Reviving dynamism in real estate sector

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Enayet Rasul
REHAB fair 2007 is drawing record crowds as always. Every year since this annual event was first launched by REHAB, it had been eagerly awaited by everybody keen to buy real estate. The ones who visited the fair in recent years were found to be in great number. This year is likely to be no exception. But it is doubtful how far the current year's fair will be successful in terms of real sales or transfer of real estate in contrast to previous years. This is because stresses on this sector are greater than at any time in the past.
People's enthusiasm for buying real estate remains undiminished but they are confronted with fears as well as lack of finances in many cases to carry out their purchase plans. As for the real estate developers, they are frustrated by rising costs of construction materials which have been undermining their capacity to persuade buyers of their properties with affordable prices and the apprehensions on the part of buyers that buying real estate could mean their becoming the targets of law enforcement bodies on suspicion of buying properties with ill gotten money.
The real estate sector has been growing fast in the present decade. But its 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 real estate developers not only started satisfying a wide range of 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 bank on more resourceful customers in many cases on a sustainable basis while the country's foreign currency reserves swelled as the expatriate Bangladeshis sent home 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.
But the movement of this sector was seen to be more downhill in recent months. According to media reports , sales of flats have dropped drastically during the last six months. The drop in sales, on average, is noted to be some 50 per cent. This adverse development is without a precedent in this sector. The big drop in sales was brought on mainly by the anticorruption drive of the government.
The buyers of real estate in many cases were wheeler-dealers who made their big money during the past regime. They stopped purchasing real estate out of a premonition that doing of this would reveal them as the owners of much wealth and this in turn would motivate the anticorruption department to investigate the sources of their wealth. Not only these people, even the ones with well earned money and reputation intact, were gripped by similar fears in many cases and have been putting off their plans to buy real estate.
The scare has only deepened in recent months. Operators of the real estate sector 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, if this rule is not restored notwithstanding its abolition in the budget for 2007-8, then the real estate sector is bound to go on suffering its current downhill trend. Thus, the REHAB is pleading for a reinstatement of the IT-20 rule so that resourceful buyers can get back their confidence and take an interest in buying real property again. REHAB underlined that government's principled move to do away with the IT-20 was justified in terms of morality and fighting corruption. But they are pleading for a retention of IT-20 only for a year 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 IT-20 rule.
REHAB leaders described in their statements drawing attention of the government that abolition of the IT-20 rule will only mean that funds that would likely be invested in the real estate sector if the IT-20 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 IT-20. They say that keeping IT-20 and, thus, helping sales of real estate to increase, the same will mean greater revenues for the government when the government badly needs such revenues. The growth in the sector will mean further creation of employment for a large number of workers and employees, the consequent incomes for them and also preventing a downtrend in enterprises or industries linked to the housing and construction sector .
Another major area of REHAB concern is the price of construction materials. 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 present fiscal year should have lowered or at least kept unchanging the duties on the imported raw materials of linkage industries of the real estate sector. But this did not happen and even higher duties were introduced. For example, the duty on clinkers which is used to make cement locally, was doubled from 5 to 10 per cent. The same happened to imported scraps from which iron rods are made. 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 asked for a withdrawl 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 remains unchanging at 15 per cent when the REHAB and its customers say that it should be maximum 5 per cent 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 also demanded that government should explore the ways and means of extending long term housing loans at nominal interests to encourage greater housing and construction activities.
The importance of doing everything possible to reinvigorate the real estate sector stems from the fact that a large number of people are dependent on it directly for deriving an income to maintain themselves and their families. The industries which have developed as linkage ones for the sector such as rod industries, cement industries, sanitary wares industries, light fitting industries, etc., and businesses engaged in the sale and distribution of these products, all of them plus the main real estate sector, provide a livelihood to some 10 million people. Thus, any reduction in the size of this sector must have a negative effect in shrinking als#o the country's gross domestic product (GDP), employment and income opportunities. The government is a major beneficiary of revenues it receives directly from the real estate sector and from enterprises allied to it. The real estate sector is also relied on to meet the rising housing needs of people and it has been meeting this expectation commendably over the years.
Thus, it should be obvious why this vital sector deserves all the official supports that can be extended to it for getting back its dynamism. This sector can get a big boost if the government takes some favourable fiscal measures in relation to it. The same would involve reduction of government's revenues to some extent. But government is threatened with loss of comparatively greater revenues by keeping the stresses on this sector. Therefore, it should be prudential policy to give some breaks to this sector by reducing taxes and duties which would allow it to flourish. In that case, greater revenues can be earned from it in the medium and longer terms.
For example, the prices of construction materials in the past allowed the REHAB members to offer flats to buyers at taka 250 per square feet. Now, taka 500 per square feet is charged. Imported clinkers and iron scraps are the main raw materials of the rod and cement industries. Import duties on these as well as VAT can be scaled down to decrease their prices. This, in turn, will help the developers to lower their construction costs and they would be in a position to offer flats to buyers at significantly reduced prices. Buyers are expected to respond well to such a drop in prices of flats. Registration costs at 15 per cent is also considered as too high. The same should reasonably be at 5 per cent and this step, too, will help in lowering the prices of flats to get a more enthusiastic response from the buyers.
There are other policies to be pursued such as Rajdhani Unnayan Katripakha (RAJUK) approving plans assuredly within a time-limit. Progress in this area has been noted recently but it has to be sustainable. RAJUK's bureaucratic hassles have gone on frustrating the real estate developers and this problem must be overcome on a lasting basis. The utility agencies should be also similarly made to act quickly in relation to the application from developers for various services. Government may also consider selling to the developers at less than market prices some of the lands it owns for building low cost apartments by the latter for selling to less affluent or non affluent sections of people.