Covid-19 has had a sudden and significant repercussion on people's life which has now truly become a global phenomenon and it is really fast-moving and has defied many predictions. As we are in the midst of the coronavirus pandemic it has not only brought severe humanitarian crises but also carried economic emergency with it. Most countries in the world, including the developed countries, are still limping to contain the virus.
While the whole world is grappling together to win the race against the dangerous virus it is apparent that the pandemic is creating serious economic havoc across the world. It is imminent that the economic puddle of crisis doesn’t end up so early and this economic tragedy may serve as a stark reminder for the following year and many years to come.
On one hand, few businesses like pharmaceuticals, health industry, entertainment such as Netflix and online shopping/stores are leveraging during this tumultuous situation. In the meantime, fast-growing industries like online education, software industry, virtual consultation, coaches and training, sophisticated agriculture, delivery industry, packed food, and non-cyclical products may have good future prospects. On the contrary, businesses embedded as small and medium enterprises, the tourism and hospitality sector, the aviation industry, the automobile sector are the worst hit business by the pandemic. It is important to note that the tourism and hospitality sectors were the first to get influenced by the virus spread and will be the last for resumption. Most Nepalese companies will see their top and bottom line getting impacted amid COVID-19 pandemic as the real estate sector may not be aloof from this landscape.
It is especially true in a country like Nepal where investing in real estate is the first advice given to anyone who starts off a stable career because investment in the real state is considered as one of the secure and lucrative modes of investment. This requires limited liquidity in comparison to other businesses and one can obtain humungous profit accrued from an investment in land and building. Since it is also considered as a dependable passive source of income, there is no surprise why people accentuate for making investments in the real estate sector. This culture has also been snowballing over a period of time in Nepal. It is believed that people tend to make investments in lands and buildings after they have substantial savings spared after consumption in food, clothing, health, and education.
Despite the real estate sector being the prominent investment vehicle amongst many young and energetic investors, where will the business actually move post-pandemic may be the concern for people who have already invested in the sector and the new investors who are anxiously waiting to enter the market. The new investors who are trying to enter the market may be expecting the price to plummet and tap the opportunity while the investors who are already into the business expect it to take an upward trend. Whether the price of the lands and buildings will hike or nosedive in the aftermath of pandemic heavily depends on how the sector has been fueled to date in Nepal with several intriguing questions propping up.
Secondly, in the current scenario, Banks and Financial Institutions in Nepal have the highest loan exposure in purchasing land and building. As a result of the coronavirus impact, banks may face a tough time recovering real estate loans. Those who took loans to buy land thinking that land prices may increase in future may not be able to repay because businesses are being shut down, organizations are downsizing their employees, economic activities are frozen leaving no source of income for individuals. This will assist in doubling the non-performing assets of the financial institutions. A fresh surge in bad debt could restrict Banks and Financial Institutions to capacitate themselves for further lending facilities in real estate sectors. It will not be surprising to hear if the banks and financial institutions report declining profits in the fourth quarter. Moreover, the government/central bank supporting steps will be crucial in this scenario. Financial Institutions may have two options for loan default recovery; either bank could allow customers to defer mortgage payments and wait for repayment or put the property in foreclosure. If banks defer loan repayments up to three months, sooner or later, there is a high chance of settlement of interest along with the safety of principle since the economy will also be healing at that point in time. Likewise, the bank can try to get their money back by putting property in foreclosure.
There are two different ways in which foreclosure can impact the prices of real estate sectors. The first is that they add to the supply of homes that are currently on the market. A larger number of homes for sale in a particular market may translate into lower prices or a longer waiting time until a sale is realized. But putting the property in foreclosure may create negative connotations in the future where it will not be a far cry for us to repeat the history of the US financial crisis 2008 here in Nepal. Likewise, under bank pressure to repay loan and principle, owners may sell the property at the distressed value which would lead to a price slump in real estate.
Thirdly, although, the contribution of black money and corruption on real estate is really difficult to assess the dimension accurately, the growing influence of black money and corruption in the real estate sector is well known. Real Estate is always the most vulnerable sector for corruption. Once the corruption money enters into the real estate market, it finds a safe haven from being caught by tax office authorities. The majority of assets in choice locations are owned by public officials and members of political parties in Nepal. It has now become a dream to purchase land and building in the urban area for people whose earning is below the average and for those who fall under mediocre class. The attractiveness of the real estate sector as a preferred investment is because of the persistence of inflation pressure and a dearth of urban land and housing in the country. It is well known to us that corruption often thrives during the time of crisis. Our Government is also providing opportunities for corruption and has overlooked forming a clear strategy for dealing with the pandemic. It can be projected that sooner or later the corrupted money during this pandemic will land on investment of real estate. Since the corrupt elite has a big chunk of money with them, they are ready to pour it for procuring land despite overstated price which may take the price to an unprecedented height. Thus, the Government must put an effort to close the loopholes that allow corrupt politicians, civil servants, and business people to be able to hide black money through the purchase of expensive real estate. Further, this sector should be regulated and monitored closely.
Nepal is a free market economy where real estate prices depend on the law of supply and demand. The demand for owning property post-pandemic is highly dependent on the future real incomes of the individual, consumer confidence, economic growth, and status of employment in the country. As living standards of individuals plunge, so the demand for most real estate falls. Likewise, as people are less optimistic about the future economy of the country, they may be tempted to delay a property purchase. As per the recent reports published by the World Bank, economic growth is expected to fall in Nepal and is expected to stay between 1.5 and 2.8 percent in fiscal year 2077/78. When the economy resists real growth with declining prosperity, property demand and price tend to tumble. Similarly, three in every five employees lost their jobs in Nepal due to COVID-19 crisis, which displays that unemployment is high, incomes are lower which in turn limits the number of people who are able to afford properties. Thus, for a short period of time, demand for property may decline and price may fall.
Further, putting social distance between yourself and neighbors is a challenging task when you live in an apartment. The risk for spreading the virus is higher for densely populated apartments and people now have become more cautious about their health than before. Thus, this pandemic has left people thinking that the house is a more important asset in their life. Maybe, people who now stick to apartments may switch to owning houses which would lead to a fall in the price of apartments and a community housing system thus increasing demand for land and building in urban areas.
Essentially, countries will do whatever they can do to get the economy back on track. As gradual recovery begins and things settle, real estate will remain as an attractive asset class to invest.
Binaya Nepal, Small Share Investor, M.B.A. Graduate, South Asian Institute of Management (SAIM)