Real estate sector in real doldrums

Shahiduzzaman Khan Real estate sector is now passing through a challenging time. Sale of apartments has dropped by at least 50 per cent during the last two years, prompting realtors to reduce the prices of their unsold flats. In order to attract buyers, the realtors are now offering discounts up to 20 per cent. Still there have been no notable increase of sales of their flats. Over 20,000 ready flats will be added to the list of at 16,000, already lying as unsold ones, from early next year. A report published in the FE this week dwelt at length on the developers' concern that the industry might face closure in the coming days if the proper attention is given to this Tk 200 billion worth industry. The sector is continuing to witness poor sales since 2009 when the government stopped providing fresh gas and electricity connections for domestic use. The realtors' sufferings intensified after the recent debacle in the country's stock exchanges as many of the prospective consumers have lost almost everything they had, following the crash of the market. Desperate realtors are now offering the customers hefty discounts, raffle draws and gift items-on-booking with a view to increasing their sales. All indications suggest that the future of the sector is very uncertain. Realtors say they have been forced to decrease the prices of apartments, knowing fully well that their profit margin will be very little. The price for per square feet of apartments has come down to nearly Tk 16,000 from Tk 21,000 in the city's posh areas like Dhanmondi and Gulshan. Even after offering attractive raffle draws and expensive gifts to the participants in the growing numbers of real estate fairs, the situation is not improving up to the expectation of the realtors. A number of companies have experienced more than 50 per cent fall in sales over the last 12 months. Many realtors have started terminating their employees to reduce expenditure under the changed circumstances. In fact, Tk 76.80 billion investment of the realtors remains virtually stuck up due to the latest government decision about giving conditional power and gas connections, while both buyers and developers have long been servicing their debts to the banks, to the extent of Tk 890 million per month. According to an estimate of the real estate and housing association (REHAB), the developers failed to deliver around 10,000 ready apartments worth Tk 8.0 billion to the clients in time due to the absence of new electricity and gas connections to residential and commercial projects and an increase in land transfer costs. In addition, due to lack of electricity connection, construction works for a total of 700 new projects, comprising an estimated 10,000 apartments, had to be suspended, affecting the demand for land or apartments in Dhaka and its neighbouring cities and towns. This has created a negative impact on the sustained growth of the sector. The government raised the land registration fees to Tk 2,000 from Tk 250 per square metre in 2010. This has created a deadlock in the registration process, as people tend to take more time hoping that the government will revise and lower the rate. The tax to be deducted at source on apartment registration fees was also increased 10 times, creating yet another problem in the sector. Furthermore, the recent political turmoil in the Middle East and a debacle in the stock market have contributed to a decline of substantial sales in the last few months. With the demand for, and sales of, flats declining, relevant linkage industries that have been developed locally, including brick, cement, MS rod and paint have also been adversely affected. In fact, these industries have earlier witnessed marked growth and expansion, in tandem with an otherwise buoyant the real estate sector earlier. Now, if real estate sector begins to crumble, linkage industries will too feel the crunch adversely. At present, the turnover of the real estate sector stands at around Tk 1,000 billion a year, while the sector contributes 14 per cent to the gross domestic product (GDP). There are 2.5 million construction workers employed in the sector, while another 30,000 engineers, planners and management staff are also involved in it. The fate of such people will become uncertain if the sector loses its steam. With the fall in the apartment prices in the city, there are reasons to believe that the consumers should rejoice. But the fact remains that most of them have lost their purchasing capacity due to erosion of their real income in the face of unabated pressure of inflation, besides the fallouts from fall in remittance earnings from abroad and stock market crash. Flat prices had gone up six to eight times in the city's posh areas during the last 15 years, driven by high demand that pushed up land prices exorbitantly in those places. Shrinking land and spiralling prices of construction materials had also added to the price-hike of flats. On one hand, the realtors are buying land at a very high price, and on the other hand, they are forced to sell flats at lower prices. As a result, they are failing to reap modest profit from the business as the prices of construction materials have also gone very high. The government needs to take some immediate steps to resolve the energy crisis and find alternatives to re-instate the decision about allowing new gas and electricity connections, and remove anomalies in taxation and duty regimes. If some positive steps do not come earliest, the sector that provides employment for a large number of people will be put in a jeopardy. And it is time now to act fast. - szkhan@dhaka.net