State Of Real Estate

Nepal’s economy is buffeted by multiple problems. The country’s manufacturing sector has not been strong for decades. Agriculture is not performing better either due to the apathy on the part of the state. The service sector was doing pretty well.  But the COVID-19 pandemic dealt a crushing blow to all these sectors, having a cumulative impact on the national economy. The disruption of the movements of people and supply of goods hit almost all aspects of human life. In order to revive the crippled economy, the government unveiled a series of stimulus schemes so that the trade and industries limp back to life but the post-pandemic recovery has been frustratingly sluggish. Of late, the economy has shown some signs of improvement but there are many promising areas that are still reeling from the pandemic-induced crisis.

The real estate business is one that is still struggling to come out of economic downturns. It has further plummeted owing to the ban on the land plotting and Nepal Rastra Bank's (NRB) strict policy on real estate companies and loans for residential homes. The NRB introduced a provision that obliges the borrowers to pay 50 per cent of monthly income in installments to get a home loan ranging from Rs 5 million to Rs 20 million. As per NRB's policy, loans exceeding Rs. 5 million must maintain a loan-to-value ratio of 50 per cent. Previously, this ratio was 30 per cent in the Kathmandu Valley and 40 per cent outside. Likewise, the loan-to-income ratio has been increased to 60 per cent for loans up to Rs. 5 million and 50 per cent for loans up to Rs. 20 million. 

Due to these measures, the flows of real estate loans have declined by 0.6 per cent in February this year. The banks and financial institutions had issued loans worth Rs. 249.44 billion in July 2023 for real estate business and it fell to Rs. 247.99 billion in February 2024. On the other hand, the flow of personal residential home loans up to Rs. 20 million is going up. Despite this, the construction of individual residential houses has decreased by 80 per cent as compared to pre-COVID-19 phase. The NRB resorted to the stringent measures after the real estate prices soared up and banks suffered liquidity crunch. Recently, the NRB has eased the policy of lending in real estate and individual residential home loans. Similarly, the government has lifted the ban on land plotting. There has been a common practice of providing loans with real estate collateral. When the real estate business plunges, this also invites crisis for the banks and financial institutions. 

The real estate sector used to have a transaction of around Rs. 1,500 billion annually, providing employment opportunities to thousands of people, contributing to revenue generation and offering quality housing at reasonable costs. But the slump has left various professionals, such as construction workers, engineers, architects and real estate agents jobless. In addition, the consumers' confidence and spending have also dipped. Rise in the transactions of real estate business through informal channels has increased additional challenge to the sector. Most of the cooperatives have the tendency to invest their savings in land but when there is no buying and selling of lands, it becomes difficult to maintain investment portfolios. As the economy is gradually moving on track, the real estate sector is expected to bounce back. The government requires intervening the sector through transparent transactions and taxation policy to overcome its lingering troubles.