For the last several years, the business of real estate has flourished considerably in Nepal. People tend to buy plots of land not for the purpose of building houses thereon but from a commercial viewpoint. There are two major reasons for the increasing investments on land and buildings: easy and cheap bank loans and inward remittances.
Banks and other financial institutions have a real estate and house loan portfolio of Rs. 114 billion. This figure would represent about 12 per cent of the overall economy. This goes on to show that many people have been attracted to real estate and housing loans. Besides, the remittances sent home by Nepalese workers working abroad have also been used for land acquirement or housing purposes.

Migration
The unrest prevalent during the insurgency period forced an umpteenth number of people to migrate to the cities or abroad. The trend of such migration is still going on. With such migration, the need for land for the migrants to house themselves has arisen. This has sent them searching for land at any cost.

In the meantime, real estate entrepreneurs have become active. Capitalising on easy financing from financial institutions, they have been able to do well in their business. Even general people have now developed a tendency to buy land, however small, in the hope of selling it at a higher price in the future.

In fact, the prices of land are going up so much that it will not be a surprise to find the prices double in one year’s time - a hundred per cent return. As such, investments on land have turned out to be more profitable than those in gold or fixed deposits.

Nowadays, there is a tendency on the part of the builders to pool together many plots of land, build apartments and sell them to the general public. Similarly, some people tend to acquire a swath of land, parcel it out into small plots and sell them. And those who buy such plots also tend to sell them, thus giving a commercial touch to land transactions.

The real estate sector is a risky sector. Despite this, investment in this sector has literally grown out of hand. Realising this, Nepal Rastra Bank, which had suggested to the financial institutions to curb real estate lending in the past, recently came up with a directive to control real estate transactions.

The directive is two-pronged: on the one hand, it has aimed at setting measures for the real estate and house loan exposure of financial institutions and on the other, interests will have to be raised by five or six per cent. The financial institutions will have to keep their real estate and house loan exposure to 40 per cent of the total loan exposure by the end of this fiscal year, to 30 per cent by the end of the fiscal year 2067-68 and to 25 per cent by the end of the fiscal year 2068-69.
With a hike in the bank rate imposed by Nepal Rastra Bank in order to retrench imports amid a rising trade deficit, the commercial banks have also hiked lending rates.

The directive will work towards reducing real estate and housing transactions by restricting bank loans and imposing higher interest rates on such loans. The other sources of funds for such transactions are remittances sent home by Nepalese workers working abroad. However, the flow of such remittance money has also slowed down due to the world recession.

With restrictions in place regarding disbursement of real estate and house loans, even a greater flow of remittance money cannot spur real estate and housing transactions.

There is now a scuttlebutt going around in the market. Will land prices come down? Some people say that land prices will go down because it will be difficult to raise loans from financial institutions. Others are of the opinion that land prices may not go down but they will stabilise at the present level for some time to come.

One thing is, however, certain - land prices will not go up. A price crash, which is more likely at this juncture of time, will adversely hurt real estate entrepreneurs and apartment builders. People are now trying to find out how the wind blows.

The directive has, thus, brought about ripples in the real estate sector. It has also impacted small loan clients as they will have to pay higher interest on their loans. They cannot avoid the juggernaut of costly interest because they have agreed in their loan papers that they are agreeable to floating interest rates. With the recently announced directive, small loan clients will be put to injustice. They will have to pay higher interest for no fault of theirs.

The financial institutions will be more than happy because they will be able to raise their interest income. Most of such loan clients may not be in a position to repay their loans. In such a case, they will have to sell their property in order to repay their loans. However, a good aspect of the directive is that such loans will not have to be recalled at once in order to keep them within 40 per cent of the total loan exposure. The financial institutions have until the end of this fiscal year to regularise their real estate and house loan portfolio.

Relief measure
A relief measure must be worked out for the protection of the interest of the existing real estate and house loan clients. They should be allowed to enjoy the existing interest rates and only the new loan clients should be levied revised interest rates. Otherwise, the existing loan clients may be compelled to dispose off their property financed by a bank or some other financial institution to repay their loans in order to steer clear of heavy interest payment. But it may be more difficult to find buyers, given the present situation engendered by the directive.