Real estate in real trouble

People in Bangladesh are seen to be rushing to do the same kind of business when they see that some others are doing extremely fine in the field. It is observed in setting up shops of medicines, selling school dresses to students and choosing subjects for study.
The real estate business was unknown here in Bangladesh till 1990s. In the beginning, only three or four companies came up to do business in this sector by constructing high-rise buildings. Then they divided those into apartments for sale to the intending buyers.
Initially, there was hesitancy among  buyers as to whether they should buy a part of the building along with others in the name of buying an apartment. The main reason for such a hesitation was whether the buyer would compromise his freedom if he was to own an apartment along with other apartment owners in the same building. Later that vanity evaporated. The middle class and the higher middle class people rushed to purchase apartments from the realtors. Seeing high profits in the real estate business or what one can call 'apartment sale business', many people with capital or no capital rushed to do the same business.
By 2010, the number of realtors swelled to more than a few hundreds. They turned out to be prime customers of lands in the posh areas of Gulshan, Baridhara, Banani and elsewhere in good locations of Dhaka city. Suddenly, the prices of land went up beyond anybody's imagination. The realtors followed two types of strategies in land acquisition: one was outright purchase of the land and the second was to come up with the owners of the land on sharing basis.  In the twinkle of an eye, the land became the most valuable asset in Bangladesh. As the land value went up phenomenally in Dhaka city, the spill-over effects spread to other cities and from there to rural areas also.  
The other main reason of sky-high land prices was the use of remittances by the Bangladeshi workers in land purchase. As other kinds of assets remained unknown to them, their first choice of investment became land purchase whether in towns or rural areas.
However, as Bangladesh has been suffering from land scarcity, nobody now believes that land price will come down anytime in the future. People consider land purchase as safe investment. So long this perception will prevail there will be no likelihood of a decline in land price. The same people also constitute one of the main segments of customers for apartment purchase from the realtors.
But during the last few years, the condition of real estate business went from bad to worse. The sector now seems to have been over-saturated, at least for the next few years. The record high price of real estate is no more there. In some cases, it came down to 50 per cent but still the realtors are not finding customers for the already-built apartments. The realtors are blaming other factors for the slump in the demand including the Bangladesh Bank policy of high interest rate.
But unfortunately, the realtors did not realise on time that the sector was being over-saturated. An over-supplied real estate market cannot hold out high price for an indefinite period. The price of apartments had to come down and it came down. The apartment builders built more than they could have sold. On the other hand, in simple economic terms, investment in real estate was not economic in any way.
The yield rate from investment in real estate went down as the price of the land went up and the rental price was not even sufficient to cover one-third of the opportunity cost of money or cost of borrowed funds if used to purchase an apartment. Simple economics led to a slump in the demand which unfortunately the realtors did not notice. They are now reducing the offer prices, but that too is not found to be enough to buoy the market. Many apartment buildings now remain unsold, and any reduction from the present asking price will simply lead the realtors to huge losses. But they are to accept the losses now, because this sector was not managed well by them. They could not adjust the supply with the declining demand.
Some of the banks which offered credit to the realtors are also in a real bad shape, as credit already given now turns out to be bad one. For some banks, the amount is up to 38 per cent of the total classified loan. This means, if the demand for real estate does not pick up in the next one or two years, the banks will not be able to come out from the bad debt trap. The interest rate in the economy is too high. The real estate business is closely related to the market interest rate.
Also, the slump in the stock market business has been identified as another reason for causing slump in the demand for real estate. Real estate experiences a huge demand when a group of people becomes too rich too quickly. A bullish stock market is in a position to provide such people.
The real estate in Bangladesh does not have a secondary market which one can call a market in real sense. Most of the people who purchased apartments did so for dwelling purposes. Now those people who want to sell their old apartments simply cannot do so easily, as there exists no competitive secondary real estate market. Absence of competitive secondary market is working as a stumbling block in the way of a functional real estate market.
Finally, if the realtors want to come out of the present mess, they must keep pending any new construction project for the next few years. Also, they are to further reduce the offer prices of apartments. Only a reduced price will clear the present backlog.
The writer is a Professor of Economics, University of Dhaka, abuahmedecon@yahoo.com