Housing and construction sector in deep throes
Wednesday, 20 June 2007
Enayet Rasul
THE real estate sector has been growing fast in the present decade. The boom in the housing sector can be traced back to the past decade. But its real boom time was between 2001-2005 when it surpassed other emerging sectors to become the second most contributory as well as the fastest growing sector after readymade garments (RMG). The real estate sector started accelerating in this period as the local real estate developers not only started satisfying a wide range of local customers with their readymade apartments and houses, they could also create successfully temptation among Bangladeshi expatriates to spend a part of their foreign currency earnings and savings to own real property at home.
Thus, the gains from this development were two fold : real estate developers could now bank on more resourceful customers in many cases on a sustainable basis while the country's foreign currency reserves swelled as the expatriates sent home their earnings in foreign currency in greater amounts through the official banking channels to buy property in Bangladesh.
But a number of negative developments gripped this sector from last year. One disincentive was the long standing political turmoil. The uncertainties turned off the interest for a while of both domestic and overseas buyers of real estate. The buyers were keeping their fingers crossed and waiting for more predictable times before deciding to invest in real estate. At the same time, prices of all kinds of building and supportive materials needed for housing, were rising fast. The twin developments were squeezing this sector even before the present reconstituted caretaker government took over.
But the movement of this sector is seen to be more downhill in recent months. According to insiders' information, sales of flats have plummeted by as much as 60 or 70 per cent during the last six months. Never before, the developers faced such a gloomy situation in respect of sales. Many of them are in a bewildered state of mind knowing not how they will manage to prevent a collapse of their business. The sharply reduced sales was brought on mainly as a crackdown against corruption by the government.
The buyers of real estate in some cases were wheeler-dealers who made their big money during the past regime. They have been on the run and not going for purchases of real estate out of a feeling that doing of this would expose them as possessors of huge unearned money and make them the targets of the anti-corruption drive. Not only these people, even the ones with a relatively cleaner background appear to have been seized by such apprehensions.
This scare has only deepened in recent days and operators of the real estate sector say that the worst is yet to come. They are of the view that unless a section of the income tax rules which in the past provided for not questioning the source of wealth in relation to buying of houses and cars is not retained notwithstanding that its abolition has been recommended in the budget declaration for 2007-8, then the real estate sector is bound to suffer a catastrophe in the coming days. With this rule abolished, potential buyers of real property will not risk buying out of an anticipation of being dogged by law enforcement people who would be free to inquire about their sources of wealth.
Thus, the Real Estate and Housing Association of Bangladesh (REHAB) is practically down to its knees begging the government to reinstate the relevant IT rule so that buyers can get some confidence and take an interest in buying real property again. REHAB also underlined that government's principled move to do away with the relevant IT provision obviously is justified in terms of morality and fighting corruption. But they are pleading for its retention only for a year -- for the sector to be able to absorb the change -- to give some support to a sector which is seen to be a vital one in the economy the crashing of which could cause greater all round economic harms than what would be achieved in the realm of fighting corruption by abolishing the relevant rule.
REHAB leaders described in their statements drawing attention of the government that abolition of the relevant IT rule will only mean that funds that would likely be invested in the real estate sector if that rule operates, would now take flight and go out of the country. So, what is better, they ask : to provide a scope for undeclared money to be invested in the economy or to be denied any benefit from such investments as the undeclared money goes out of the country forever. REHAB leaders see more economic pragmatism in preventing this denial of resources to the country by retaining the relevant IT provision that will otherwise discontinue from the next fiscal. They say that keeping that provision and, thus, helping sales of real estate to increase, will mean greater revenues for the government when the government badly needs such revenues. The growth in the sector will mean non employment or further employment for a large number of workers and employees, the consequent incomes for them and also preventing a nose-dive of enterprises or industries linked to the housing and construction sector ranging from cement to sanitary wares, electrical fittings, etc.
Already the prices of construction materials are on the high side. Compared to what the prices of these materials were in 2005, the prices in 2007 are notably higher. The price rise in the case of rods was 19 per cent, cement 32 per cent, bricks 62 per cent, sand 72 per cent, electrical wires 100 per cent, paints 32 per cent and shuttering materials 28 per cent. The budget for the coming fiscal year, therefore, should have proposed lowered or at least unchanging duties on the imported raw materials of linkage industries of the housing and construction sector. But this has not happened and even higher duties have been proposed. For example, the duty on clinkers which is used to make cement locally, has been proposed for doubling from 5.0 to 10 per cent. REHAB is pleading for a readjustment of these higher duties on raw material downwards so that prices of construction and related materials can decrease as an outcome of lower duties on them. In the case of cement the import of which is subjected to restrictions, REHAB has asked for a withdrawal of such restrictions along with lower duties on the imported cement so that the housing and construction sector can benefit from adequate availability and reasonable price of this basic building material.
The registration fee for real estate is already considered as very high. The inability to pay such high fees frustrates many otherwise intending buyers from buying real estate. The registration fee has been proposed to be kept unchanging in the next year's budget when the REHAB and its customers have been pleading for its lowering to really create a big enough stimulus among the prospective buyers to press ahead with their buying plans.
Government provides cash incentives for some export products to provide incentives to exporters to export more and earn more foreign currency. REHAB leaders are for similar giving of cash incentives to them as they make sales of real property to Bangladeshis living abroad. The cash incentives will give a spur in selling real estate among overseas buyers leading to growth in the industry. The sales, on the other hand, will also add to the country's foreign currency reserve. REHAB has also demanded that government should explore the ways and means for extending long term housing loans at nominal interests to encourage greater housing and construction activities.
THE real estate sector has been growing fast in the present decade. The boom in the housing sector can be traced back to the past decade. But its real boom time was between 2001-2005 when it surpassed other emerging sectors to become the second most contributory as well as the fastest growing sector after readymade garments (RMG). The real estate sector started accelerating in this period as the local real estate developers not only started satisfying a wide range of local customers with their readymade apartments and houses, they could also create successfully temptation among Bangladeshi expatriates to spend a part of their foreign currency earnings and savings to own real property at home.
Thus, the gains from this development were two fold : real estate developers could now bank on more resourceful customers in many cases on a sustainable basis while the country's foreign currency reserves swelled as the expatriates sent home their earnings in foreign currency in greater amounts through the official banking channels to buy property in Bangladesh.
But a number of negative developments gripped this sector from last year. One disincentive was the long standing political turmoil. The uncertainties turned off the interest for a while of both domestic and overseas buyers of real estate. The buyers were keeping their fingers crossed and waiting for more predictable times before deciding to invest in real estate. At the same time, prices of all kinds of building and supportive materials needed for housing, were rising fast. The twin developments were squeezing this sector even before the present reconstituted caretaker government took over.
But the movement of this sector is seen to be more downhill in recent months. According to insiders' information, sales of flats have plummeted by as much as 60 or 70 per cent during the last six months. Never before, the developers faced such a gloomy situation in respect of sales. Many of them are in a bewildered state of mind knowing not how they will manage to prevent a collapse of their business. The sharply reduced sales was brought on mainly as a crackdown against corruption by the government.
The buyers of real estate in some cases were wheeler-dealers who made their big money during the past regime. They have been on the run and not going for purchases of real estate out of a feeling that doing of this would expose them as possessors of huge unearned money and make them the targets of the anti-corruption drive. Not only these people, even the ones with a relatively cleaner background appear to have been seized by such apprehensions.
This scare has only deepened in recent days and operators of the real estate sector say that the worst is yet to come. They are of the view that unless a section of the income tax rules which in the past provided for not questioning the source of wealth in relation to buying of houses and cars is not retained notwithstanding that its abolition has been recommended in the budget declaration for 2007-8, then the real estate sector is bound to suffer a catastrophe in the coming days. With this rule abolished, potential buyers of real property will not risk buying out of an anticipation of being dogged by law enforcement people who would be free to inquire about their sources of wealth.
Thus, the Real Estate and Housing Association of Bangladesh (REHAB) is practically down to its knees begging the government to reinstate the relevant IT rule so that buyers can get some confidence and take an interest in buying real property again. REHAB also underlined that government's principled move to do away with the relevant IT provision obviously is justified in terms of morality and fighting corruption. But they are pleading for its retention only for a year -- for the sector to be able to absorb the change -- to give some support to a sector which is seen to be a vital one in the economy the crashing of which could cause greater all round economic harms than what would be achieved in the realm of fighting corruption by abolishing the relevant rule.
REHAB leaders described in their statements drawing attention of the government that abolition of the relevant IT rule will only mean that funds that would likely be invested in the real estate sector if that rule operates, would now take flight and go out of the country. So, what is better, they ask : to provide a scope for undeclared money to be invested in the economy or to be denied any benefit from such investments as the undeclared money goes out of the country forever. REHAB leaders see more economic pragmatism in preventing this denial of resources to the country by retaining the relevant IT provision that will otherwise discontinue from the next fiscal. They say that keeping that provision and, thus, helping sales of real estate to increase, will mean greater revenues for the government when the government badly needs such revenues. The growth in the sector will mean non employment or further employment for a large number of workers and employees, the consequent incomes for them and also preventing a nose-dive of enterprises or industries linked to the housing and construction sector ranging from cement to sanitary wares, electrical fittings, etc.
Already the prices of construction materials are on the high side. Compared to what the prices of these materials were in 2005, the prices in 2007 are notably higher. The price rise in the case of rods was 19 per cent, cement 32 per cent, bricks 62 per cent, sand 72 per cent, electrical wires 100 per cent, paints 32 per cent and shuttering materials 28 per cent. The budget for the coming fiscal year, therefore, should have proposed lowered or at least unchanging duties on the imported raw materials of linkage industries of the housing and construction sector. But this has not happened and even higher duties have been proposed. For example, the duty on clinkers which is used to make cement locally, has been proposed for doubling from 5.0 to 10 per cent. REHAB is pleading for a readjustment of these higher duties on raw material downwards so that prices of construction and related materials can decrease as an outcome of lower duties on them. In the case of cement the import of which is subjected to restrictions, REHAB has asked for a withdrawal of such restrictions along with lower duties on the imported cement so that the housing and construction sector can benefit from adequate availability and reasonable price of this basic building material.
The registration fee for real estate is already considered as very high. The inability to pay such high fees frustrates many otherwise intending buyers from buying real estate. The registration fee has been proposed to be kept unchanging in the next year's budget when the REHAB and its customers have been pleading for its lowering to really create a big enough stimulus among the prospective buyers to press ahead with their buying plans.
Government provides cash incentives for some export products to provide incentives to exporters to export more and earn more foreign currency. REHAB leaders are for similar giving of cash incentives to them as they make sales of real property to Bangladeshis living abroad. The cash incentives will give a spur in selling real estate among overseas buyers leading to growth in the industry. The sales, on the other hand, will also add to the country's foreign currency reserve. REHAB has also demanded that government should explore the ways and means for extending long term housing loans at nominal interests to encourage greater housing and construction activities.