Affordable housing creates investment opportunities in PNG

Much like the construction industry, Papua New Guinea’s real estate sector has recorded strong growth in recent years as the nation rolled out its $19bn PNG liquefied natural gas (LNG) project. Rising inflation, as recorded in the country’s consumer price index (CPI) housing category, saw property prices and rental rates spike between 2008 and 2013. This trend continued into 2014, suggesting that the property market is likely to remain on an upwards trajectory, reinforced by robust GDP growth and a growing urban population.

At the same time, developers are moving to capitalise on the government’s plans to deliver tens of thousands of housing units in the affordable segment. This has remained underdeveloped for decades despite the best efforts of the National Housing Corporation (NHC). With a new emphasis on private sector participation in the housing programme, developers are slated to see sustained growth in 2015 and the commercial segment is forecast to remain strong, with favourable macroeconomic growth, and a host of new energy and mineral resource projects set to launch in 2015.

Growth Trajectory

Although sector-specific data is limited, available statistics show PNG’s real estate sector has undergone a marked expansion in recent years. The Department of Treasury (DoT) reported collective growth of 69% in the finance, real estate and business services sectors between 2008 and 2013 to reach PGK687.2m ($260m).

Meanwhile, Port Moresby’s Gerehu suburb saw a 236% increase in nominal house prices over the same period, according to the National Research Institute (NRI). Rental and housing inflation echoed this, with the housing CPI up from 92.3 in 2011 to a high of 126.3 in 2014. The Bank of PNG (BPNG) reported that the housing category of the CPI rose by 14.9% in the fourth quarter of 2014 alone, indicating that the boom years are far from over (see analysis).

Indicators

The performance of PNG’s two largest property investors, Nambawan Super and Nasfund, are widely viewed as proxies for the health of the real estate sector, and both have recorded strong profit growth in recent years. Despite a gradual slowdown in LNG construction, Nasfund’s net profit rose by 50% to PGK335m ($126.8m) in 2013, while Nambawan Super’s profits were up 17% at PGK410m ($155.1m).

The trend continued in 2014, with Nasfund announcing net profits of PGK258.5m ($97.8m) for the year – a moderate decline compared to 2013, but still higher than officials had anticipated, given the overall economic slowdown triggered by the end of PNG LNG construction. Nambawan Super, meanwhile, posted net profits of PGK338m ($127.9m), similarly lower than in 2013, but a solid performance nonetheless.

Supply Side

A significant influx of high-end units in Port Moresby has seen the residential market contract somewhat in recent months. New offerings include the 69-unit Avara Apartments Complex and Square, currently under development by Malaysia’s Khor Eng Hock & Sons, as well as the PGK1.4bn ($529.8m) Seaview International Gardens, which broke ground in May 2013, with Chinese developer Jinyn Developments reporting it will include 122 apartment units priced between PGK1.7m ($643,280) and PGK4m ($1.5m).

Developers are also moving forward on the second stage of the Windward Apartments, with work on the original 12-storey, 24-unit apartment block originally finishing in 1987. Phase two will see a new 13-storey residential complex add 40 new luxury apartments to the market, with construction kicking off in 2014.

Century 21 Siule reported in May 2014 that market maturation and an increase in availability saw top-end rents decline by up to 30% from their 2011-12 peak, with rents in the mid-range segment falling by 10-20%. Prices were largely unaffected at the lower end of the market, as affordable housing remains in critically short supply, owing to a combination of low average incomes, high mortgage rates and a lack of land to develop.

This has presented considerable opportunities for property developers in the affordable housing segment, with the government planning to invest PGK70m ($26.5m) in its National Land and Housing Programme in 2015, with total funding to reach PGK178m ($67.4m) by 2019. The outlook for the residential segment nonetheless remains mixed; a January 2015 article in local property portal Hausples reported that while Century 21 Siule and DAC Real Estate expect prices – and rents in particular – to decline in 2015, others, such as LJ Hooker, are projecting that prices will remain flat or even possibly rise over the year.

Investment Environment

Recent price fluctuations notwithstanding, the country’s real estate market is generally favourable to property investors. The government has been active in promoting and developing alienated land and establishing industrial centres to attract investors. The country has established a number of new free trade zones (FTZ), with the Free Trade Zone Act No. 18 of 2000 granting investors unrestricted access to land in FTZs.

Tax regulations also demonstrate PNG’s openness to real estate investors. According to the Global Property Guide, rental income earned by non-residents is taxed at progressive income tax rates, ranging from 22% to 42%, though capital gains unrelated to business-making activities are not taxed.

The country also has no inheritance tax. Purchase costs are relatively low and buyers only pay for the stamp duty, which ranges from 2% to 5% of the property value. Moreover, developers launching new projects in rural areas can qualify for a 10-year exemption from corporate income tax.

Active Players

There are a number of private real estate agencies active in the country, most notably the Professionals Real Estate Group, which has offices in Port Moresby, Lae, Mt Hagen and Madang, and resident agents in Rabaul, Wewak and Goroka. Other notable players include Century 21 Siule, DAC Real Estate, Pacific Comfort Real Estate and PNG Real Estate.

Employment in the sector is also rising; in its June 2014 quarterly economic update, the BPNG reported that employment in the business services sector, including real estate, expanded by 0.4% in the second quarter 2014, driven in part by new recruitment in the property management division of an unnamed real estate company in Port Moresby’s National Capital District.

Land Reforms

Government reforms are also helping to drive development. Land in PNG is categorised as either alienated land, owned by the government and mainly located in urban areas, or customary land, which comprises 97% of the total supply.

The government has introduced two notable land reforms in recent years; the Land Groups Incorporation Amendment Act of 2000 and the Land Registration Amendment Act of 2009 – both of which were enacted in March 2012.

The Land Groups Act provided the legislative framework for customary landowners to incorporate as legal entities and register their unused land to be leased, while the Land Registration Act allows for leases of up to 99 years, in addition to permitting mortgages to be created and used as security or transferred. In addition, the act allows mortgage providers to enter and take possession of land in the event of a default – an important reform aimed at bolstering investor confidence.

Unfortunately, land allocation remains one of the most significant challenges to real estate development, particularly in terms of developing more affordable housing. The process of acquiring land is costly, complicated and time-intensive, and this will likely require further reforms if the government is to meet its ambitious affordable housing goals.

Lending

Given the lack of sector-specific data, lending provides another good indication of real estate activity. According to the BPNG, total lending to the private sector, public non-financial corporations, and provincial and local governments rose by a total of PGK796.8m ($301.5m) in the fourth quarter of 2014 to reach PGK14.3bn ($5.4bn). This was driven by increases of PGK354.8m ($134.3m) and PGK442m ($167.3m) in new lending to the private sector and public non-financial corporations, respectively. The BPNG reported a broader rise in lending across several sectors, including real estate (disaggregated data is not available), with annualised domestic credit growth at 11.8%.

Price Tag

With real estate lending on the rise, home ownership is expected to expand in the coming months, although interest rates remain elevated at most institutions in the country. According to a March 2015 report from the NRI, average annual interest rates on housing finance as of the fourth quarter of 2013 stood at 9.1%, with banks that are active in both Australia and PNG often charging considerably higher rates on residential loans in PNG than in Australia. In one example, rates in Australia were 5.88% plus a $5 monthly fee, compared to 9.25% plus a quarterly account administration fee of 0.16-0.35% of the loan value in PNG.

PNG’s mortgage rates are some of the highest in the region. Overall lending rates averaged 10.5% between 2010 and 2013, according to the World Bank, compared to 10.2% in Samoa, 7% in Fiji, 5.9% in New Zealand, and 5.5% in Vanuatu, although rates in the Solomon Islands averaged 12.4% over the period. The NRI attributes PNG’s high rates to low levels of competition in the banking sector and an elevated incidence of default, with high rates and restrictive lending conditions continuing to inhibit expansion of home ownership in the country. For example, some commercial banks require a minimum equity of 35% for a home loan, which is a substantial burden for borrowers. Indeed, continuing price rises in the real estate sector have caused increasing concern that affordability is at an all-time low.

Affordable Initiatives

The government has accordingly taken steps to address this issue, launching the First Home Ownership Scheme (FHOS) in September 2014. The initiative, which offers long-term mortgages at 4% interest rates to first-time buyers, was initially limited by the requirement that potential homeowners obtain a land title as security for the loan.

To rectify this, the government later announced it would release 40,000 new plots of land with free titles to facilitate the programme’s roll out. As a result, the first six months of the scheme saw PGK4.2bn ($1.6bn) in new loans provided to FHOS participants, with Hausples reporting that real estate agents in Port Moresby expect the initiative will lead to higher sales of homes in the PGK200,000-700,000 ($75,500-265,000) range.

The scheme will also benefit property developers like Portion 11 Management, which is currently overseeing construction of the PGK250m ($94.6m) Edai Town project. Located just outside of Port Moresby, Edai Town is a 500-unit gated community with prices ranging from PGK280,000 ($106,000) to PGK500,000 ($189,000) and above. Upon completion it will house up to 2000 residents, and include ancillary facilities such as police and fire stations, retail space and office buildings, with Portion 11 offering financing to potential buyers under FHOS. This will be particularly advantageous for buyers who are unable to secure their own land title, and marks an important step forward for development of affordable housing in the country.

While recent construction activity has largely focused on development of the PNG LNG project and related works, new LNG revenues – albeit lower than originally projected due to weaker oil prices – will allow the government to move forward on a long-awaited infrastructure development programme that will see significant upgrades to PNG’s roads, ports and airports (see Construction chapter) and simultaneously make significant progress in addressing the nation’s housing shortage through the NHC’s Build-Sell-Share scheme. As part of the NHC’s broader National Housing Policy Framework, the government also expects to deliver 40,000 new affordable units to its citizens over the next 20 years (see analysis).

Commercial & Industrial

Stakeholders report that demand for commercial property in Port Moresby remains strong despite completion of the PNG LNG project, with the majority of demand concentrated in the Gardens area in the city centre, as well as the western coastal neighbourhood of Harbour City. In May 2014 David Conn, CEO of the Port Moresby Chamber of Commerce and Industry, told Business Advantage PNG that market confidence was being supported by the government’s planned infrastructure investments, which has led many private construction firms to maintain a long-term presence in the country. Citing the examples of the DoT’s planned new office complex, new units under construction for ExxonMobil in Harbour City and the potential commercial development of the Paga Hill region, Conn said he expects growth in Port Moresby’s commercial real estate market to be robust in 2015.

Industrial development is also expected to accelerate in the coming years as the government moves to further develop PNG LNG-related infrastructure. For instance, the 72-ha Ravuvu Business Park, located on the western shores of Fairfax Harbour, is already operating as a warehousing, logistics and staging point for incoming shipments, offering a variety of commercial and industrial facilities, while Curtain Brothers’ PNG Dockyard has been constructing a new dry dock facility, valued at PGK500m ($189.2m), allowing for ship repair at Fairfax Harbour and significantly increasing the country’s competitive advantage.

Long-term industrial development will be supported by the planned Konebada Petrochemical Park and the Independent Public Business Corporation’s plan to relocate the Port Moresby port.

Lae

Outside of Port Moresby, the real estate market in the second city of Lae is also showing robust growth, particularly in the commercial segment. Business weaker demand for executive rentals has affected the property market, rising demand for new commercial space is expected to drive future real estate growth in Lae. Indeed, the city has welcomed a number of new industrial and commercial developments in recent years, with more expected in 2015 and beyond.

Paradise Foods is currently building a new Pepsi bottling plant in the city, while SP Brewery is in the midst of a multi-year capital investment programme for its plants in both Lae and Port Moresby. Perhaps most significantly, Nestlé unveiled the first stage of a $9.5m expansion of its plant in Lae in February 2014, which is expected to boost production by 30%.

That being said, future growth is still likely to face some challenges. Joe Tupana, property manager at Arthur Strachan Real Estate, told OBG that most of the city’s commercial buildings, including warehouses and workshops, are all completely leased, while new developments are constrained by lack of available land.

However, new infrastructure projects have improved the outlook for commercial and industrial development. In July 2014 authorities announced plans to develop plots of land surrounding the Lae Nadzab Airport. Located around 40 km outside of Lae, the airport is already undergoing upgrades to its operational facilities under the supervision of the National Airport Corporation (NAC), with the expansion to focus on developing the surrounding area. According to the NAC, the planned airport city at Lae Nadzab Airport will include commercial land for airport and transportation businesses, truck parking bays, retail outlets and hospitality facilities. The authority has issued a call for expressions of interest from commercial developers, offering a potential solution to Lae’s land shortages.

How Provincial

With land supply limited in Port Moresby and Lae, ambitious developers are increasingly seeking new opportunities outside of PNG’s major urban centres. East New Britain presents considerable opportunities in this regard. Although its former capital city Rabaul was largely destroyed by volcanic activity in 1994, the new provincial capital, Kokopo, is the fastest-growing city in the country.

A number of new projects have been planned within Kokopo’s city limits, including the Gazelle International Hotel, the Gazelle Restoration Authority and the Kokopo Sports Stadium. Recent years have already witnessed the development of a number of new housing estates, including Tibur, Kenabot and Takubar, while the Warangoi area represents an undeveloped, high-potential location for future development.

In March 2015 Thomas ToBunbun, chairman of the East New Britain chapter of Communal Land Development, said the province plans to move forward on a number of mixed-use developments in the coming years, emphasising the growing opportunities for tourism development in the province. ToBunbun lauded the connection that was established between Kokopo and the Tokua airport, which has facilitated tourism development and stimulated the local economy.

Madang province, located on the country’s northern coast, has also been identified as a rising real estate destination owing to several factors, including a growing community of people who have relocated from other parts of the country. This has prompted an increase in investment in new residential builds.

The province’s residential property market is likely to receive a further boost as the country moves to establish the long-awaited Pacific Marine Industrial Zone (PMIZ) in Madang, with the Chinese contractor Shenyang International signing a $95m agreement to develop the free zone in March 2013.

New investment in fisheries is expected once early infrastructure works are completed, and the government has budgeted more than PGK50m ($18.9m) annually between 2014 and 2018 to develop the PMIZ. The zone is likely to have positive knock-on effects for the local economy, with Prime Minister Peter O’Neill forecasting that the PMIZ will generate PGK2bn ($756.8m) in economic activity per annum and create 20,000 jobs.

Outlook

Although the real estate sector is unlikely to return to the highs witnessed during the PNG LNG construction boom, the industry remains robust, supported by the government’s efforts to roll out new affordable housing units, as well as infrastructure development projects that will keep the construction and real estate industries on a growth path in 2015.

With GDP growth expected to reach 15% in 2015 – nearly double the 8% growth that was recorded in 2014 – the country’s real estate market will likely remain vibrant and active into 2016. Although issues surrounding land allocation continue to hinder major new developments in PNG, the government’s plans to deliver new land plots and expand the areas available to commercial and industrial companies, particularly outside of Port Moresby, bode well for future sector growth.