Real-estate boom fuels overheating fearsReal-estate transactions have started picking up rapidly in the country, fuelling concerns that the property market may be overheating.
Real-estate transactions have started picking up rapidly in the country, fuelling concerns that the property market may be overheating.
Collection of land registration fee—one of the most reliable indicators to gauge real-estate transactions here—jumped 161 per cent to Rs 1.8 billion in August, show the data of the Department of Land Reform and Management (DoLRM).
“Our revenue grew impressively in the first month of 2016-17 largely because of surging demand for real-estate,” DoLRM Director Sushil Prasad Acharya told the Post.
The hike comes on the heels of growth of 61 per cent and 67 per cent in land registration fee collection recorded in June and July, respectively. The latest growth acceleration marks a turnaround in real-estate business, which had started taking a beating in the initial months of the last fiscal year.
Land registration fee collection had continuously fallen in the first seven months of the last fiscal year, except for a blip in October.
Transactions went up only after the months-long border blockade was lifted, with land registration fee collection reporting a growth of 1.8 per cent in March. Since then real-estate transactions have continuously grown.
The demand for real-estate is surging lately largely because of greater inflow of money sent by Nepalis working abroad, which is filling up coffers of banks. Yet investors are not ready to invest this money in productive areas, such as manufacturing and other employment-generating activities, because of “not-so-good business climate” in the country.
So, banks have been compelled to channel loans towards unproductive sectors, such as real estate and stock market, at interest rates that are, on average, lower than the inflation rate.
As banks started offering cheap credit, issuance of real-estate loans, including commercial and residential, grew by 30.8 per cent in the last fiscal year, which ended in mid-July, show the unaudited reports of commercial banks operating in the country. This kind of credit expansion has reminded many of the delirious boom witnessed by the real-estate sector in 2008-09, which then had experienced a bust.
“We are heading in the same direction as in the mid-2000s when people made speculative bets on real-estate. This does not bode well for the entire financial sector because more and more capital is going to one asset class,” said Nabil Bank CEO Sashin Joshi, implying that lessons learnt from the previous real-estate crisis did not turn out to be durable.
Yet many bankers do not seem worried, as exposure of banks towards real-estate sector has not crossed threshold fixed by Nepal Rastra Bank, the banking sector regulator. Currently, banks are allowed to channel up to 25 per cent of their total loans towards the real-estate sector—both commercial and residential. But as of mid-July, commercial banks had diverted only 14.3 per cent of their total credit towards the sector. Despite this, many expect credit flow towards real-estate market to grow in the coming days, as commercial banks have gradually started building up capital base to meet minimum regulatory paid-up capital requirement of Rs 8 billion by mid-July 2017 from existing Rs 2 billion.
“If the investment climate in the country fails to improve by the time
banks raise the paid-up
capital, more money is
bound to flow towards unproductive sectors like real-estate,” said Joshi.