured and timely endeavours of the real estate developers with the support of the government and its central bank, have worked as a catalyst to growth. Real estate sector helped greatly by developing the state of art infrastructure developments, buildings, townships, shopping malls not only in the urban locations in India but in the Tier II & Tier III towns as well. Real Estate sector contributes 8.53 per cent of the total GDP (gross domestic product) and also witnessed growth rate to the tune of 30 per cent. It is also pertinent to note that this sector has emerged as the fifth largest destination of foreign investment in India.
The role of real estate sector in the densely populated Bangladesh can hardly be over-exaggerated. The real estate and housing sector is one of the main drivers of national economic development and industrialisation. It has a huge multiplier effect on the economic activities and therefore, is a big driver of economic growth. It is one of the largest employment-generating sectors after agriculture. This sector has been backing about 12-15 per cent to Bangladesh's GDP. Not only does it generate directly and indirectly 3.1 million employment opportunities but also stimulates the demand for over 250 ancillary industries e.g. steel, cement, tiles and sanitary ware, cable and electric ware, paint, glass and aluminium, brick, building materials, consumer durables and so on. The real estate building construction industry is considered one of the fastest growing and largest sectors in Bangladesh. In 2008-2009, the construction sector employed  2.024 million people which is expected to rise to 3.10 million by this year and 3.32 million by 2020, as reported by WCC.
Real estate sector in Bangladesh has been suffering badly since 2010. Fiscal support from the government and monetary policy support from the Bangladesh Bank can remove the present stagnation in this sector. Different industrial bodies, economists and bankers have identified the prime reasons for the present stagnating condition of the sector. To improve the real estate sector means to improve overall economy of the country. The government and the central bank should come up with "special programmes" like those adopted in the EU countries, India and Australia and prioritise strategies to reenergise the sector. The needs of back-up infrastructure for housing and real estate development also require to be addressed carefully. We do find large number of examples in the private and public sectors where housing and real estate projects lack the much needed amenities and infrastructure like water supply, drainage, roads, and transport connectivity etc in addition to the much needed gas and electricity connection.
The recently declared monetary policy statement (MPS) by the Bangladesh Bank for July-Dec 2015 does not have anything special or new for the real estate and stock market sectors, although these two sectors are the backbone of the economy. Most of the stakeholders, economists and analysts firmly believe that a single-digit interest rate with easy term loan for real estate sector can make a dramatic change in this sector. Government's decision not to provide gas connection to real estate housing severely affected the sale of apartments. The central bank considers real estate sector as "unproductive" and puts many conditions on housing loans that hampers the growth in this sector in many respects. How could a sector that contributes 15 per cent to the GDP, employs three million people, supports dozens of backward linkage industries, be dubbed unproductive?
True, risks for banks triggered by bad loans to the real estate sector can have a substantial impact on banking performance. Falling property prices may also lead the banking sector into agony via various channels, through increases in bad loan expenses, or deterioration in the financial conditions of borrowings, or a contraction in financial transactions and in economic activities. No doubt, real estate lending is one of the most important components of bank loans. In most developed countries it accounts for one-third, sometimes even more than half, of total bank loans. Declines in real estate prices imply a lower return in the property industry and hence real estate loans are more likely to default. This reduces the profitability of bank lending and increases the banks' bad debt expenses.
The complexity of the credit risk channel increases the prevalent use of collateralised lending in real estate loans. On both residential and commercial property markets, mortgage loans are often collateralised by the underlying property. When property prices decreases sharply, even ratios that were initially considered to be very conservative may turn out to be insufficient for collateral drops close to zero. Real estate assets are also widely used as collateral for other types of loans, oscillations in property prices would have a broader sway on the banking industry through the balance sheet effect as noted above. When real estate prices fall, a typical borrower is more likely to face financial constraints in the form of reduced borrowing capacity. These constraints restrict the scale of new investment and reduce the profitability of corporate firms. As a result, the credit risk exposure of other types of bank loans increases as well, exacerbating the fragility of the banking sector.
Given the odds confronting the real estate sector to grow up to its potential, cheaper borrowing mechanism may ease much of its prevailing difficulties.
The writer is the CFO of a private group of companies.
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