Sluggish real estate sector needs props to survive

Traditionally, homeownership has been one of the key indicators that one who buys a home, belongs to the middle class.  In order to purchase homes, flats to be more specific, people need to have a good source of income. Sources of house finance may be divided into two broad categories i.e. direct finance and indirect finance. At the outset, the home buyers may arrange funds directly from their own savings, friends/relatives, sale of valuables and so on. Secondly, they have a wide option to avail loan from banks, non-banking financial institutions (NBFIs), the Bangladesh House Building Finance Corporation (HBFC), micro credit lenders and others.
Financial institutions (FIs) are providing loans through two ways to different entities. The FIs may finance the developer company for construction of projects; additionally they are also providing loans to the individual home buyer if the client wishes to buy a flat.

At the end of June 2014, loans to the housing sector from banks and NBFIs including Grameen Bank stood at Tk 454.20 billion, which was 9.7 per cent of total credit to the private sector. Even though the outstanding housing loan is increasing, the growth of such loans is decreasing noticeably.
In earlier times, the realtors had created an artificial demand in people's minds. Customers were lured by lovable and lucrative advertisements of unknown developers. If we can recall the 1995-1998 scenario, per square feet apartment price in a prime area of the capital was Tk 1,500 to Tk 2,000 and in 2010 it was Tk 15,000 to Tk 20,000 per square feet. The real estate price increased 10 times over the last 15 years.
The present scenario of housing market is not good. The realtors cannot attract their customers even by reducing apartment prices by 10 per cent to 30 per cent. Most of the realtors experienced a 30 per cent-70 per cent sales drop in the last couple of years. They are suffering badly because of the depressed trend in real estate business.
Due to ongoing political instability and frequent spells of shutdowns in the recent months, a huge number of flats have remained unsold in the urban areas. According to recent data, there are more than 13,000 flats remaining unsold in the capital.
On the other hand, several projects are now halted as the realtors cannot carry construction materials to the project locations. As a result, flats will become costly and handover time will be uncertain.
From the above graph, it is seen that sector- wise share of real estate, renting and business service sector has witnessed a downtrend. Basically, the real estate, renting and business service sector increasing every year, as seen from table, has a positive growth every year. But, compared to overall GDP growth, this sector expanded in a slower rate. That is why in overall GDP, the contribution of this sector has a downward trend.

The reasons for slowdown in the real estate sector are prohibition of black money injection, share market fiasco, overseas job crisis, self-indulgence of developers and political instability. These days, the developers are asking for package price instead of per sft. price. Package price seems to be attractive to the potential home buyers since it includes apartment price, car parking space, utilities and other amenities. Some of the developers are selling flats at a lower profit margin to maintain their cash flow.
From the current scenario, several problems have been identified in the real estate sector which may be solved in the following ways:
Likewise, people are not willing to buy flat that is under construction as there may be complications or delays in the handover process. In some cases, the home buyer cannot get registration from the developer or the developer company delays the process for a long time for the reason that the whole project is running with a bad loan. Therefore, the loan-giving bank/NBFI cannot discharge the individual flat since the whole project is mortgaged with it. Thus, before signing agreement with the developer, the customer must ensure whether the developer company is availing any loan against the same project or not. If it is 'yes', the home buyer must ensure that the loan is running with a good repayment history.
Although the real estate sector is running with several problems, there is no way to call the real estate sector as an unproductive one. There are almost 2,500 to 3,000 realtors engaged in this business, more than 1,00,000 architects, graduate engineers, diploma engineers, management officials, skilled and unskilled manpower are engaged there. Besides, 269 backward linkage companies have direct linkage with real estate business like rod, cement, bricks, tiles, paint, sanitary, cables etc. About 3.5 million people are also engaged in this sector. Moreover, this sector has a substantial contribution to our GDP.

Real estate development has a net positive fiscal impact on the government's revenue earnings. Revenue resources during the construction phase include fees related to the project approval, taxes on building materials, corporate taxes on builders' profit, income taxes on construction works and so on.
Banks cut both lending and deposit rates just over two or three months ago. Home buyers would be among the biggest beneficiaries. We expect that the interest rate too will be cut in this year. Banks should go for aggressive lending to the housing sector, as it is more secured compared to other commercial loans.
In a recent circular, the Bangladesh Bank has increased home loan ceiling from Tk 10.00 million to Tk 12.00 million, which will definitely create a positive impact on the ailing real estate sector. However, debt-equity ratio is remaining the same at 70:30. For example, if a customer wishes to avail a loan of Tk 12.00 million, he has to spend Tk 3.60 million as equity. Accordingly the price of the flat/house must be at least Tk 15.60 million or more.
This writer had the opportunity to participate in the Rangs Lifestyle Fair and recent REHAB (Real Estate and Housing Association of Bangladesh) fair held in the Bangabandhu International Conference Centre, Dhaka. The organisers were optimistic to regain the sales in 2015. Most of the visitors were looking for small or mid-sized flats ranging from 800 sft. to 1,200 sft. as they have budget constraints. On that occasion, the Housing and Public Works Minister said the government will build 40,000 flats on 187 acres land at Mirpur as it has to ensure housing for all. Besides, the government has planned to construct 1,00,000 flats within next few years at Uttara, Jhilmil and Purbachal.  
Real estate businessmen are demanding low-cost home loan, stimulus package and a stable political condition since they are experiencing decline in sales in the last couple of years. In the present scenario, a tripartite consensus is required among the government, the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI) and the REHAB to save the industry from further downfall.
The demand for homes is increasing day by day as the population is simultaneously swelling. Bringing middle class to this sector should be the prime motto of the realtors.
The writer is a Senior Executive Officer, Bank Asia Limited, Consumer Credit Department, Corporate Office.
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