The housing sector and its challenges
Tasmiah Nuhiya Ahmed, Law Research Officer, BILIA. She is an Advocate of the Supreme Court : The real estate business has not been going well for the last couple of years due to disproportionate price of flat and registration cost.
The National budget 2015-16 imposed Value Added Tax (VAT) on apartment price including cost of land at the rate of 1.5 per cent for up to flats of 1,10sft, 2.5 per cent up to 1,600sft and 4.5 per cent for flats of over 1,600sft floor space. In addition to VAT, four per cent gain tax, three per cent stamp duty, and two per cent registration fee each for government and City Corporation, totalling 11 per cent payment were imposed.
When one purchases a piece of land no VAT is to be paid, but when the person constructs a building on the land he/she has to pay VAT on construction cost of the building. As most people cannot afford to buy a piece of land and construct a building on it, they opt for flats. The flat purchasers have to pay VAT for the portion of land as well as for the flat (part of building). At the time of registration, a flat purchaser needs to pay stamp duty, registration fee and gain tax on the value of land occupied by his/her flat.
As per the report of the State of the Bangladesh Economy in FY2018, which was prepared under the flagship programme of the Center for Policy Dialogue (CPD), titled Independent Review of Bangladesh’s Development (IRBD), in FY16, a total of 134 annual development programme (ADP) projects registered zero physical progress (out of 1,557 projects, i.e. 8.6%) and 39 of these projects belonged to the Physical Planning, Water Supply and Housing sector . The report also suggests that there are high lending rates in housing loan (17.8%) .
The announced interest rate of the scheduled banks ranges from 8.75%-15% (Percentage per annum) (updated on March 2018) . The higher inertest rate results in low investment and that ultimately results in slowing down the progress of real estate sector in Bangladesh.
The bank interest rate for home loan ranges between 8.99% – 14.5% (Updated information on 29 May 2018) , which is relatively high.
The prices of real estate properties are rising very fast. Price hike of land and construction materials also add to the overall price hike. The price of land is increasing at a very high rate after 1990. After 2000, the rise in land price became steeper. There is no control of the Government over the price increase of land within Dhaka city. Increased land price have a direct impact on apartment price. Also, after 2005, price of bricks, granular sand, cement, grade 60 rod etc. had a rapid, almost exponential, increase. Due to such unimaginable increase in land price as well as sharp increase in prices of the construction materials price increase of apartments became an obvious consequence .
As an obvious result of such price hike, a good amount of undocumented money has been utilized in acquiring land, apartments, buildings, shops etc. in past few years. But the usage of black or undocumented money in the Real Estate sector cannot be measured precisely because no authentic information is available anywhere. Apart from such undocumented money, foreign remittance is a prominent source of fund to purchase any real estate property along with personal and family savings, and bank loan. But, any consolidated figure about how much foreign remittance is invested per year in real estate sector is not available .
There is no Refinancing Fund from the Government for the Housing sector that allows the consumers to take the benefits of purchasing flats under a system through the replacement of an existing debt obligation with another debt obligation under different terms. Government may allocate BDT 20,000 to 50, 000 Crore, depending on the availability; under Refinancing Fund category for the citizen consumers to realize its commitment “Housing for All”.
At this moment, land registration fee is between 14 and 19 per cent of total land price, while flat registration fee is between 12.5 and 15 per cent of the same . Buyers have to spend 15.5 percent of a flat’s cost for registration, which includes 4 percent gain tax, 3 percent stamp fee, 2 percent registration fee, 2 percent local government fee and 4.5 percent VAT. Flat sales have decreased by 60 percent in recent times due to high registration costs while the rate of launching new projects has declined by 75 percent . If we look at our neighbor countries, we see that their registration cost for flats is far below than ours.
Another impact is that people are buying flats but do not go for registration due to the high registration cost. Ultimately government loses revenue and complicacy arises with regards to inheritance when the buyer leaves the property to his or her heirs upon death.
In order to get approved a Rajdhani Unnayan Kartripakkah (RAJUK) plan for constructing and developing a building on a plot of land, it takes a person to go to approximately eleven (11) agencies and may take up to two years or even more. Now if a land develop enters into an agreement with a land owner for constructing and developing a building in his or her land, he loses substantial amount of time in getting RAJUK approval. That actually obstructs the performance of the contract and may sometimes lead to commit breach of contract by the developer even though the delaying approval process is not at all the developer’s fault.
Moreover, there is a requirement to obtain Environment Clearance Certificate for constructing and developing a building on a plot of land and this is also very much time consuming and complicated.