What is hindering real estate recovery

In fiscal year 2021/22, the government mobilized Rs 58.34bn in revenue from real estate transactions. However, the impacts of the second wave of Covid-19 brought the economy to a virtual standstill, hitting real estate transactions hard.

Although most of the sectors of the economy have recovered since then, the struggling real estate sector has yet to regain momentum. The government lifted a ban on land plotting to boost real estate transactions. However, it failed to make much impact as revenue from real estate transactions stood at Rs 46.54bn in 2022/23.

Real estate entrepreneurs say although there have been some improvements in the current fiscal year which began in mid-July, the sector has been unable to gain momentum due to various policy and practical difficulties. A recent study report submitted to the government has also suggested policy reforms to boost real estate transactions. The report has pointed out several factors impeding the real estate sector like lack of clear legal provisions for building integration, an overly complicated planning approval process, dominance of middlemen, unnaturally high prices, ineffective regulation, and difficulties due to land ownership limits.

Slow recovery

The real estate sector has been unable to recover since Covid-19. Annual revenue collection from this sector, which used to reach around Rs 70bn, has now fallen to Rs 46bn. While real estate transactions are increasing, they have not returned to pre-covid levels, according to Bed Prasad Aryal, the spokesperson for the Department of Land Management and Archive.

According to department statistics, the government raised Rs 46.54bn from real estate transactions in 2023/24. During Covid-19, annual revenue from real estate transactions had dropped to as low as Rs 25bn. Aryal said the sector is now gradually recovering from its vulnerable state. He added that land and housing transactions have increased more in the eastern Terai region compared to the Kathmandu Valley.

Low transaction value to avoid taxes

The actual annual real estate transactions amount to approximately Rs 2trn. However, government statistics only show transactions worth Rs 1trn. Bhesh Raj Lohani, chairperson of the Nepal Land and Housing Development Federation, said the sector has been deteriorating due to a lack of transparency in buying and selling. He explained that the difference between market value and government valuation creates this discrepancy.

“Purchases and sales happen at one price, while government valuations are much lower. If the state made the system transparent, the value would be at least Rs 2trn annually. Due to non-transparent transactions, the government is losing revenue from different headings like registration fees, capital gains tax and income tax,” said Lohani.

To support real estate transactions, both the government and Nepal Rastra Bank (NRB) have relaxed various policies. According to the central bank statistics, approximately Rs 224bn has been invested in real estate loans by the end of mid-November of the current fiscal year, up from Rs 211bn in the same period of the previous fiscal year. Despite a 6.65 percent increase in loan investment, real estate transactions have not grown as expected.

Meanwhile, a task force formed by the government to study the problems and challenges of the real estate sector has submitted its report to the government. The committee submitted its report to Deputy Prime Minister and Minister for Urban Development Minister Prakash Man Singh on Friday.

The committee has highlighted the need to revise most laws, procedures, and standards, as well as create new laws to address problems and challenges in real estate transactions.

Similarly, it has recommended issuing the 2007 Construction Standards for municipalities and urbanizing VDCs within Kathmandu Valley and the 2015 Basic Standards for Settlement Development, Urban Planning, and Building Construction as umbrella standards, and revising and implementing the 2005 Standards for Joint, Collective and Planned Housing.

Likewise, the task force has suggested that the government implement the 2020 Environmental Protection Regulations as per federal principles, and facilitate finance and tax-related matters.