Like gold, real estate is also a traditional asset class in the sense that it has been an investment vehicle for a long period of time. And also like gold, over the years, most people have invested indirectly in real estate either for residential purposes or for commercial use such as farming. However, unlike gold and other exchange traded asset classes such as stocks, investment in real estate is quite illiquid and requires a large investment.

Direct investment in real estate is illiquid as it takes time for buyers and sellers to meet and negotiate the terms of sale. While investors in overseas markets can get indirect exposure to the real estate sector through the Real Estate Investment Trust (REIT) which is traded on organized exchanges, there is no such investment vehicle in Nepal for retail investors. Compared to direct investment in real estate, indirect investment through REIT provides easy entry and exit opportunities.

Similarly, direct investment in real estate, leaving aside a much desired and required residential property, will take a substantial chunk of your portfolio as real estate investment is a big ticket item. As a result, a lot of retail investors who want to save for the future and have small savings cannot add the real estate sector to their portfolio.

While REIT, as mentioned above, is a viable approach for retail investors in overseas markets to get the desired exposure to the real estate market without committing a substantial chunk of their portfolio, lack of such vehicles in Nepal has curtailed the ability of retail investors to enter the real estate space in Nepal. As a result, only individuals with a high net worth are able to enter the real estate market and diversify their portfolio holdings.

However, in spite of the above mentioned constraints to investing in the real estate market in Nepal, with a lot of excess liquidity in the market and easy access to bank credit, people’s interest in the real estate market has increased during the last couple of years. Easy access to credit enabled investors to use more leverage and enhance returns.

For example, suppose you are buying a piece of land worth Rs 10 million with 25 percent of your own equity and 75 percent bank loan at an interest cost of 15 percent. After one year of purchase of the land, if the price goes up to Rs 15 million (a 50 percent increment in the value), your investment will provide an astonishing return of 155 percent (the flip side to the high leverage is that if the price goes down, it could wipe out your entire equity).  Enticed by such potentially high returns, investors flocked to the real estate market, and Nepal witnessed a spectacular real estate bubble during 2005-09 when prices were reported to have doubled almost every six months. However, recent policy interventions by Nepal Rastra Bank (NRB) to limit the exposure of banks to the real estate sector have to a large extent dampened new deals and stabilized prices.

In the short run, there will be some price correction as banks tighten credit to the real estate sector in line with NRB requirements. However, in the long run, given the demand-supply mismatch, especially in metropolitan areas, real estate prices will continue to rise. Moreover, as the Nepali economy improves and gains momentum, the share of middle class population will increase in the future creating demand for land and properties. Hence, for investors with a long-term investment horizon, real estate still represents an attractive investment proposition.

Source: Laxmi Capital Market Limited (2010),"Investing in real estate",The Kathmandu Post: Money, p.4

Brought to you by Laxmi Capital Market Limited, a proposed merchant banking subsidiary of Laxmi Bank. Views and recommendations expressed here are generalized and may not apply for a specific investor with unique risk-return profile. Investors are advised to refrain from acting solely on the basis of this article. As such, Laxmi Bank assumes no liability whatsoever.