The once booming real estate sector is facing a downward spiral in the number of transactions. This once over heated sector is now cooling down. There is also strong indication that the price of real estate will slump further in the days ahead. In fact, the absence of demand has pushed prices down and dealers are facing problems in selling real estate even at prices lower than its valuation. Thus, transactions in real estate have dropped to 20 per cent of what it used to be.

In the past three years, a number of development banks and finance companies had over invested — even as high as 110 per cent — in the real estate sector, which was then booming. However, the steep inclines in land prices are now a thing of the past. Sashin Joshi, president of Nepal Bankers’ Association, says, “The increase in land price in the past was merely due to speculation, which has no relevance in the actual price and hence the price could not sustain. Such over-investment resulted in stretching of the bubble, and hence the real estate industry could no longer sustain it. The property bubble is bound to burst at some point of time but when it will happen is unpredictable. Hence, major preventive steps need to be taken in the interest of everyone.”

In the past, banks and financial institutions were attracted to the real estate sector because the Nepali economy is not competitive in terms of manufacturing and with political problems and unfavourable business environment the onus of the economy shifted towards non-manufacturing areas like real estate. “The property bubble was because of over investment of banks and finance companies,” says Rajendra Khetan, chairman of Laxmi Bank, adding that frequent strikes, lack in policy implementation and absence of state support to manufacturing led financial institutions to turn away from manufacturing and investing in real estate instead. According to Khetan, “The situation is still precarious and if major steps are not taken within six to 18 months, the problems of real estate business and their inability to pay back loans will affect commercial banks.”

To prevent this collapse,over-investment should be diluted at the earliest by creating direct interaction between sellers and genuine buyers, he states. In addition to this, equal proportion of demand and supply must be ensured. In the past, there was over supply without adequate demand of real estate, which has now resulted in this stagnant phase. “To cope with this decline in transactions, real estate dealers have slashed prices by as much as 30 per cent in Kathmandu, yet it is difficult to lure buyers even at half the rate,” says Prakash Subba, real estate agent of nepalhomesearch.com, a leading property and real estate website. However, Om Rajbhandary, CEO of The Comfort Housing and third vice president of Nepal Land and Housing Developers’ Association, contradicts Subba, saying, “Only those dealers who lack holding capacity and cash are in trouble. Land price has not yet declined, only transactions are slow.” He adds that future of real estate business is still very bright.

But just how long these real estate companies can put up a brave front is left to be seen. With their loans and interest rising, sales transactions dwindling and the threat of the bubble bursting anytime a reality, the future does not look very bright. Buyers are now opting to hold out in expectation of further decline in prices.

According to a Nepal Rastra Bank (NRB) official, the price of property has dropped by 20 to 30 per cent on the outskirts of Kathmandu, 15 to 25 per cent in Lalitpur and 10 to 25 per cent in Bhaktapur. Outside valley the most affected region is Chitwan, where prices have fallen drastically. Most property dealers are following the ‘wait and watch’ policy and still hopeful that things will improve.

Besides over-supply in the past, another reason behind the decline in this business is intervention policies formulated by NRB. The imposition of a cap on loan exposure of banks and financial companies has limited the risks. NRB limited aggressive loan exposure to 25 per cent of each bank’s total investment portfolio. Along with it, the imposition of a capital gains tax and income disclosure on property transactions above Rs 3 million have also discouraged commercial buyers.

Housing companies are now blaming banks for this stagnant phase. According to Rajbhandary, banks must re- schedule their loan system and subsidise the past loans to recover from this situation and bring balance in the national economy. Bankers have a different view. Joshi says banks are not responsible for the rise and fall of real estate business. “Profit and loss is a part of any business, so one has to face the consequences,” he asserts.

Joshi also says, “To my knowledge, there is no chance of rescheduling and refinancing of loans. I have also not heard of any cases where defaulting of loan has been requested.” He added that banks presently are not facing liquidity pressure as has been publicised. Instead, they are in correction mode.

Don’t bank on it

According to spokesperson of Nepal Ratra Bank, Gopal Kafle, this situation of a cool down was anticipated earlier and hence the cap was imposed. “However there will be no impact on the commercial banks as is being publicised by the media. But to cope with this stagnant phase, there is the possibility of provision for relaxation on the loans schedule from this fiscal year to the next fiscal year,” says Kafle.

He says the central bank had to intervene to make this correction. “In the past, finance companies and development banks invested in the real estate beyond the limits. So they are facing problems and some of them may also suffer from bankruptcy.” He believes that, to rise from this situation the government should be stable and create opportunities for an industry friendly environment. Only then will investment switch to the manufacturing and productive sectors.


"If major steps are not taken, within six to 18 months, the problems of real estate business and their inability to pay back loans will affect commercial banks." - Rajendra Khetan, chairman of Laxmi Bank

"To my knowledge, there is no chance of rescheduling and refinancing of loans." - Sashin Joshi, president of Nepal Bankers' Association

"Only those dealers who lack holding capacity and cash are in trouble. Land price has not yet declined, only transactions are slow." - Om Rajbhandary, CEO of The Comfort Housing and third vice president of NLHD

source: Himalayan News Service(2010),"Are banks under pressure? ", The Himalayan Times: Perspective, 18 Dec 2010, page 1