Om Rajbhandary

CEO and Chairman

Comfort Housing Pvt Ltd

 

Over the past three years, the land prices have risen astronomically high and it has become a speculative market. Investors have invested because they saw prospects for profit. Such investors are not selling as they are waiting for higher prices. And they will continue holding as long as they have the capacity to hold.

 

How do you evaluate the housing industry at present?

I started my career as a developer and we are the pioneer in promoting community living concept in Nepal and real estate as an industry. My aim is to establish this as a professional institution because this is a very large industry where everyone can be adjusted. Human life does not exist without real estate because any building, whether it is hospital or a theatre or a residence, belongs to this sector. So, this sector should be developed in a proper way. When we compare Nepal with any other country, our urbanisation is largely unplanned. Housing industry is dependent on three elements - government, individuals and the developers. Our government has a different agenda and the government people are not bothered about well managed urbanisation.

 

How do you look at the future of this industry?

Nepal's 15 per cent population live in urban areas whereas the global urban population today is 50 per cent. By 2030, our expected urban population will be around 30 per cent while the global urban population will reach 70 per cent. According to a survey, in Nepal, we require nearly 270,000 housing units annually. In 10 years time, one million units will need repair and maintenance. Likewise, within the Kathmandu Valley, we will have a deficiency of around 40,300 units every year. So, it has a bright future and huge potential. On the other hand, secondary transaction is equally important. In my opinion, in community living, there is 10 to 15 per cent secondary transaction. The secondary transaction also generates revenue for the government.

 

How can the housing sector be revived from the current problems, such as the restrictive rule of Nepal Rastra Bank?

A number of factors affect the housing market. They are: government policies, financial institutions, building materials, building technology, households, land prices and the real estate agents. We have different policies coming from the government and the Nepal Rastra Bank (NRB). There are a few aspects in the government policy that need to be addressed immediately.

 

First is the capital gain tax rate that is 10 per cent for any transactions within five years and five per cent after five years. Thre is difficulty for people to afford 10 per cent capital gain tax. So, when the people sell the property in the secondary market, they report transaction figure to the government, they show a lower than the actual figure. This ultimately affects government revenue. For example, if I buy a property for Rs 10 million and sell that in a year-and-a-half for Rs 20 million, then my capital gain is Rs 10 million. And from that Rs 10 million, I am expected to pay Rs 1 million as capital gain tax to the government. To avoid such taxes, people are showing Rs 12 million on paper though the actual transaction is for Rs 20 million. This way, the government is losing revenue. Once the property is liquidated, the money is normally deposited in the bank. But while depositing the money in the bank, you have to show the source of the money. Hence, only Rs 10 million can be deposited. The rest Rs 8 million remains out of the system. This is one of the reasons for the current liquidity crisis.

Second, while buying land of more than Rs 3 million, it is mandatory to declare income source. This is the other concern that needs to be addressed immediately.

Housing must be recognised as an industry so that the revenue goes into the state coffers. The NRB limitation has now been relaxed and a new loan portfolio category - home loan - has been created as well. I think the banking sector too should have a positive attitude towards housing industry. There are three different perceptions among the banks - some say that the real estate is an industry and profits can be made from this. That’s why they have made investments in this sector. Others say that the real estate is a future industry and they need some experience in this sector. So they have made limited investments. There are yet others who regard as a very risky industry. Therefore, they have made very small investment in this sector.

We are currently at the bottom of the real estate cycle. To recover from such a state, these government policies and the perception of the banking sector towards this industry should change.

 

Though the NRB has relaxed lending, some of the housing developers say it is yet to make its impact in the market. Why such slow response?

Over the past three years, the land prices have risen astronomically high and it has become a speculative market. Investors have invested because they saw prospects for profit. Such investors are not selling as they are waiting for higher price. And they will continue holding as long as they have the capacity to hold. Some investors are keen on recovering the principal amount if they are not in a position to make profits. Some other investors are willing to liquidate even at a loss so that they may not need to continue bearing the financial burden. We are at a stage where even if we can't make profits, we have to liquidate the property. Our strength will be tested in mid-July because there will be pressure from banks. Our inventory holding capacity too will get revealed. Today, if you can sustain yourself, you will emerge winner but if you can't, you will have to liquidate to get the return on interest and principal.

 

When the bank's investment was curbed, how severely were your projects affected? How did the companies manage to take their projects forward?

As per the data from the government authorities, fiscal years 2007-08 and 2008-09 witnessed the highest number of new projects registration while 2009-10 had very few and in 2010-11, there are no new projects registered at all. The projects approved in the past are making progress, but some of them are progressing very slow or they have downsized.

 

An investor will definitely look for maximum returns. But people do not have much confidence in the real estate industry at present. So people are not putting in money. Similarly, banks are also not investing which is why this industry has slowed down.

 

One indication of low sales of apartments is that Nepalis are not much attracted towards group housing. What should be done to assure them that such houses are better than individually constructed residences?

I personally feel that people have gained more confidence in group housing now. A decade ago, this concept was very new. Today, a number of developers have entered the market with their projects because the concept has been accepted by the people. The success or failure of a project is a different issue altogether. The concept of community living has been largely accepted by the Nepali people. Now, the percentage of owner-built houses is declining while the developers-built housing market is on the rise. In developed countries, all the people buy houses from developers only. Once you are very rich, then you may want to go for custom-built houses.

People complain that the developer-built houses and flats are unreasonably priced. How can the price be brought down to make the houses affordable for more people?

In my opinion, the prices of the developer-built houses are reasonable at present. Therefore, the prices are not going to come down from what they are. Though some investors and developers may sell their property at even lower price than what it is at present, that will be only in case of financial distress. The land purchased by the developers was very expensive in the first place. The interest on the capital borrowed is very high. Similarly, there is a high uncertainty cost. Besides, human resource cost is getting expensive by the day. In all ways, if you compare with yesterday's price, today's price is at the same level. But the expenses have certainly increased. So, the developers have cut down on their profit. They are at a point where they can't come down any further in price. 

 

that means there is no plan to build more affordable housing? 

It is true that developers are not coming up with affordable housing. As a developer, we should come up with low priced products targeting the wider mass. While we at Comfort Housing are planning to come up with affordable housing, some colleagues in inthis industry have already brought such products to the market. So, the products will come to the market as per the demand in the market. The problem is that while the people have low budget, they have a high value house in their mind. They should also know how much they can afford and what they will get within that.

 

Commercial and residential housing projects are centred in few cities, mainly in the capital. Why are developers not interested to take such projects in the semi-urban areas and small towns?

Well, the concept has changed now. I had started a project in Dharan a long time ago. At that time, the community living concept was not popular. The migrant population of Kathmandu is 39.6 per cent. Everyone wants to own a house here as Kathmandu is the capital city. That is why developers are mainly concentrating in Kathmandu valley. Now that the peace process has progressed to some extent, development outside the Kathmandu valley is bound to take place in a year or two. The land prices in all the commercial towns have gone up like anything and that is one of the indicators. Even in the Kathmandu valley, the projects have come up in the suburbs. Our urban area is expanding by 4.6 per cent every year. Today, three to five kilometres periphery of the ring road is also considered urban area. So, the developers are going beyond the ring road and that is why we see a lot of housing projects centred within this belt. I feel that we should go further beyond that. We should focus on the development of suburban areas so that we can minimise the load on the carrying capacity of the city.

 

The Supreme Court recently declared null and void the rule that required all transactions above Rs. 5 million to be made through bank. How much relief would it provide to the industry?