Analysis: ACC’s probe on home buyers sends chill in realtors

Home buyers are jittery as the country's anti-graft agency has stepped in. In its latest move, the ACC started sending out letters to the Rehab seeking information on the property ownership of individuals.

It sent jitters through the entire real estate sector. Worries were spelt out at a media briefing by the Real Estate and Housing Association of Bangladesh (Rehab) on October 25. The Rehab, a strong lobbying group, argues that the dreaded letters will again depress the sector that is struggling to return from the doldrums.

In June this year, it came as a big cheer to realtors after Finance Minister AMA Muhith reduced tax rates making it easy for homebuyers to purchase apartments. And the window on black money in real estate -- a controversial move -- has remained open since fiscal 2013-14.

That cheer seems muted now. With the Anti-Corruption Commission or ACC hunting for details on homebuyers, the scope for whitening black money by investing it in real estate is shrinking, according to Rehab.

The real estate sector has not only grown alone but also helped other industries flourish.

In 1994, when the sector just started to grow, only one company, Chhatak Cement Company, used to produce cement. Most of the cement had to be imported then. But the linkage industries have cut the country's reliance on imports, thus saving foreign currencies. Moreover, some linkage industries are exporting, thus earning foreign currencies important for the balance of payments.

More than 35,000 engineers, architects and senior managers and 35 lakh workers are working in the sector, which accounts for more than 5 percent of the employed labour force of 2015. The sector provides livelihood for 2 crore people. Labour wages in the sector are increasing gradually.

Bangladeshis living abroad also buy homes or apartments in Bangladesh and they account for about 30 percent of all the sales of the Rehab.

The sector's contribution to the GDP is 15 percent, according to the Rehab. However, the World Bank in its latest update on Bangladesh in October said the construction sector now accounts for about 8.9 percent of GDP.

The construction sub-sector performed better in fiscal 2015-16, growing at 8.9 percent compared to 8.6 percent the previous year. Real estate, renting and business activities have also performed better, expanding by 4.5 percent in FY16 compared to 4.4 percent in FY15.

Now, green shoots are appearing in real estate -- after years of slowdown -- thanks to property price corrections, falling interest rates on home loans and sustained political stability. The number of unsold ready apartments has now declined to 8,000 from 22,000 a couple of years back.

 The recent decline in lending rates is expected to further boost apartment sales.

Since its inception in 1991, Rehab members have supplied about 143,000 flats and 70 plots to the clients. The sector pays a significant amount of taxes and created jobs. Besides, 269 industries such as rod, cement and tiles linked with the sector have been contributing to the economy.

In spite of the tremendous potential of the construction and real estate sector, a series of factors adversely affected its development: land value distortions, absence of secondary property market, limited asset securitisation and sales of mortgages, and weak backward linkage industries. 

High property price is another barrier to the growth of the sector.

Property is unaffordable for the masses in Dhaka, almost like that in London, Sydney or New York in terms of affordability. Property prices in Dhaka are more than 10 times an average person's annual income, whereas the international measure of affordability is about four times the annual income.

The government needs to provide ample residential lands for homes in the major urban cities and establish good connectivity between Dhaka and the neighbouring districts in an effort to rein in soaring housing prices.

The major component in apartment price is the land price but the land prices are high because there is insufficient supply of serviced residential land in the urban market.

The duty on property registration, taxes and other fees, which amount to about 15 percent, is one of the highest in the world. It is less than 5 percent in India.

For its part, the real estate sector must change its business model too.

So far, real estate companies, developers and lenders have run after the rich. But there are many people in the middle, lower income and fixed income categories who want to have their homes. But if they don't have access to low-cost loans for a longer period and easy installations their dreams will continue to remain dreams.

Owning homes is crucial for a more stable society and social democracy as people feel to have a physical stake in the country. But home ownership level in Bangladesh is about 30 percent, whereas it is up to 80 percent in developed countries.