Papua New Guinea: Property boom easing

Rapid expansion in Papua New Guinea’s property market is set to be further heated by new foreign investment. However, industry players reject fears of a bubble and predict that rising prices will soon stabilise.

Malaysian firm Iris Land announced in February that it had entered into a $53.4m agreement with Kida Maru Holdings to develop a housing project in Port Moresby. Kida Maru, which owns 14.75 ha of land in the capital’s Granville district, says it will join Iris Land in the development of a project that includes 275 units.

The agreement highlights a surge in property development that has been building momentum in the past decade, with factors such as urbanisation and investor confidence in the country’s natural gas resources driving growth. Observers also point to reforms of the financial system that they say have led to a more flexible, consumer-focused lending regime.

Recently completed projects include the 20-storey Grand Papua Hotel and the three-storey Vision City Waigani mall, as well as new buildings for ITC firm Datec and ANZ Bank. Major construction developments under way include apartment blocks being built for Steamships Property, a Bank South Pacific headquarters in Harbour City, preparations for the 2015 Pacific Games to be held in PNG, and the University of PNG’s plans to build new housing for athletes and guests who will participate at the games.

The swift re-drawing of the capital’s low-set skyline has raised fears of a bubble, however, with the IMF advising PNG’s financial sector to be cautious of overheating in the property market, as real estate prices in the capital are already unsustainably high.

However, the IMF also noted in a July 2011 report that high real estate demand and market assessments of potential future constraints relating to the progress of the $15.7bn, Exxon-Mobil-backed, liquefied natural gas (LNG) project are expected to support property valuations in the short term.

Meanwhile, major property player Nasfund − a superannuation fund − is forecasting a property glut by 2014. The firm believes that the current rate of construction will see demand dissipate as rental rates retreat, with the past 18 months witnessing rates for up-market accommodation reach $4500 per week.

“While growth has been phenomenal over the last decade, [2011] has seen stabilisation,” Nasfund wrote last August. “Any correction in the property market will not be a ‘bust’, but more a consolidation with minimal impact on the economy. The reason is that much of the major commercial and real estate holdings are held by large, well-capitalised institutions, and that in a downturn in property, the assets are generally held not sold by these institutions”.

Indeed, Nasfund officials have praised the central bank for a role in cooling the market. Rod Mitchell, Nasfund’s general manager, said, “The banks in PNG have shown a very responsible attitude to the current property boom, ensuring lower-interest, loan-to-valuation ratios on any development”.

However, the issue of landownership is a substantial challenge to real estate investment. Critics say that confusion about ownership of land − whether it is communally owned or owned by a single person − is a problem for the economic development of the country, particularly in major mining projects.

Around 15%, or some 1m people, of PNG’s 6m population currently live in urban centres. By 2030, however, the country is expected to have around 3.5m people living in towns and cities. The rapid urbanisation represents a potential opportunity for real estate firms but creates a significant challenge for the government.

In February 2012, Billy Manoka, the CEO of the Independent Consumer and Competition Commission (ICCC), said the government has identified a “critical” shortage of housing faced by Papua New Guineans and has requested the commission to conduct a comprehensive review into the housing and real estate industry in PNG. Manoka told local media that the review, which is yet to be published, had found that high rental prices were “symptoms of significant underlying failures, represented by the inefficient and insufficient supply of raw land, organisational deficiencies and lack of clarity of government policy”.

Higher rental and purchase price are also the result of an insufficient transportation and road network that raises construction costs. To ensure more investment enters the real estate market, improved infrastructure and transparency at all levels of the property market are necessary to entice outside investors. With a more powerful mandate to fulfil its regulatory role, the ICCC would also be able to smooth the way for increasing private participation.