The rise of high-rise apartments in Kathmandu

7 min read
Published:
24 Nov 2017
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7 min read
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Despite Kathmandu’s high-rise sector suffering two major shocks--the 2015 earthquake and the 2016 credit crunch--the sector is actually doing pretty well owing to the unrelenting demand for apartments

Among Kathmanduites, it has become a truism that these days you can’t afford to build your own house. That high cost in building your own property has chiefly been a result of the high demand for land. Due to the city’s ever-growing population, in which urbanisation has had a massive role to play, the demand in the real estate sector surged over the past decade or so, and it is set to grow at an even faster pace in the coming years. This trend had already been foreseen by the government and the players in the real estate sector quite some time ago. According to the projections made by the National Shelter Policy in 2012, around 1,364,000 residential housing units would be needed in the urban areas, with around 900,000 new units needed by 2023. Over the years, this has been true especially for the high-rise apartment tower sector, which saw continuous growth. Today, there are more than 105 registered projects that have received permits to construct buildings, are completing constructions or are in the process of construction.

And this demand for apartments has persisted even though the sector has in recent years suffered two major shocks: one, the literal shocks that Nepal experienced in the form of the 2015 earthquakes, and two, in 2016, when the Nepal Rastra Bank (NRB) discouraged banks from lending money to be used for “unproductive” sectors such as housing. But here we are in 2017, and the demand for units in high-rises and in colonies continues to soar unabated. 

The earthquakes and their effects

In 2015, the overall housing sector in Nepal faced a crisis. While the country was trying to recover in the aftermath of the earthquakes, the housing industry was hit badly and developers were living through exceedingly dismal times. The government temporarily banned the construction of houses after the earthquake. And just when the aftershocks were slowly subsiding, the economic blockade handicapped the country in late 2015. Then around the second quarter of 2016, a vicious cycle produced by certain market variables that were feeding each other led to a demand for apartments in high-rises and colonies making a comeback: immediately after the earthquakes, people were afraid to live in high-rise apartments and they wanted standalone houses on a standalone piece of property; that meant that the demand for land surged, meaning prices surged, making it too expensive for people to build a house, so if you needed a house, the only option you had was to get an apartment in a high-rise or a colony.

Land prices saw an increase of 40 to 50 per cent, while the prices of houses went up by 20 to 30 per cent. And even for developers who wanted to start new housing projects, land acquisition had become a challenge. From those bleak days, the developers of high-rise apartments and colonies are now living through much rosier times.  

“What was once the most overriding fear—that of high-rises crumbling—among people is at a much lower level today. In fact, we’re almost back to how people used to regard apartments in the pre-earthquake days,” says Areena Tuladhar, Marketing Manager at Shangrila Housing Pvt Ltd. According to Tuladhar, people are starting to believe again that most apartments are safe, even the ones that suffered some structural damage. And developers say that measures such as retrofitting have been implemented to make these apartments liveable again. They say that seismic retrofitting has now become a widely used option to modify existing structures to make them more resilient. Retrofitting safeguards the building from seismic activity, ground motion and soil failure during earthquakes. “You don’t have to rebuild the apartment building from scratch,” says Tuladhar. “Retrofitting is usually enough.” 

Surviving the credit crunch 

From late 2016 to early 2017, the Nepali banking industry went through what was known as a liquidity crunch, where banks faced an acute shortage of funds to loan to borrowers. According to most bankers, the cause of this crunch was the excessive lending that the banks had over the years provided to the housing sector in the form of home loans. This provision of providing home loans had been deemed unproductive by many economists and the central bank. They saw this type of investment merely as funds stagnating: as opposed to how money flowed vis-à-vis the manufacturing sector, which always promised a healthy circulation of funds.

The crunch’s effects on the housing sector were patently evident. During the initial stages of the crunch, the banks’ inability to provide loans pushed investors away from the sector, which led to a prolonged absence of any activity in commercial-property investment. At the peak of the crunch, the demand for houses, apartments and land had fallen by almost 40 per cent in just a few months. That was primarily because banks were charging interest rates of up to 13 per cent on loans, which was almost double the rate that the banks had been charging before the crunch. In the months following the crunch, while the Nepali economy was still on its way to recovery, NRB issued several policies in order to ensure that such a situation would not arise again.
To make matters worse for builders and developers, in the budget for the 2017/18 fiscal year, NRB’s latest directive revised the loan-to-value ratio for credit sought to purchase real estate in the Valley from 50 to 40 per cent. “That means that the banks can finance only 40 per cent of the property being purchased,” says Narendra Bajracharya,Director at Comfort Housing.

But why do Nepalis still prefer apartments?

No matter the shocks to the high-rise sector, people have continued to prefer apartments in high-rises to standalone houses. For the most part, the Nepali population began adopting the apartment culture at the turn of the new century. According to data from the Kathmandu Valley Development Authority, during the period between 2004 and 2015, the valley saw 71 construction permits for new apartments being issued, with the most being issued during the 2008/9 fiscal year (23 permits were issued that year).
Quite a large subset of the Kathmandu populace believe that living in apartments meet their myriad needs. For example, one is security; you don’t have to worry about leaving your house unattended, and this is especially convenient for families where both the husband and wife work. They need not worry about basic facilities such as water and electricity, and a lot of these units come with amenities such as swimming pools, fitness centres, recreational parks, among others. And buying an apartment obviously removes the hassle of your having to go through the painstaking process of building your own house. 

However, in the end, the element that appeals the most to customers is the affordability of the apartments. Typically, apartment prices range from Rs 30 lakhs to anywhere around Rs 3 crores (with luxury penthouses selling for up to Rs 5 crores). In contrast, even the most basic standalone houses cost at least Rs 2.5 crores. 

Radiating outwards

“The space available inside the Ring Road has always been getting more and more scarce and more and more expensive,” says Santosh Pradhan, CEO of Excom, the latest players making a foray in the real-estate sector. “That’s why we’ve seen high-rise buildings mushrooming in the Valley’s outskirts, in places such as Sitapaila, Bhaisepati, Pepsicola, Harisiddhi. All this growth is basically a result of the fact that Kathmandu is the city people want to live in, and people will keep migrating to the capital from Nepal’s countryside and smaller cities,” says Pradhan.

And no matter the shocks to the real estate sector, say developers, Kathmandu’s denizens will increasingly end up living in high-rises. High-rises are here to stay.

Contesting the ‘unproductive sector’ label

While the central bank has deemed lending to the housing sector as unproductive lending, developers beg to differ. “Though this sector did play a role in creating the crunch, stating that home loans were one of the main causes does not help anybody,” says Narendra Bajracharya. Bajracharya and other developers view this sector as a channel through which people inject funds into the economy in the form of investments. “Investing in real estate ensures that funds circulate in the economy via streams such as payment for construction materials and labour wages, which is a much better option than people simply hoarding the money,” he says.