Realty slump deepens across the country

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Overheated real estate market in major cities, including the Kathmandu Valley, have shown first signs of turmoil, deepening anxiety of speculative investors and adding worries to the financial institutions that issued huge loans to the sector.

In the Valley, transactions dropped by 60 percent over mid-December 2010 to mid-January 2011 (sixth month of the current fiscal year), compared to the same period last year, according to the data of Department of Land Reforms and Management (DoLRM).

The prices too have dropped by around 30 percent during the period, said Suman Neupane, a property developer.

The situation is still worse in cities like Pokhara, Butwal and Bhairahawa, among others, where asset bubble had started to swell later than the Valley.

For instance, statistics of Land Revenue Office (LRO), Kaski, shows that land transactions in Pokhara, the major real estate hot-spot, have dropped by as much as 71 percent over the second quarter of this fiscal year, ending mid-January 2011, compared to same period last year. The slump has also caused the prices there to drop to half of the past, according to our correspondent Manoj Adhikari.

Previously, land dealers used to trade land at Rs 100,000 per 75 square foot in Pokhara. Now they have dropped the price to Rs 50,000 per 75 square foot.

Land and housing prices in Pokhara had jumped 15-fold over the span of two years till mid-January 2010. However, leading developers said they have started to dispose plots at half price, as rising lending rates threatened to jack up interest liability sharply.

“With banks and financial institutions tightening issue of fresh loans and gearing up recovery of past loans, we see no signs of market bouncing back soon,” said a developer, adding that it was wise to sell the plots now than later.

As a result, LRO Kaski recorded transactions of just 5,108 units of plots during the second quarter of this fiscal year. The office had recorded transactions of 12,089 residential plots during the same period last year. “The transactions had enabled us collect Rs 146.46 million in revenue, 71 percent higher than what we have managed to collect this year,” said Rishi Ram Lamichhane, registration chief at the office.

In Butwal too, the market has slumped so badly that one Netra Bhattarai, a resident of Kalikanagar -11, who earlier refused to sell his land plot at Rs 300,000 per 75 square feet, is searching buyers to sell it at just Rs 100,000.

“Unfortunately, I am not finding any buyer even at such reduced rates,” he told Republica.

Our Butwal correspondent Sher Bahadur KC reported that land and housing transactions in Butwal and Bhairahawa -- the mid-western trading hubs -- have dropped to half and the prices too have come down by as much as 75 percent.

Local property developers said the slump had badly hurt their capacity to repay loans. Tara Bista, an entrepreneur, said that developers are on a selling spree, cutting prices in a bid to recoup their investments and clear bank loans.

Records of LRO in Chitwan and Makawanpur too show that realty transactions there have shrunk by as much as 35 percent over the past year. However, property prices there have dropped only nominally, compared to other districts.

DoLRM data shows that transactions have slowed in Dang as well. Our correspondent in Nepalgunj, however, reported that land transactions there have inched up, as banks and financial institutions (BFIs) continue to issue loans to the sector, but under different headings.

The transactions have slowed in Biratnagar -- the eastern trading hub - as well.

Realty boom had stretched out of the Kathmandu Valley, inflating asset bubble in cities like Pokhara, Butwal, Dang, Bharatpur, Hetauda, Biratnagar, Dharan and Itahari some two years ago, as BFIs invested in the sector aggressively. But it has started to take corrective course, thanks to Nepal Rastra Bank´s intervention into the market, which came in the form of cap on BFIs loans exposure to the sector a year ago.

The slump, however, has turned the BFIs, mainly financial institutions anxious, as their loans portfolio in the sector is huge, and crash of market could bloat their non-performing assets and non-banking assets, hurting their financial health severely.

source: Sharma, Milan Mani (2011),"Realty slump deepens across the country ", republica, 19 Jan 2011

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