I am frequently being asked about what is going to happen to the real estate market? Are the apartment prices going to go down? How much? Is it a good time to buy? I read comments in the newspapers from the so called experts; some also give their learned opinion on television talk shows. It seems that everyone has their two cents on this subject.
My honest submission is that I do not know what is going to happen to the real estate market in the coming days. Being in this business for nearly four decades one thing I have learned is not to make any predictions about it. And frankly I do not think that most of the people who are making the predictions have any idea of what they are talking about. But I can analyze the relevant facts and then leave it to you to make your own predictions.
Every country is busy fighting the Coronavirus pandemic while businesses are struggling to survive. Uncertainty is widespread in the financial world and there is a general worry and concern about the future of the world economy. After living with Covid-19 for the last two months the world is now trying to get back on its feet. Countries like America, Italy and Spain which have seen the worst of this scourge are opening up despite the fact that the pandemic is not over yet. The rate of infections and deaths have gone down because of the quarantine and social isolation measures but as soon as people are back to normal life there is bound to be a spike in the number of infections and deaths. But the world leaders have also realized that prolonging the lockdown would cause irreparable damage to peoples’ livelihoods and trying to keep people locked up any longer may cause mass revolts and upheavals in society. Basically, we have to accept the Coronavirus as our cohabitant in planet earth. It has been there for centuries and it will probably remain with us for many more centuries. The more pragmatic way is to learn to coexist with it and develop an immunity to it.
Though it may seem much longer, the world has been in a lockdown for only two months. Some countries were hit by the pandemic before others and are therefore ending their lockdowns earlier whereas in Bangladesh we were hit later in March and hence after two months we are also now gradually opening up our economy even though the number of infections are on the rise. A lot is being said about the global economic devastation caused by this pandemic but personally I don’t think that the world economy will fall into a prolonged recession on account of a two month hiatus. There is fundamental difference between the present crisis and the previous global economic crises. For example, the 2008 crisis was a result of excess. There were problems with the economic fundamentals. It started with the collapse of the toxic sub prime mortgage loans in the US and gradually spread to the other areas of the US economy and since the economy of the entire world is somehow intertwined with the US economy virtually every country had an economic meltdown. This time around in the pre covid-19 era the world economy was on the right track. The world was prospering on sound economic fundamentals before the pandemic struck us like a terrorist attack. If this coronavirus were to go away quickly like the SARS virus then I would have argued that the world would see a quick V shaped economic recovery. Unfortunately it seems that the threat of Covid-19 will not disappear any time soon (even once a vaccine is approved it will have to be mass produced and mass administered, no simple task). Sooner or later there will be a herd immunization and we will have a peaceful cohabitation with the coronavirus. But for the next few months businesses and consumers will generally be more cautious in their spending and by virtue of this inflation will be restrained even though the world has poured trillions of dollars to support its economies and its societies during this pandemic.
I think that we will be seeing more of a U shaped economic recovery which will probably start in early 2021. The official forecasts are also very positive with predictions of a bounce back of the world economy in 2021. The IMF has predicted Bangladesh’s GDP growth to be 9.5% in 2021. However, there is a caveat here because the World Bank has projected this to be between 1.2-2.9%. The wide difference between the projections by these two venerable institutions also raises a lot of questions about the efficacy of the projections made by economists who are wrong more often than they are right. Irrespective of these projections, the Bangladesh economy has been on very sound footing. Metrics such as our GDP growth, foreign exchange reserves, debt as a percentage of GDP have all been very strong. These are some of the reasons to be optimistic about our relatively quicker economic rebound.
Having thrown some light on our macro economy let me analyze our real estate sector. Looking at the supply side a reassuring fact is that unlike in developed countries, the real estate developers in Bangladesh are not so highly leveraged. Generally, the private sector real estate projects in Bangladesh are done under joint venture with the land owner and therefore the cost of land which forms a big part of the investment in any development project is a part of the equity in the project. This makes the sector reasonably robust which can withstand the periodic vicissitudes.
Between 2007 and 2012 our property market heated up abnormally. The reason was primarily the ever increasing demand of the landowners and the irresponsible competition that the developers created with each other in the auction like bidding for land. The result was an inflated bubble which was not reflective of the real value of the property in the context of the economy or the buying power of the market. Market correction was imminent. Between 2012 and 2018 the prices of apartments in Dhaka fell by up to 30%. The correction caused a huge loss to a lot of the reputed developers who completed the projects absorbing the massive losses. Many of the less established developers abandoned their projects and to this day there are structures in Dhaka lying dilapidated and incomplete. In 2018 the market started to stabilize. The prices stopped falling and the market reached an equilibrium. This stability was good for the sector and the buyers gradually returned to the market. The point here being that the market correction has already taken place and the present prices of apartments are a correct reflection of their intrinsic value. Further price reduction would mean that property is selling below its fair intrinsic value.
For ongoing projects where the developer has already sold a significant number of apartments, reducing the price for new buyers would create a lot of discontent amongst those who have already bought the apartments at the earlier prices. These customers may also demand a price reduction or threaten to cancel their booking. Therefore the developers would be very wary of reducing prices for ongoing projects.
Most developers will hold off launching new projects in the immediate future. This would also be the prudent thing to do because market prices are determined by supply and demand and adding supply to the existing unsold inventory would put further pressure on the selling price of the apartments.
Some smaller inexperienced developers tend to take land giving very high percentage share to the landowners. They also sell their apartments at lower than market value. This is the only way they can compete with the genuine established developers. But it also means that they have extremely low margins and in such a crisis they panic and reduce their prices further for the sake of their cash flow. Every time there has been a price correction in our market, we have seen the same phenomenon repeated. These fringe developers panic and slash their prices only to find that the project has become unviable and they are forced to abandon the project or delay it till the market improves. Just as in the past the same scenario is likely to play out again where some unsuspecting buyers will be lured to such low priced offerings but it will be a risk that they will be taking. That being said there would also be some very attractive deals offered even by the prominent developers in projects which have been completed but a few odd units remain unsold. In this uncertain period the developers would be keen to off load such inventory at discounted prices.
On the demand side there will be some wait and see by the buyers but this will probably last only a few months. By the next quarter normalcy would be returning to our lives and those buyers who were sitting on the fence will start to reenter the market which will see a surge in demand due to the suppressed transactions in the previous six months.
The coronavirus pandemic has brought all economic activities to a grinding halt and the government would be keen to get things moving as soon as possible. To this end the Bangladesh Bank will try to maintain low interest rates to spur economic activity. This may lead to some inflation and the property market will not be exempt from this inflation. The savvy buyer knows that when the prices start going up it happens all of a sudden and the best opportunity to buy is lost to those who procrastinate. These smart buyers will come into the market sooner than others.
The woes of the pandemic aside the Bangladesh economy has been flourishing and this has created a thriving middle class. Unlike a decade ago when high end apartments in the posh areas of Dhaka was the most lucrative segment of the market now it is the mid range category which is the most vibrant. The buyers from this segment are mostly involved in local businesses which are much more insulated from the turbulence in the global economy and will not be so adversely affected by the present crisis. These buyers will be looking to purchase their dream home sooner rather than later.
There are two major types of buyers. Ones that are looking to buy a home and the other which is the investor. Real estate and the capital market are the two main investment options for investors everywhere. Our capital market has been unpredictable and unrewarding for the retail investor. From Jan 2018 to date the Dhaka Stock Exchange index has fallen from 6300 to 4000 where it has been fixed to avert further hemorrhaging. There is very little investor confidence in the capital market. Over the past so many decades it has been proven time and again that investment in property in the metropolis has been the most lucrative option for investors in Bangladesh. This investor class will also be boosting up the demand for real estate and will be keen to avail the good deals that the developers will be offering for their unsold inventory in their completed projects that has been mentioned above.
Owning a home is an instinctive human need. This need cannot be kept suppressed for too long. Based on the above analysis I shall leave it to the readers to draw their own conclusion about what is going to happen to the property market in the coming months. As I have submitted at the beginning of this article, I do not know and I do not make predictions.
In parting I would like to leave you with the opening lines from the song Home Sweet Home written by the American dramatist John Howard Payne. These lines were also quoted on the brochure of our very first project in 1984 called Forum Apartments.
“Mid pleasures and palaces though we may roam, be it ever so humble, there’s no place like home”.