To start off, the loan ceiling for real estate developers should be increased similar to how it was extended for SMEs recently
After over two months, the unofficial lockdown throughout the country is finally being lifted on a limited scale. People are once again going back to their workplaces and economic, production and all other activities are resuming, in order to reinvigorate the economy. But as things go back to “normal” — relatively speaking — assessments are now being made to properly understand the extent of damage or loss that many industries have been suffering. The Covid-19 downtime has had a far-reaching effect across all sectors and has created all sorts of problems, some of which are unprecedented. For the housing sector, the problem lies in sourcing funds and the now uncertain future of planned projects.
The prolonged downtime has affected real estate developers in more ways than one. However, the main impact will be felt financially as all construction-related activities were completely stalled for the entirety of April and May, leading to an increase in overhead cost for many ongoing projects. Now that work is resuming on those projects, developers would need to inject more resources to make up the delay caused by the downtime and having to spend much more money than originally planned. As siphoning this cost to the buyers — the main source of funding — is not an option, this will lead to a shortage of funds for many developers, unless funding can be leveraged by financial institutions. But for that to happen, relaxation plans in the leveraging process for developers need to be introduced.
To start off, the loan ceiling for real estate developers should be increased similar to how the loan ceiling was extended for SMEs recently so that enough funding can be accessed necessary for the completion of projects. A better line of credit will be invaluable for small to mid-sized real estate developers, in particular, for those who have a limited self-funding capacity and rely heavily on the buyers for funding. Since the only option for such real estate entities to source funding is through borrowing against leveraging their assets or completed projects to banks or non-banking financial institutions (NBFI), an increase in the amount that can be borrowed without any collateral will enable these businesses to finish their projects without having to resort to leveraging assets.
Increasing the loan-to-value (LTV) ratio will be also a great help for real estate developers to generate liquidity support. This step will especially be helpful for initiating future projects to meet the ever-growing demand for housing in Bangladesh. A project requires millions just to get it to launch and reach the stage necessary to attract further investments. The upper-mid-tier developers will be able to leverage their existing properties and gain extra funding which will help them bear the increasing cost of raw materials as well as help them focus on any incomplete project without overburdening them with a financial shortage. But, ideally, this sort of credit line regulation change should be accompanied by low-interest rates.
While interest rates for all types of loans have recently been reduced and capped at 9%, the current situation is different and requires an unprecedented move to tackle the losses incurred. And that means lowering the interest rates even further. Even a better line of credit alone can be a gateway to disaster for some real estate developers if all they are concerned and focused on is the repayment of high-interest rates on their borrowed amount. So, without actually lowering the interest rate, or the government shouldering some of the rates, the full potential of such measures cannot be achieved.
In addition, temporarily relaxing and extending loan repayment dates will also be the right move forward as many of the real estate developers will be recuperating their losses for a long while. The Real Estate Housing Association of Bangladesh (REHAB) has been requesting, on behalf of real estate developers, for exemption from paying interest on loans this year and rescheduling them as soft loans. If granted, this will take much of the burden off the shoulders and reinvigorate real estate investment as well as the industry very quickly.
Bangladesh House Building Finance Corporation (BHBFC) has recently asked the Finance Ministry for Tk1,100 crore to boost investment in the sector, which will be used both in short-term and long-term plans. According to their short-term initiative, businesses will be exempted from paying additional interest on the actual interest rate for non-payment of loan instalments till June 30 this year. Furthermore, a more relaxed stance will be adopted in the case of loan rescheduling where existing down payment will be lowered by a further 5% as relaxation of the conditions on paying down payments. As for their long-term initiative, Tk200 crore each year will be utilized to ensure a steady credit flow for real estate entities that seek it.
For the real estate market to stay afloat, all it needs is a steady and favourable source of funding, that’s it. Even if the need for property seems to be experiencing a downturn, it is not. The demand continues to maintain its pace during this Covid-19 crisis and will bounce back up as things are relaxed. But if real estate developers are forced into a corner where necessary financing dries up, the market will experience a tremendous shortage from which it will take years to recover. The market and the entities engaged in it need a lifeline at the moment from the government and from the financial institutions which will foster the continuation of real estate development.