After a roaring half-decade, the industry is gradually slowing down

After a wildly successful five-year run on the back of heavy investment that came with the global economic recovery, the real estate sector in Papua New Guinea is moving out of the fast lane. Growth in property values is slowing and demand is starting to cool. The unprecedented demand spike linked to ExxonMobil’s $19bn PNG liquid natural gas (LNG) project, which drove a surge from 2009, has since been tamed by the addition of new stock across all subsectors of the market, following a flurry of new builds in the National Capital District (NCD) and, to a lesser extent, selected areas across the country.

This decline has led to market correction in certain areas, but some real estate categories have been affected more than others. Demand for industrial space remains high, while a depreciating kina and expansion of new shopping malls has had a dampening effect on the retail category. Though demand remains strong in the NCD for new high-end residential units and modern centrally located commercial office space, the addition of hundreds of units of new stock in recent years has softened the market considerably. “Commercial property remains pretty solid on the high end,” Mark Dawson, general manager of corporate and institutional banking for the Pacific at ANZ Banking Group, told OBG. “Some yields are coming off, but there is not much leverage for high-end residential. When the market normalises I don’t foresee any underlying drop off in value: it is not a property bubble.”

Riding The Wave

The massive surge in demand that started in 2009, combined with limited investment avenues for onshore liquidity, created a tidal wave of new investment in the real estate market centred around Port Moresby. As the PNG LNG project entered its initial construction phase, related industries soared. From 2008 to 2013, the finance, real estate and business services sectors together expanded by 69%, from PGK407m ($165m) to PGK687.2m ($279m), according to data from the Department of Treasury (disaggregated data remains unavailable). Growth in the value of residential properties in Port Moresby was especially strong among advertised nominal house prices in the suburb of Gerehu, where they increased by 236% between July 2008 and January 2013, according to an issues paper published in March 2014 by PNG’s National Research Institute (NRI), entitled “Use of Land Lease as Collateral for Accessing Formal Sector Finance in Papua New Guinea”. While the chief driver of this growth was simple supply and demand, speculative purchases also helped kick the market into overdrive. Rates of return on property exceeded that of other domestic investment options such as government bonds, which yielded around 12%.

This growth reflects a broader expansion in the same period both regionally and globally, as the world real estate market recovered from the economic downturn of 2008. But the effect on the PNG market has been much more pronounced. Annualised returns on property in the pan-Asia region averaged 8.8% from 2007 to 2012, according to IDP, a real estate research firm. The highest returns in 2012, exceeding 10%, were in other regional emerging markets such as Indonesia, Malaysia and Thailand, as well as in more established markets like Hong Kong and Taiwan, while moderate growth in the 5-9% range occurred in Singapore, China and Korea. This region far outperformed others around the world in the six-year period, with annual returns averaging 3.8% in Europe and 3.2% in the US.

The Slower Lane

Despite the recent correction, many in the industry feel that prices are still too high, and could decline another 5-10% in 2014. Such a continued drop would limit incentives for new projects, which are already facing a challenge from less available onshore financing. Many of the established PNG firms that have cash to spend on real estate projects have already invested heavily in the sector, and will be hesitant to embark on any new large capital investments in the current economic climate. Even state investment vehicles – such as Nambawan Super, a superannuation fund, and Nasfund, a property investor – have been reducing their exposure to the property market. “The rising cost of construction in PNG is proving a challenge for investors in property,” Michael Block, chief investment officer at Nambawan Super, told OBG. “Nambawan Super does extensive feasibility studies before embarking on a new construction project, and with property values falling and construction costs rising, new projects are less attractive than purchasing existing buildings. In some extreme cases it is possible that a new build might be valued at only 80-90% of cost. This is obviously a difficult situation for a superannuation fund which seeks to make a good return for members.” Other brakes on housing market growth are the greater supply of stock, which has diluted the market, and the rapid depreciation of the kina, which fell some 20% against the dollar in 2013, putting downward pressure on property prices.

As overall foreign investment tailed off starting in late 2012, so too has the strong performance of the PNG real estate market. A significant correction hit in the first quarter of 2013, when sales in the aggregated finance, real estate and business sector declined by 8.1% before recovering by 19.5% in the following quarter, according to Bank of PNG statistics. In the 12 months to June 2013 sector sales increased by 8%. Data from the Treasury Department put overall growth in the sector at 6% in 2013, down from 10% in 2012 and 20% in 2011. Further growth is projected to stabilise going forward, at 5% a year through 2018, with the sector contributing 0.2% to real annual GDP growth.

Residential

At the beginning of the ExxonMobil venture, as expatriate executives and other personnel began flooding into Port Moresby, the sleepy capital city was inundated with requests for safe, modern high-end residential units. Its heretofore limited stock was quickly snapped up, leading to an unprecedented spike in rental and purchase prices across the city. Median house prices in the Gerehu suburb of the NCD, where most owner-occupied residences are located, surged from nearly PGK300,000 ($121,950) in May 2009 to about PGK850,000 ($345,525) by June 2012, according to data from the NRI issues paper. This boom, combined with a dearth of other investment options for onshore cash, led to a host of new top-end residential projects in and around the city. The flood of new stock onto a volatile market led to a sharp decline later in 2012, to a median price of about PGK450,000 ($282,925). The figure then rebounded temporarily to around PGK800,000 ($352,200) in the first quarter of 2013 before plummeting by about 50% to just over PGK400,000 ($162,600).

New Housing

Among the residential offerings being minted is the Brampton Street Residential Development, complete with an apartment block, office complex and central square. With work completed on the Avara Office Annex in 2013, the project’s new phase broke ground in mid-2014, and building is also under way on the 69-unit Avara Apartments Complex and Square. Malaysian developers Khor Eng Hock & Sons are overseeing construction on this project, which will include modern amenities such as restaurants, a gym, a swimming pool and a state-of-the-art security system.

Other ground broke in May 2013 on the Seaview International Gardens, a group of apartments overlooking Walter Bay at 2 Mile Hill in Badili along Hurbert Murray Highway. According to the Chinese developer, Jinyn Developments, the project will house 122 apartment units ranging in size from two to five bedrooms and costing PGK1.7m-PGK4m ($691, 000-1.6m) each. At a total cost of PGK1.4bn ($569m), these will be built in three phases according to demand, the first of which will see 13 units completed by late 2015, according to the developer.

Construction of the Windward Apartments East – part of the larger Windward Apartments being developed by Pacific Palms Property, a subsidiary of Steamships – was completed in December 2013. Having finished off the original 12-storey, 24-unit, 12,500-sq-metre apartment block in 1987, the company has since embarked on the second phase of construction, Windward Apartments Stage 2. In all, the new additions will add 40 new luxury apartments within a 13-storey residential complex.

With such additional stock becoming available just as demand hits a slight downturn, rental prices are beginning to return to earth. As the overall investment environment continues to cool, however, a price nosedive has so far been avoided. “We have found that the good properties are still able to lease quite readily and sustain the rents they have been achieving,” Ingrid Richardson, general manager at local realtor Strickland Real Estate, told OBG. “It shows that there are still companies that are prepared to pay higher rates of PGK4000-5000 ($ 1626-2032) per week for the right property.”

The behaviour of property prices has varied by type. The residential and hospitality segments have taken the largest hit over the past year as the market has adjusted, followed by commercial properties. Meanwhile, residential properties renting in the range of PGK4000-6000 ($1626-2439) per week saw the largest declines. Tenants of higher-end flats, for instance, could see their weekly rental rates fall in 2014 from PGK7000 ($2846) to PGK5,000 ($2033).

Industrial

As PNG relies heavily on imports for everything from fresh fruit to industrial machinery, its nascent industrial sector consists mostly of very basic manufacturing for simple goods consumed domestically. Large-scale industrial development has thus far been relatively limited, due to the competitive challenges hampering the domestic sector, such as high transport and energy costs, lack of a skilled labour force and a small domestic market. To date, development in manufacturing has occurred largely as the result of spin-offs from projects related to exploitation of natural resources.

One area with significant opportunity for expansion is the tuna canning industry, which is growing rapidly within the burgeoning Pacific Marine Industrial Zone (PMIZ) in the province of Madang. After five years of delay due to funding issues and disputes with local villagers, development looks to be proceeding at the free trade zone in 2014. Once the infrastructure is in place, this should pave the way for further investments from fisheries companies. In March 2013 a $95m contract to begin construction on the initial stages of the 216-ha industrial zone was signed with Chinese contractor Shenyang International. The government has budgeted more than PGK50m ($20.3m) a year for 2014-18 to develop the PMIZ.

Logistics Centre

Another industrial zone that has piggy-backed on the windfall from the PNG LNG project is the Ravuvu Business Park, which handled most of the logistics for incoming materials destined for the natural gas venture. Located along the western shores of Fairfax Harbour, across the bay from Port Moresby and roughly 20 km southwest of the PNG LNG plant, this 72-ha development operates chiefly as a warehousing, logistics and staging point for incoming shipments before they are transported inland. The site offers standard industrial services such as commercial and industrial lots for use as warehouse space, workshops, holding yards, Customs bond areas, dangerous goods storage areas and reefer storage, as well as support services such as rented accommodation, office space, and recreational and catering facilities.

Run by Avenell Engineering Systems, Ravuvu recently completed a commercial wharf for local shipping, increasing logistical operations for sites outside of the NCD. The business park also houses the Ravuvu Club Quarters, a residential complex of single rooms in a central housing unit, as well as one- and two-bedroom self-contained houses available for rent. Support facilities include an eatery, outdoor BBQ deck, bar, and indoor and outdoor recreation areas, including a gym and swimming pool.

Petrochemicals

One industrial development that could become a game-changer received new life in 2013: the prospect of moving forward with the long-dormant Konebada Petroleum Park. Included in the original plans for the PNG LNG project, this park was envisioned as the country’s first true heavy industrial complex, which could capitalise on energy supplies by creating new value-added downstream activities. Progress on the complex stalled for a number of reasons since the concept was first introduced in 2006. The most prominent of these is the lack of excess natural gas to use as feedstock: virtually all of the natural gas capacity for the current project has been sold in long-term export contracts. A second reason is the mismanagement of funds for the project by the then-Department of Energy during the project’s early stages.

With the promise of new natural gas coming online in the next few years, interest in the project has been rekindled. In June 2013 Mitsubishi Gas Chemical Company and Itochu Corporation met with Prime Minister Peter O’Neill and Minister for Trade, Commerce, and Industry Richard Maru to discuss a proposal to build a $1bn petrochemical plant at the site. The facility would produce industrial chemicals methanol and dimethyl ether (DME), presumably for export, from an annual feedstock of 1.2tn cu feet of gas. The 2013 proposal is a revisit of previous plans launched in 2006 to develop the methanol and DME production along with the construction of a PGK2.3bn ($935m) ammonia plant run by Indiabased firm Oswal Projects. In that year, a memorandum of understanding was signed between Oswal and PNG LNG stakeholder Oil Search to supply the Oswal plant with 50 petajoules of natural gas ( equivalent to 47.2bn cu metres). This gas would be used to produce 2600 tonnes per day (tpd) of ammonia and 4500 tpd of urea.

As of May 2014, no further movement on either investment has been announced by either the companies or the PNG government. The feasibility of any petrochemical project hinges primarily on the government’s ability to divert the natural gas production of current or future energy projects away from profitable LNG exports and towards the domestic market. One promising sign that the government is serious about these plans is its allocation of PGK5m ($2m) from the 2014 national budget to the Konebada Petroleum Park Authority.

Commercial

As spin-off activities from the recent resource boom continue to drive business forward, demand for more commercial space catering to the expansion of local businesses is joining with new investment from overseas to remake the Port Moresby landscape. Companies looking for new, modern office space will have an increasing array of options as a number of large centrally-located commercial projects come on-line in the next few years. Centres of new development, such as Harbour City, have been able to maintain higher rents than those in older areas, such as downtown.

One of the most high-profile of these is the construction of Nambawan Super’s new 9900-sq-metre Old Parliament House (OPH) Tower, scheduled for completion by the end of 2014. Located on the downtown waterfront in the city’s central business district (CBD) and overlooking Fairfax Harbour, the 10-story structure is being built on the site of the old House of Assembly. Once finished, the landmark OPH Tower will rank among the largest office buildings in the city, joining the 14,000-sq-metre Deloitte Tower and the 15-storey Pacific Place.

A second major commercial project under way is the 18,894-sq-metre Harbour Office Complex, being developed by Steamships and scheduled for completion in 2015. Also on prime waterfront real estate in the CBD, this project will consist of two five-storey buildings with linking elements of paved concourses, awnings, waterfront colonnade and boardwalk. These will house leasable office space, suites, a parking garage and retail area, as well as a waterfront restaurant and boat moorings.

Retail

As economic growth fuels an expanding middle class, retailers are rushing to keep up with consumers’ growing purchasing power by opening an increasingly diverse array of stores. Large-scale shopping complexes, which were unknown in Port Moresby just a decade ago, are now proliferating following the success of the country’s first mall, the PGK1bn ($407m), 45,000-sq-metre Vision City. This was followed in short order by the PGK100m ($41m) Waterfront Foodworld retail complex developed by Garamut Enterprises, which opened its doors in August 2012. The Foodworld market is the first project within a staggered, seven-stage 20,000-sq-metre Waterfront Mall complex that also contains residential and commercial space.

City Pharmacy Group upped the ante further in 2014 when it opened the country’s largest supermarket, Stop N Shop, within its new 9300-sq-metre Waigani Central shopping complex. The PGK20m ($8.1m) development also houses the largest movie theatre in the country, as well as a host of other smaller shops and restaurants.

As the market becomes more saturated by these recent mall additions, developers are in the future expected to focus on smaller projects in both the retail and commercial segments, as well as on areas outside of Port Moresby. The increased competition from new malls, together with the lower kina, which makes imports more expensive, will likely have a chilling effect on the development of any large-scale retail projects. “Retail commercial space looks flat, with the decline of the kina entailing a big downside risk in the short term,” noted Dawson.

Building Demand

As in any real estate market, location is the overriding factor governing any valuation of property. In Port Moresby and other urban centres across the country, it is the road networks in particular – sometimes clogged with traffic and pocked with potholes – that often divide the prime real estate from the second-tier. Changes in the accessibility of certain areas, therefore, could redraw the map for high-value property, especially in the NCD, as the government rolls out a series of road upgrade and construction projects in 2014.

Budget outlays for roads in 2014 look to be the largest of any year to date. Among them are PGK170m ($69m) for the upgrading and expansion of six major roadways around the NCD – out of a total expected project expenditure of PGK700m ($285m) over the next four years. By improving connectivity and easing traffic congestion, these infrastructure projects should open up development in many of the affected areas, including 6 Mile, 7 Mile, 9 Mile, Erima, Waigani, Morea Tobo Road, Saraga Street, Kittyhawk Street, Gordons Industrial Area and the stretch of road from Gerehu to Hanuabada.

In all, the 2014 budget allocated a record PGK1.42bn ($577m) for construction and maintenance of roads and bridges. Besides the outlays for Port Moresby, major transport expenditures include PGK100m ($41m) to improve Lae city roads, PGK40m ($16.3m) for Mt Hagen town roads, and another PGK150m ($61m) for Highland Highway maintenance. Substantial upgrades to the country’s support utilities are also under way, including major projects for electricity, water and sewage in the NCD.

Home Away From Home

In a bid to cater to the many short-time or part-time business travellers flying in and out of the country on a regular basis, as well as boost tourism infrastructure, the hotel and serviced apartments sector has also been rapidly adding capacity over the past two years. Some of this pent-up demand began to ease in 2013 as a number of large hospitality projects hit the market.

These include the recently completed nine-storey Holiday Inn All Suites developed by Steamships Trading Company’s Coral Seas Hotels (CSH) and the Lamana Development Group (LDG), which brought 154 rooms and 80 apartments to the market. This follows the renovation of the previous Holiday Inn into a refurbished and expanded Holiday Inn Express. The LDG also operates the 120-room Lamana Hotel and the Airways Hotel and associated apartment complex (recently expanded from 253 units to 265) in Port Moresby, as well as the Alotau International Hotel in Milne Bay, Gazelle International Hotel (East New Britain), Kimbe Bay Hotel (West New Britain) and a number of other international ventures. The other primary hospitality operator, CSH, owns the 28,000-sq-metre, 156-room five-star Grand Papua Hotel and Apartments, which opened in 2012, and is also building a new 106-room Melanesian Hotel in Lae that will include 89 long-stay apartments.

More international competition is now entering the market, with ground broken in March 2013 on the new PGK380m ($154m) Raintree Hotel and Suites development at Vision City. Malaysian conglomerate Rimbunan Hijau (RH) Group is developing the project, a five-star hotel with 438 rooms including 66 apartments within the Vision City Mega Mall complex. The accommodations will be supported by infrastructure and services including a 1700-sq-metre ballroom capable of hosting 1200 guests, a gymnasium, a lagoon-style swimming pool and a private lounge – all to be completed by mid-2015. The diversified RH Group also operates numerous hypermarket and supermarkets across the country and is a major player in the timber and agricultural sector.

Urban Housing

As economic growth and the lure of jobs attract more residents to urban centres by the day, the government is facing a dilemma of how to deal with proliferating squatter camps popping up around its major cities. Urban development is a key priority addressed in numerous government strategic development plans, including the Medium-Term Development Plan (MTDP) 2011-15, which estimates that 28% of urban populations live in these informal settlements (other surveys put the figure as high as 45%). To meet the MTDP goal of reducing this number to 15% by 2030, the government has been rolling out a number of policy changes and housing initiatives designed to provide more affordable housing for this demographic.

Recent policies are meant to deliver on these goals. In 2013 the Housing Ministerial Committee was launched, as was a Housing Policy Implementation Taskforce to review reforms recommended by the Independent Consumer and Competition Commission. These include harmonising existing land and housing policies into a broader framework governing the sector (see analysis). In 2014 came the National Affordable Lands and Housing Programme.

Additional effort will come through the National Land Development Programme (NLDP), which will seek to address the shortage of land for business and housing developments. To carry this out, the government has allocated PGK319m ($130m) to the NLDP over four years, including PGK61m ($25m) in 2014, to deliver 10 new homes per district each year for five years. In addition to formulating overall policy direction for the land sector, legislative reforms introduced in 2014 also mandate that the NLDP refine the administration of incorporated land groups in order to free up customary land through increased voluntary registration, effective resolution of land disputes, and proper and transparent administration of land markets. The state will also transfer undeveloped land currently held for housing development under various agencies to the Department of Lands and Physical Planning, to be held in trust for inclusion in the affordable housing programme.

The government also hinted in mid-2013 that it may implement new regulations on house prices, possibly through the National Housing Corporation (NHC), according to the Treasury Department. In conjunction with these planned reforms, the NHC in February 2014 announced plans to construct 40,000 affordable housing units in the NCD over the next 20 years. Under the proposal, the NHC would build and distribute 2000 new units each year using two urban development leases – one at Durand Farm outside Port Moresby and the other at the National Research Institute in Waigani – secured in concert with the Department of National Planning, the Office of Urbanisation, National Research Institute and Department of Lands.

Edai Town

Besides the many new residential projects coming on-line in recent years, another unique project is being built on 155 ha in the Edai suburb of Port Moresby. Situated 20 km from town along the highway to the PNG LNG plant, on land leased by Boera Holdings, the Edai Town project is a standalone mixed-use development that would provide a wide range of living, leisure and work opportunities for residents (including a light industrial park) all in a self-contained gated enclave. The PGK250m ($102m) project, being developed by Portion 11, will house more than 2000 residents in 500 executive units, alongside facilities such as supermarkets, retail shops, a central business district, a hotel, leisure services and support infrastructure – including its own police and fire stations, medical centre and school. Targeted for primarily local middle and upper class executives, the first four townhouses were completed in February 2014, and the developer expects to finish another 100 by the end of the year.

A smaller mixed-use development is also being planned for the Erami district of Port Moresby in the 7-ha JW Park City. Nestled between Jacksons Airport and Waigani, this project includes a retail and entertainment centre, leisure facilities, hotel, villas, apartments and office buildings.

Outlook

The recent property explosion of the last decade, which has given rise to exponential growth in rental rates and property values in certain market segments, appears to have run its course as real estate expansion continues to slow in mid-2014. New stock will continue to hit the market in the coming years across all market segments as ongoing construction projects are completed, which will further dilute the market at a time when foreign investment is in decline. These factors should contribute to further market corrections across most subsectors, although a major decline from a bursting property bubble is unlikely due to ongoing demand in some areas, such as high-end residential units in the NCD, and to speculation on new large-scale resource projects in the medium term. In spite of continued economic growth, other factors are working against the country’s retail segment that are also likely to slow the growth of more shop space, at least in the short term. The depreciating kina is driving up the cost of imports and putting these goods out of reach for a good portion of the population, while a cyclical downturn in new large resource investments has also led to a decline in foreign investment and hence a drop-off in associated jobs. “Due to a number of factors, property values have declined by 5-10% in 2013 depending on the subsector and location and are likely to dip by an equal amount in 2014,” Block of Nambawan Super told OBG.

The risk of a disruptive price correction that could effect the larger economy is also limited due to the banking industry’s relatively low exposure to the sector, and because much of the prime property was purchased in cash. Any rebound in the kina should help stabilise property prices, with real GDP projected to increase by 3.6-4.1% a year through 2018 as revenues from PNG LNG and other resource extraction projects begin to materialise in late 2014.