Hot, hotter, hottest: A correction seems likely, although opportunities remain in mid-market and affordable segments

A decade of solid growth on the back of high commodity prices, strong financial institutions and ExxonMobil’s $15.7bn investment in a liquefied natural gas (LNG) production facility have transformed Papua New Guinea’s economy. Confidence remained high ahead of elections in 2012, despite the political volatility, and the property market, a weather vane of all economies, has continued to prosper. The expansion of the property sector over the past five years has surpassed that of the past 15, and growth rates have outpaced GDP amongst high-end residential developments in the last five years. Attractive returns of 10-15% have attracted a surfeit of investment despite PNG’s chronic shortage of residential, commercial, retail and industrial space. Many of the recent development projects are scheduled to come on-line in 2012, but with the LNG project’s construction set for completion in 2014, industry executives are predicting a potential 75% drop in demand in the short term. Fears of a property bubble have emerged regarding key urban locations.

WEATHERING THE STORM: The completion of the LNG construction phase will pose a challenge for the market. With official approval for the project given in 2009, an estimated 10,000 workers will be brought to PNG over the five-year construction phase to support the initiative. This fuelled the recent growth in the property sector, which flourished as the market has sought to accommodate demand following decades of underinvestment in property. Bank South Pacific’s (BSP) managing director and CEO, Ian Clyne, reported in August 2011 that the bank’s lending for real estate in Port Moresby (POM) alone had trebled to PGK906.8m ($431.5m) over the last five years. Stricter credit review processes have been imposed with the stipulation that the borrower must not be a stand-alone investor and must have access to alternative cash flows. One of PNG’s most prolific property developers is the National Superannuation Fund (NASFUND), which built nine new commercial and residential apartment buildings over the past decade. Another three are scheduled for completion by the end of 2012. However, NASFUND’s sharp fall in profits, from PGK308.6m ($146.9m) in 2010 to PGK44.6m ($21.2m) in 2011, indicates that property values and demand have likely already peaked. NASFUND also identified the kina’s appreciation and softening share values of listed equities as additional factors at work. NASFUND’s rival, Nambawan Super, saw an even steeper decline, with profits dropping from PGK263m ($125.2m) to PGK24m ($11.4m) in the same period.

FINANCING: As developers and investors’ concerns regarding an overheating market have grown, financing has become tighter. An estimated 15% of PNG’s housing loans were in arrears and subject to foreclosure in 2010, and banks have moved to reduce their exposure, according to NASFUND’s former CEO, Ian Tarutia. Required equity on property loans has risen from 10% in 2009 to 20% in 2010, and in some cases to 30% in 2012. In its 2011 PNG country report, the IMF noted that PNG’s “financial system remains sound and should be able to withstand moderate shocks”, but also warned that exposure to potential corrections in the property market by banks and authorised superannuation funds, particularly in POM and Lae, were key risks. The extent of the market correction is still debated, as banks have worked to cool the market by ensuring lower loan-to-valuation ratios on construction developments.

The stabilisation is further supported because many of the major commercial and real estate holdings are held by large, well-capitalised institutions and because PNG’s developers and homeowners typically retain assets based on long-term investment timeframes and cultural practices, irrespective of market conditions. A lack of disaggregated data on the contribution of the housing and real estate industry to the overall economy continues to hamper the development of an industry consensus on national trends, but as PNG’s capital, POM has been at the epicentre of the property boom and the city remains the focus of the majority of investor interest.

URBAN CENTRES: Other urban centres have been affected to varying degrees, depending on their proximity to areas of high demand that are near logistical hubs and mine sites. In June 2011, NASFUND’s joint CEO, Rod Mitchell, reported yields in Lae of between 9.3% and 15% for the fund’s commercial properties, and 8.7% in Kokopo, Rabaul, East New Britain.

As the gateway to the Highlands region, home to 40% of PNG’s population, Lae has also seen considerable property investment. However, urban blight and neglect have yielded inflationary pressures in Lae that are twice as high as those in POM, and companies have consequently preferred to operate in Madang. Markets here are also expected to see increased interest ahead of the completion of a link road from Mt Hagen, which will eliminate over 200 km of transit on the Highlands Highway. At time of press, this was still in the initial construction phase. A number of smaller projects are reportedly being undertaken in Alotau, Mt Hagen and PNG’s island provinces, where inflation is far lower.

COMMERCIAL CATALYSTS: The need for commercial properties, notably office space, has driven demand in other sectors, and no more so than in POM. Prior to the start of the LNG project, the city’s property market was been dominated by the 11-storey, 14,000-sq-metre Deloitte Tower, which was constructed in 1996 and took five years to fill. ExxonMobil’s entry into the market in 2008 was the largest real estate investment to date, even if it is only a temporary move and not representative of the market as a whole. In 2014 the firm is scheduled to shift from its downtown office to a 10,000-sq-metre on-site facility in Exxon City, releasing a large volume of office space back onto the market.

While NASFUND estimated the shortage of commercial space at 11,000-14,000 sq metres in 2007, it now expects an oversupply in the market that will peak in 2013-14. The glut is a result of a surge in property investments that have been netting developers 12% to 20% yields on commercial properties.

This trend was led by NASFUND, which has been the main supplier of commercial space in POM, having constructed over 16,000 sq metres of space between 2009 and 2011. It is preparing to introduce another 12,000 sq metres of space by December 2012, in the form of the Burns Philp, Jeffery Haus and BSP Haus commercial developments.

OTHER DISTRICTS: However, with POM’s central business district (CBD) becoming highly congested, rundown and increasingly unattractive to tenants, much of the new development has been shifting inland to the Gordon, Hohola and Waigani districts, as well as to Konedobu on the flanks of POM’s harbour. New government offices are now centred in Waigani.

Seven projects totalling approximately 30,000 sq metres broke ground in 2009 and 2010 in these four districts, led by NASFUND and Steamships Property, a leading property developer in PNG. This was followed in quick succession by several more office and mixed commercial developments.

The PGK1bn ($475.9m) Vision City development in Waigani is by far the largest of such projects. Opening in 2010 and backed by Dynasty Development, a subsidiary of the industry collective, the Rimbunan Hijau (PNG) Group, Vision City is a 9.2-ha mixed-use development that hosts POM’s first 33,000-sq-metre, five-storey mega-shopping mall, the largest in the Pacific Islands region. It will eventually include a 12-storey, 290-room hotel and convention centre set to have 120 executive apartments and two 30,000-sqmetre commercial office towers.

Curtain Bros Builders’ (CB Builders) ongoing development of its Harbour City land reclamation project has also been a game changer for the city. This selfcontained, mixed-use community project already hosts ANZ Bank’s commercial headquarters in a fourstorey, 5200-sq-metre building, and Interoil and BSP are tenants in another five-storey commercial space. A seven-storey commercial building that is currently scheduled for construction in February 2013 is already 85% pre-committed, and a seven-storey car park to accompany 580 vehicles is to be completed at the same time. The new US embassy is also under construction in the adjoining locale.

In January 2010, NASFUND partnered with CB Builders in a 70:30 split to construct The Edge, a high-end project that will occupy the Harbour City site. The new development will consist of a six-storey apartment block with 63 luxury apartments, and it is reported to be the biggest apartment project in PNG history. Adjacent to The Edge is the NASFUND’s Sol Wara Apartments, a five-storey building comprising 20 units. Both developments have been completely leased. Furthermore, a three-storey complex of 20 townhouses, scheduled for completion in late 2012, will be joined in mid-2013 by three five-storey blocks with 51 two- to three-bedroom penthouses.

Along the harbour an additional project is currently under construction: the Garamut Harbour Development of Kramer Ausenco envisions a mixed-use retail and supermarket development that will eventually include residences and offices. The project will occupy 20,100 sq metres on the waterfront.

COMMERCIAL DEMAND: Despite the propensity for large office developments that usually exceed 3000 sq metres, demand is more generally typified by small and medium-sized enterprises that require offices of 75-200 sq metres, according to Ingrid Richardson, the general manager of Strickland Real Estate. This has fed demand outside the CBD as businesses have abandoned the centre, where many buildings are over four decades old and have on occasion been shut down for health violations.

A previous shortage of new buildings helped push rental prices up from PGK400 ($190) to PGK1200 ($570) per sq metre, even reaching a price of PGK1600 ($760) per sq metre, but commercial rents have recently been stabilising. Nonetheless, “there will be demand for the next 10 years for rental in the commercial properties. They have hit the top level, and hopefully they will stay there given the absence of new development,” Leo Digori, the valuer of L.J. Hooker Real Estate, told OBG.

Supermarket spend has risen from PGK479m ($228m) to PGK1.22bn ($580.6m) between 2006 and 2010, representative of growing disposable incomes among PNG’s urban populace, according to BSP’s Clyne. Vision City’s mega-shopping mall is meant to capitalise on this growing trend, providing 33,000 sq metres of retail space all under one roof, equivalent to 20% of POM’s total previous retail space.

“Commercial and office real estate has tracked the residential market, but has now plateaued as the supply and demand is about equal,” Michael Quinn, the director of the Real Estate Industry Association, said. “However, with economic growth PNG can expect to see greater demand from light industry,” he said. Industrial rentals are substantially lower, echoing the commercial sector a decade past, at just PGK300-600 ($143-$286) per sq metre, according to Westpac, a leading bank in the Pacific Islands region. Funding has been provided as part of the LNG project for the construction of the Konebada Petroleum Park, which will include a self-contained industry “conception estate” close to POM. Support for the new development was expressed through the development of a 7000-tonne-capacity fertiliser plant on the site by the Indian manufacturer Oswal Projects, and the outlook for industrial demand is good.

HOSPITALITY HIGHS: The fortunes of the commercial market have spread to the hospitality sector, which has seen the expansion of inventories of rooms and apartments to accommodate an increasingly transitory population linked to the LNG project and ancillary service providers. A four-fold rise in rooms in POM is on track for completion by end of 2012, led by Steamships Property’s Coral Sea Hotels (CSH) and Nambawan Super, a leading superannuation fund in the country. CSH has aggressively moved to expand its holdings at the Ela Beach Hotel, which in 2010 saw 60 rooms, including 42 premier suites, added. CSH also aggressively challenged Crowne Plaza’s dominance of the CBD. CSH’s 161-room, five-star Grand Papua Hotel, which opened in 2011, could take the market lead once the Crowne Plaza undergoes anticipated renovations post-2014. However, the Grand Papua is also facing competition from the 150-room expansion of the Holiday Inn Express, including over 80 serviced apartments, owned by the Kumar Hotel Group, in which Nambawan Super has a 54% stake.

Serviced apartments are featured strongly in the expansion plans of all hotels to accommodate longstay visitors, and competition has been strong. This market has also been tracking commercial and residential trends, Glen Murphy, the general manager of the Grand Papua Hotel, told OBG. “We are starting to see the implications for 2014 in the apartment market right now. There is a softening of demand because there is increased supply and there is definite pressure on rates,” Murphy said. The key market drivers in POM remain corporate accounts and a limited meetings, incentives, conferences and exhibition (MICE) segment. Efforts to open the market with the development of the PGK200m ($95.2m), five-star Casino Hotel by Korean company CMSS PNG, have faltered. The 290-room hotel remains incomplete in the Boroko district, with work suspended amid accusation that PGK22m ($10.5m) of landowner funds invested by the state-owned Mineral Resources Development Company have been embezzled.

While these projects have been aimed at the highend segments, they are not representative of PNG’s broader hotel market, which exhibits a preference for three- to four-star facilities. Mid-tier hotels have improved their occupancy levels because of more affordable tariffs, and two new three-star hotels are billed for POM’s Boroko district. CSH recently signed on to a three-year new build on the site of its Melanesia Hotel in Lae. Further upcountry, hotels are adapting to the Highlands region market with smaller builds, while Madang is experiencing a slump after a downturn in tourism created an inventory surplus. PNG’s outlying islands have remained shielded from the worst of the property boom, but small-scale investments continue catering to specific location demands.

RESIDENTIAL REDUX: Across PNG, residential property markets have outperformed every other sector, fuelled both by chronic shortages of affordable housing and sharp rise in demand on the back of the LNG development project. However, with new builds focusing on high-end rental housing, the market has become dangerously out of kilter, and signs of a correction are already emerging.

Over the past four years rents have more than doubled, with the highest rents for the upmarket units at PGK5500-8000 ($2600-3800) per week. NASFUND announced that the completion of the 63-unit complex would be its last apartment development in POM for some time, citing “stabilisation” of the market as the rationale. However, both superannuation funds have turned their attention to development of plots in the 8/9 Mile district, including 160 blocks for houses priced at PGK300,000-700,000 ($142, 770-333,130). Strong rental returns and investment yields have helped fuel the property boom. Developers still anticipate investment yields of between 15% and 20%, but investors are increasingly cautious.

Owners are responding to the influx of supply with reduced rental costs, and lease averages dropped from PGK7000 ($3331) to PGK4500-5000 ($ 2141-2379) per week. However, this trend is for the most part being led by new market entrants, said David Tilby, a consultant at Costplan Services, a leading surveying and construction management firm that is working with CB Builders. “With the entry of several international firms into PNG’s property and real estate markets, we would expect rental prices to become more fluid in response to market demands, which would be a relatively new development in comparison to past trends,” Tilby told OBG.

However, top rental prices are misleading and not indicative of the property’s market value, Digori explains, with owners profiting from higher rental revenues as they seek to maximise returns, and this has extended to PNG’s foreign residents. Although only nationals may have freeholds, Strickland Real Estates reported a growing trend in residential sales to foreigners. While many expatriates have taken advantage of corporate housing allowances during their tenure in PNG, many have also bought to rent. Accordingly, the pipeline is stocked and continues to meet demand. Over 320 high-end units are currently under development at the Dream Inn, Savannah Heights, Glory Estate (the Residency), Paga Hill, Koki Market, Koki Heights and Harbour City. These are all targeted at the expat demographic, asking PGK5000 ($2379) per week for two- to three-bedroom units. In February 2012 Malaysian firm Iris Land made public its plans to collaborate with Kida Maru Holdings to undertake a $53.4m venture to develop a housing project in POM. 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 275-unit project.

Banking executives speaking with OBG also report developers seeking backing for tower developments behind the Boroko Foodworld site at Harbour City and Ela Beach, including a nine-tower block project staggered over eight years. More growth is also being planned in Lae, capitalising on local mining and palm oil expansion, which NASFUND has sought to tap with the 12-storey, 44-unit Sinclair Haus and the six-storey Hillside Gardens. Nambawan Super has also been active in this segment, investing in the mixed commercial and residential IPI Haus.

The resource extraction industry will continue to dictate market demand, according to Quinn. “There is distinct growth in different sectors for various reasons, but much of the expansion that we have seen is being driven by the mining sector, and this will continue to underpin development and expectations.”

HOUSING SHORTFALL: The willingness of foreign companies attached to the LNG and related projects to pay top dollar for employee accommodation has helped push rental rates to “ridiculous highs”, said Digori. Ordinance permitting the tax deduction of housing allowances by companies has also exacerbated existing price trends. Identified as a key inflationary issue in 2010, the Independent Consumer & Competition Commission (ICCC) called for the removal of tax deductibility for private sector expenditure on employer-assisted housing to moderate demand-side price pressures, but no action has yet been taken.

Consequently, “40% to 50% of the middle-class workforce is affected by the housing shortage,” said Digori. This has pushed technical, professional and middle management staff into temporary settlements that are increasingly encroaching on customary land plots, the territory that is legally reserved and belongs to the indigenous PNG population.

Housing shortages for the middle class has become a national problem. Although thorough analysis is difficult to undertake because disaggregated data is largely unavailable, the scale of the problem is clear. At present, 40% of Papua New Guineans live below the poverty line and the country’s population is expected to double every 23 years, as evidenced by current growth trends. Despite being the world’s second-least urbanised country, with 12.5% of its population living in urban areas, “settlement population” in major cities is also doubling every nine years, the ICCC reported in 2010, and total urban population is increasing at half that rate. POM is home to over 100 squatter settlements and others have cropped up around Lae, Mount Hagen and Rabaul, with units accommodating between 15 and 20 people, 2009 research by Habitat for Humanity shows.

CAUSES: The LNG project is not the root cause of the current crisis; rather, consistent inefficiencies and past failures to meet demand are what led to the present shortage. “The fact is that we have never been prepared for anything like this,” said Digori. “We are blaming everything that is wrong on the LNG project, but the fact is that [these problems have] been building up way before it began.” The collapse of the National Housing Corporation (NHC) in the 1980s has meant that no state agency was responsible for ensuring affordable residential housing.

“The private sector is filling the role that the NHC once oversaw,” said Quinn. “The NHC still has a key place in the market if the organisation were overhauled and run as a private, not-for-profit entity, catering to demand in geographic locations and sectors where it is not financially viable for the private sector to operate, and to supply the accommodation needs of the public sector workforce,” he added.

LOW END UNDERSERVED: However, with the rising costs of material and labour (see Construction overview), few developers are considering the lowend residential sector, especially when there are high returns to be made at the higher end. “The shortages are not being addressed by the housing industry. Developers are catering to the big investors that are coming in and require housing for their employees,” said Digori. Only CB Builders has ventured to cater to the lower-income market segment by offering precast concrete housing that are made at its new production facility established at Moutokea Island in 2012. However, the firm acknowledges that even these are only within the reach of the middle classes. Commercial banks have also failed to keep pace with demand from this segment, as reflected by the inadequate range of products and services on offer, said Clyne. Between 2005 and 2010, there was just a 10% increase to PGK193.8m ($92.2m) in fiscal advances for housing, said Ian Clyne, the managing director and CEO of Bank South Pacific, at the PNG Advantage Conference 2011. Moreover, while the government believes that banks should offer concessionary financing rates to first time buyers and nationals, the difficulties of ensuring proof of income in a largely informal and non-banked economy means that few PNG nationals can afford housing loans.

Realising trickle-down opportunities linked to the LNG project is still decades off for the majority of the population, and housing prices remain an average of 24 times higher than the median worker’s salary. As urban migration accelerates, land shortages will also continue to inflate prices. Moreover, PNG’s ubiquitous and influential wantok system, wherein housing is considered the property of the family or group, has placed greater pressures on workers’ incomes, reducing their ability to save. This has also prevented the development of a secondary market in PNG, across all sectors and levels, according to Quinn. “There is no significant second-hand market in the country, but we can expect this to change in the upcoming few years following a market correction.”

Ultimately, while a correction in 2014 will make many urban properties more affordable for PNG’s middle class, the combination of inflationary and demand-driven pressures across all levels of the residential property market will continue to push purchase prices and rents ever higher in the short term.

GOVERNMENT INTERVENTION: The government has sought to address problems at the lower end of the market by prioritising it in a number of policy initiatives, including the Mining Act, which requires mining firms to provide housing for their workers and their families. Employer-provided housing is a standard provision of contracts with larger firms, but the stipulation is not strongly enforced. The government’s Office of Urbanisation (OU) is piloting two affordable housing developments: the Highlands’ Goroka Valley project will provide 1600 allotments over 400 ha; and POM’s Taurama Valley will includes 400 allotments over 70 ha. Both have been budgeted to provide housing at PGK200,000 ($95,180) per allotment, according to Max Kep, OU chairman and director.

PNLDP: These developments are taking place in the context of the National Capital District Commission’s Poreporena-Napa Napa Local Development Plan (PNLDP). However, since the project’s launch in 2010, pilot housing sites have been subjected to sabotage, Kep alleged publicly, disrupting their implementation until earlier in 2012, when the Integrated Land Groups (Amendment) Act was passed (see analysis).

The industry watchdog, the ICCC, backed up Kep’s claims in an authoritative report in 2010 that addressed PNG’s housing crisis. The report singled out the Department of Land and Physical and Planning (DLPP) for its failure to adequately plan and provide for housing. This led to the replacement of senior management at the DLPP, and Kenneth Atasao, the PNLDP’s project leader, was installed as deputy city manager of the Regulatory Services Department.

The success of the PNLDP projects will determine whether three other pilot projects in Tari, Minj and Faniufa in the Southern, Western and Eastern Highlands, respectively, will proceed. In line with the development goals, the DLPP has extended the initiative nationwide, drafting urban reconstruction plans with owners of customary land plots and a mining firm that is present in Lihir, New Ireland and Kokopo in Eastern New Britain. The DLPP has also established a physical planning board for Boku in Bougainville, and is exploring a similar plan for Milim in New Britain.

OUTLOOK: Demand for properties across all sectors and segments is expected to continue, following several decades of underdevelopment in PNG. However, the frenzy of construction catering to high-end demand, an unusual trend in the mid- to long-term market environment, has resulted in an overheated property and potentially oversupplied market, albeit one that is lucrative for some.

While the extent of the likely upcoming market correction is still unclear for the commercial and high-end residential segments, a recalibration is already becoming evident in terms of rental prices. Further correction will be all but inevitable come 2014 when the LNG project is scheduled to conclude, unless substantial new resource extraction projects are initiated to shore up the housing demand.

Despite the flourishing market in the upper end of the spectrum, demand for low- to mid-tier property remains neglected. In the absence of an effective and properly resourced policy to address the issue, responsibility has fallen on the private sector, which has so far proven unable to overcome the materials and labour costs, and other associated challenges. Although high-end real estate is thriving for now, conservative growth is expected in the decade ahead, as the nation regroups and consolidates the returns from the LNG and other energy and mining projects.