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March 2017 Economy and Policy

Published on: 2017-03-20 11:16:04     1046 times read    0  Comments
Is Real Estate a Trading Item?

Since 2000, the real estate business has been gradually picking up in the Kathmandu Valley and other major cities of Nepal.

--BY HOM NATH GAIRE

Real estate refers to immovable property such as land, house or any type of building or infrastructure used for either residential, business or other purposes. Real estate is an asset with limited liquidity relative to other investments. As it is capital intensive, capital may be gained or cash flow may be generated over it. Thus, it used to be an asset class or investment vehicle in the past. However, it seems to be used as trading goods in recent years.  

Real estate represented by residential homes, commercial properties, agricultural land, and farm house and so on, often consists of the largest component of the wealth of individual investors. Real estate investment involves the purchase, ownership, management and rental of property to generate regular income or cash flow. 

Similarly, investment in housing accounts for 15–35 percent of aggregate investment, whereas housing construction and housing-related sectors constitute approximately nine percent of the labour force worldwide (Nenova, 2010; Sarker et.al, 2011). Real estate trading involves the frequent purchase and selling of real estate for profit or capital gain in the short term. 

The improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investment called real estate development. This kind of real estate sector has been increasing both in the developed and developing world, a direct result of the ever increasing housing requirements and easy financing facilities and high leverage provided by the banks and financial institutions (BFIs). 

This is natural and does not harm the economy as a whole. But an unwelcome type of real estate trading has been growing, especially in the least developed countries (LDCs) like Nepal, which is neither natural nor beneficial for the economy as a whole. Limited alternative investment opportunities with underdeveloped capital market and rising speculative motives of the general public for real estate flipping  or frequent buying and selling of land for immediate profit, are some of the reasons for the increase in real estate trading. This has resulted in higher demand for land, especially in urban areas, fuelling the price of land as the supply of land is always limited. 

Nepal's Case 
Although the concept of real estate and housing was introduced in Nepal around 1990, it has evolved over the last one decade. Prior to that, people would plan for almost five years to build residential homes or buildings for business. 

Since 2000, the real estate business has been gradually picking up in the Kathmandu Valley and other major cities of Nepal especially due to the start of the Maoist insurgency and the increasing trend among people to migrate from rural to urban areas. 

At the same time, the emergence of the upper middle class in urban areas has resulted in a gradual rise in the demand for land and housing but not for apartments. 

According to the Nepal Land and Housing Developers’ Association (NLHDA), the annual demand for houses and apartments in Nepal stands at around 140,000 units. The Kathmandu Valley alone occupies about 42 percent but the organised real estate sector is able to construct barely 25,000 units per year. 

The primary reason for the increasing demand of housing is migration of the rural population to urban areas. Other reasons for migration are favourable climatic conditions, common community and availability of resources. Out of the country’s total population, 20 percent live in urban areas and the concentration is much higher in Kathmandu, which indicates growing internal migration (Population Census; 2011). 

As a result, the population in Kathmandu has been expanding at an annual rate of 6.67 percent leading to the demand for real estate. The secondary reason is the availability of easy and cheap banking loans. People prefer to invest in real estate because of the lack of other areas for investment.

Housing vs Land Plotting 
Housing provides shelter. As it is a basic need of every human being, it provides security, pride and ownership. It has great significance in human life. Housing covers both commercial and personal properties and plays an important role in overall economic growth, social upliftment and employment in the context of a rapidly expanding economy. Personal residences account for 75–90 percent of household wealth in emerging-market countries, which amounts to three to six times their annual income. Housing expenses represent 15–40 percent of the monthly expenditure of households worldwide. 

Real estate (land) markets in most LDCs are not as organised or efficient as markets of other developed countries. So is the case of Nepal, where individual properties are unique to themselves and not directly interchangeable, which presents a major challenge for the development of an organised real estate market. 

With the development of private property ownership, real estate has become a major area of business. Purchasing real estate requires a significant investment and each parcel of land has unique characteristics; so, the real estate industry has evolved into several distinct fields.

Challenges to the Economy
The increasing real estate trading and sky-rocketing prices of land have become serious economic issues for Nepal. There is no scientific and recognised real estate appraisal system in Nepal. Neither the trader nor the BFIs, which are investing billions of rupees from the depositors' money in the sector, have accurate methods of measuring the actual worth of a piece of land or an apartment of a one unit house. 

Despite the increasing demand in the real estate sector of Nepal, everything is being done haphazardly. In this sense, individual investors, real estate developers and even the BFIs have been just making speculations in the real estate sector in Nepal.

The kinds of real estate businesses:
•    Appraisal (professional valuation services)
•    Brokerage (assisting buyers and sellers in transactions)
•    Development (improving land for use by adding or replacing buildings)
•    Property Management (managing a property for its owner)
•    Real Estate Marketing (managing and selling of property business)
•    Trading (buying and selling of land or houses for short-term profit)

The writer is the Director of the Confederation of Nepalese Industries.


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