Realty sector struggles despite favorable policies, liquidity

Land and housing transactions are experiencing a slump, mirroring the downturn seen in most other sectors of the Nepali economy. Despite falling interest rates and easy access to bank loans, real estate agents say that demands are not forming.

So much so, the number of transactions has decreased compared to the previous fiscal year when it was difficult to avail of bank loans and interest rates too were high.

To stimulate land and housing transactions, the government lifted restrictions on land plotting by making amendments to the Land Use Regulations last year. Additionally, the central bank has increased the borrowing limit for housing loans. Banks, sitting on loanable funds of more than Rs 600bn, are offering housing loans at single-digit interest rates. However, real estate agents say that the demand for land plots and houses remains subdued.

The central bank has raised the loan-to-value ratio to 50 percent from 30 percent in the Kathmandu Valley to spur demand for loans. Similarly, the ceiling for realty loans has been raised to Rs 200m from Rs 150m. Likewise, the risk weight for real estate loans has been reduced to 125 percent from 150 percent.

According to the Department of Land Management and Archives, 380,175 land and housing transactions were recorded throughout the country in the first nine months of fiscal year 2023/24. The government generated revenue of Rs 29.19bn from these transactions. In the same period of the previous fiscal year, the government mobilized Rs 30.02bn in revenue from 321,307 transactions.

The number of land transactions in the ninth month (mid-March to mid-April) of 2023/24 increased to 50,252 compared to 49,150 in the same period of the previous fiscal year. However, revenue fell by 12.52 percent to Rs 3.94bn.

Although the number of transactions has increased compared to the previous fiscal year, revenue mobilization has declined, suggesting a drop in property prices. Experts, however, argue that since the data also includes properties released by banks or transfer of parental properties, not all can be counted as land and housing transactions.

Real estate agents attribute the current challenges in the real estate sector to the previous tightening of real estate loans by the central bank. They have urged the central bank to increase the debt-to-income ratio to 80 percent from the existing 60 percent.

Data provided by the department shows that land and housing transactions have increased in most of the urban districts in Koshi and Madhesh, while they have decreased in the Kathmandu Valley. Kathmandu Valley, which houses the federal capital Kathmandu, accounts for nearly 42 percent of the organized real estate sector, according to real estate agents.