Real Estate

REAL ESTATE REAL ESTATE

The increasing spread of the pandemic has disrupted the production of construction materials and investment in Real estate. The government has been trying to bring a surge in the demand for construction materials through the softening of lending limit for home loans. The new budget of FY 2020/21 also incorporates some new programs to provide safe residence and properly utilize the available lands, while giving continuation to the ongoing ones. In this budget, the government has taken the initiative to systematize and organize the real estate sector in the country.

Land Act 2020 imposes a new land

ceiling: The eighth amendment of the land act-2020 stipulates a provision regarding the regulation of exception granted to owning or possessing land above the ceiling. Land ceiling limit for a person or family is 10 bigha in the Tarai, 25 ropani in Kathmandu valley, and 70 ropani in hilly regions as per Section 7 of the act. However, this provision shall not apply to the land owned by the Government of Nepal, district coordination committees, municipalities, and educational or health institutions, industries, and foreign institutions as prescribed by the federal government. Moreover, the act has also set a provision to provide land to landless squatters. According to Section 52 of the act, landless squatters, who have been using government or unrecorded land, shall be entitled to a certain portion of such land. The land provided under this law may not be transferred to anyone or otherwise disposed of in any form for at least 10 years 113 .

Central Bank turns flexible on home

loans: The Nepal Rastra Bank has softened its lending limit for first-time homebuyers as the upper limit of debt service to gross income ratio (DTI) has been raised for the first-time purchaser of a residential home. According to the revised policy, the limit for the home loan for the housing business in metropolitan, sub-metropolitan, and municipalities adjoining to Kathmandu Metropolitan is raised to 50 % from 40 %. Similarly, in other locations, it has been raised to 60 %, which was 50 % previously. This means, individuals having income over NPR 100,000 (USD 852) per month, can receive a home loan to pay the monthly installment of up to NPR 60,000 (USD 511.33) 114 . In addition, the changed policy is expected to give pace to the businesses of construction materials, helping speed up the economic growth. Many construction materials manufacturers have been running under capacity due to decreased demands.

88% of progress made in the reconstruction of private houses:

The National Reconstruction Authority (NRA) stated that 88 % of progress has been achieved in the reconstruction of private houses since the earthquake five years ago. According to the NRA data, reconstruction of the private houses of 494,044 beneficiaries or 63 % has been completed so far while the houses of additional 190,145 beneficiaries or 25 % are in the reconstruction phase. Moreover, the number of beneficiaries certified for payment of the final tranche of the house construction grants has reached 561,650 or 72 % 115 .

Land Revenue offices open after

two and a half months: All Inland Revenue offices across the country resumed its services from 7 June 2020. The offices were closed after the imposition of lockdown by the government to avoid the spread of COVID-19, disrupting the services provided. The offices reopened by adopting health safety protocols 116 .

Key highlights from the Budget 2020/21: The new fiscal year budget has added some new programs while giving continuation to the ongoing ones. Registration of land and houses along with other services of land revenue offices will be made online in all the districts of Nepal. This year’s budget has incorporated a safe residence program where at least 100 thousand families having a thatched roof will get corrugated zinc sheet within 3 years. For this, the government has allocated NPR 3.5 billion (USD 29.83 million). For the productive and proper utilization of available land, the government will be segregating the land for industrial,

commercial, and agricultural use according to their location. Moreover, the central, provincial, and local governments will together invest to establish 300 local level branches of Land Bank this year. The government has allocated NPR 500 million (USD 4.26 million) to invest in Land Bank’s share 117 . The establishment of the Land Bank will allow landowners to deposit their unused land in the bank and interested people can use those land for agricultural purposes through the bank.

“OUTLOOK

After the outbreak of COVID-19 and the subsequent lockdown, real estate activities and production of construction materials, along with other economic activities have slowed down drastically. Due to the crisis, buying and selling land and houses is extremely low. Lack of laborers has been creating a major hurdle for the production of construction materials and the completion of construction projects in the country. Based on the post-pandemic revision of national accounts, the construction sector output for the year 2019-20 is forecasted to be NPR 488 billion (USD 4.16 billion), which indicates a contraction of 0.31 % over the previous year 118 . The overall impact of further contraction in this sector can be significant for Nepal’s economy as the construction sector’s contribution to GDP stands at 8 % 119 .

The Cabinet allowed construction projects and industries that produce construction materials to resume their activities from 6 May 2020. However, the activities were not able to pick up pace as they were unable to mobilize workers, many of whom had left for their homes. Also, many industries and construction sites don’t have accommodation facilities for the workers and the ongoing crisis has made it difficult for workers to pay rent. Along with a lack of laborers, the production of construction materials was also affected due to disrupted supply chains. The import of raw materials such as wires, pipes, and paints were not allowed during the lockdown period. According to a study conducted by the Asia Foundation, the supply chain of essential construction materials in Nepal is likely to remain disrupted for around three months after the lockdown is lifted and imports are allowed to resume 120 .

Way forward

Considering all the arguments, the construction sector in Nepal is unlikely to return to pre-lockdown vibrancy before November 2020 121 . However, a collaborative effort from the private sector and the government is needed to overcome the prevailing challenges caused by the crisis. The local government can help industries and construction project sites to manage accommodation and arrange transportation facilities for the workers until normalcy is resumed. Moreover, the construction sector is not dependent on the global economy as much as other sectors are. There is enough domestic capacity to produce core raw materials such as cement and steel. A coordinated response from the private sector and the government can lead to efficient use of domestic resources.

Real estate is still considered a safe investment, however, with the ongoing crisis and sluggish economic activities, people are losing confidence in this industry. The softening of lending limits for first-time homebuyers by Nepal Rastra Bank might help to attract new players in the market. As most of the buyers depend on bank loans to purchase land and houses, the BFIs can bring new schemes that will encourage these buyers to invest. For instance, NMB Bank launched an enhanced variant of its housing loan product in March 2020, with an 11% interest rate fixed for 5 years 122 . Home loan products that respite the mental and financial pressure of buyers amid the crisis might help the real estate industry recover.