Real Estate in the Economy of Bangladesh

Importance of Real Estate in the economy of Bangladesh
Over the last 15 years the Real Estate development sector has made significant contribution to many sectors of our economy.

• 1200 families homes has created since 1985 in Metropolitan City
• 1000 acres land development for housing (For lower middle and middle income families)
• Construction materials purchased Tk. 1000 crore
• 1200 construction worker employed by RE and pay Tk. 45 crore annually
• Professional development and pay Tk. 2 crore annually (Architect, Engineers & Others)
• 5000 management staffs (Accountants, Supervisors) and pay Tk. 25 crore
• VAT pay approximately Tk. 150 crore from 1993
• Cement manufacturing industry get impetus by RED
• 2500 diploma engineer are engaged in the sector

Problems of Real Estate development in Bangladesh/Metropolitan City:
Lack of Government policy or cooperation as for example:

• In 1989 the ministry of industries declared construction of residential complexes on commercial basis as an industry. However, today this notification from the ministry of industries is not recognized by the National Board of Revenue. Therefore this sector is not entitled to any benefit of industry.
• Transfer fees of stump duty, highest in the world. In Metropolitan City 22% of total value paid by the purchaser as fees.
• Housing is one of the basic needs and in almost all development countries 90% of the value of the property can be borrowed from the government financing institutions.

1. Only for middle and higher income groups
2. Destroys the harmony in sky line
3. Increase pressure on limited services
4. Traffic and public problems
5. Creation of air and light circulation
6. Lack of community space
7. Socio-psychological problems
8. Located/Clustered in and around CBD of Dhaka city

Some current problems on Real Estate Development

1. Different embargoes on high rise construction
2. In appropriate rules of housing development
3. Harassment of environmental directorate for environmental clearance
4. Lack of coordination between utility and agencies
5. Procedural delay in plan approval
6. Procedural delay in registration and transfer

Summary recommendations to boost Real Estate sector:

• Coordination among all the concerned agencies including utility agencies must be ensured
• For RAJUK approval of drawings, one window service need to be established
• Government land can be allotted to the developers at government land price
• Registration fee and procedures for the government and non-government land should be similar
• There should be a law which ensures the implementation of DMDP Master Plan and Bangladesh National Building Code (BNBC) in 1993
• Law and order situation should be drastically improved, so that terrorist activities do not occur in the site Building construction rules 1995 of RAJUK and other Metropolitan City needs to be totally reviewed
• Institutional credit facility must be increased at a lower rate for low income households to promote housing for fixed income families
• Representation of REHAB in decision making in RAJUK, WASA, DESA, TITAS and other concerned agencies.   

Problems & prospects of Real Estate business in Bangladesh

1. Background information:

• Dhaka heritage 400 years old
• Last four decades recorded tremendous growth in population and area
• 3.5 million in 1981, 5.7 million people in 1991 within 171 sq. miles
• Population will be 10 million by 2001
• Housing problem acute; continuous deterioration of service facilities
• Huge housing backlog; according to World Bank in 1981, 1.9 million housing units for 11.8 million urban population
• Pressure on build able residential land is very high
• High land price, 60%-90% consumer price index during 1974-1987

2. Housing in Dhaka City: Public and Private performance
   Public sector housing (Performance):
   

• Little success, supply less than effective demand
• Large investment goes to benefits of the upper and middle class of people
• Public Works Department (PWD), Housing & Settlement Directorate (HSD) are construction agencies for government accommodation
• According to World Bank in 1981, only 7% of total housing stock was built by public sector and rest by the private sector

         Private sector housing (Performance):

• Housing development in the form of apartment development
• Individual or company construct one or more buildings
• Increase in real estate companies
• 20 years before buyers reluctance to purchase apartment
• Increase in cost of land and construction
• Wage income earners in middle east & other countries
• Because of return influence, many apartment builders have come up in the market
• In 1988, 20 developers engaged in Dhaka city
• 20 companies developed about 5000 new building units in 1990.
• Considerable contribution for increasing the housing stock in Dhaka City

3. Prospects:

• Delivered housing facilities to the urbanities
• Utilization of minimum land
• Planned residential development
• Better environment
• Employment opportunities
• Tax return higher
• Positive effects on city
• Form and design of city

4. Problems of Real Estate Business:

• Only for middle and higher income groups
• Destroys the harmony in sky line
• Increase pressure on limited services & lack of community space
• Traffic and public problems
• Creation of air and light circulation
• Socio-psychological problems
• Located/Clustered in and around CBD of Dhaka city (Why?)

1. Easy access
2. Proximity of supporting facilities of office
3. Higher rate of return on investment

5. Recommendations for Real Estate business:

• No magical solution to solve the housing problems
• High rate of population growth as well as high land value, apartment development should be encouraged in the future development
• Walk up (5-6) storied apartment should be encouraged
• Co-operation among the service delivering agencies
•  A private housing bank should be established
• Proper rules and regulations for high rise construction
• Zoning law for Dhaka and building height should be formulated and reformed
• Lift, park, community, fire-fighting etc. should be provided
• Loan, short and long term credit for housing construction

EIS

When a development project is taken then its environmental consequence are evaluated, the evaluation are called EIS.

Factors/Consideration for new project in EIS:

The comprehensive review for EIS studies incorporates the economic impact along with the effect on employment, housing, and other aspects of new development. The following list prepared by the Urban Land Institute, shows what groups may be affected by a proposed project that would consider in EIS

Physical proximity:

• Persons living or working on the land proposed for development
• Persons living or working immediately adjacent to the proposed development
• Persons in neighborhoods surrounding the proposed development
• Persons within commuting distance (For example, one our by public transit) from proposed commercial & industrial development.

Business relationship:

• Builders, REALTORS, bankers and others directly involved in the development
• Owners and managers of business or property in the neighborhood

Political jurisdiction:

• Citizens of the local jurisdiction containing the development
• Citizens of immediately adjacent jurisdictions and of the entire metropolitan area
• Citizens of the state and nation

Socio-economic and demographic:

• Age group
• Racial and ethnic groups
• Persons of various income levels, from poor to affluent

Other interest groups:

• Tourists
• Landowners
• Others

The long-term public interest:

• All present groupings over time
• Future generations

Hence the EIS must indicate how much of these groups will be affected by the proposed development. On the final analysis, the report must consider the long term public interest which will be influenced by the new project.

Elements/Main parts of EIS
The five main parts of an Environmental Impact Statement are given below:

1. The Probable environmental impact of the proposed action
2. Any adverse environmental effects that cannot be avoided upon approval of the proposal
3. Alternatives to the proposed action
4. The relationship between local short-term uses of the environment and the maintenance and enhancement of long-term activities
5. Any Irretrievable and irreversible commitments of resources that would be involved in the proposed action, should it be implemented.

Criticisms of EIS

• Non-compliance
• Overlapping jurisdiction
• New environmental policies
• Industry criticisms

Differentiate Between Sub-dividers & Developers

The terms ‘Subdividers’ and ‘Developers’ are frequently used interchangeably and each has a distinct meaning.

Subdividers: A subdivider acquires undeveloped acreage, divides the tract into smaller parcels in accordance with government regulations, installs streets and utilities, and sells the parcels to investors or builders.

Developers: A developer, by combining land with a completed structure, advances the process a step further. Developments may include industrial parks, shopping centres, multifamily housing, or single-family residences. The developer is also responsible for financing marketing and sale to the ultimate user.

Road patterns in the subdivision plan:
In planning subdivisions these principles should be observed in road patterns:

1. Streets intersections should be at right angles to minimize traffic hazards. Lots with double frontage are uneconomical and undesirable and should be avoided
2. Intersections of minor streets with arterial or collector streets should be held to a minimum to avoid hazard and delay
3. Dead end streets should be avoided
4. Streets jogs with centre-line offsets of less than 125 feet should be avoided
5. Corner lots require greater widths than interior lots in order to provide setback of the dwellings from the side street

Broker & Agent

Definition of Broker:
Generally Real Estate broker is a person who help buying & selling the real estate/real property. In the business sense, a real estate broker is a person or corporation engaged primarily in the marketing of one or more of the various rights in real property.

• Basic function of broker is to negotiate price
  
• Success or failure of a broker depend on his ability to bring together a buyer and a seller who are ready, willing and able

A broker business consists of:

• Selling or leasing property or space in a building
• Placing a mortgage
• Collecting rent
• Performing other services for a certain percentage of the money of the transaction.
  

Definition of Agent:

Anyone who is legally competent to enter into a contract may be an agent. A person capable of acting in ones owns behalf is capable of acting for another if proper authority has been given.

Kinds of Agents:

In terms of business to be transacted, Agents are 3 types:

1. General Agent: A general agent is authorized by the seller to transact all affairs in connection with a particular kind of business or trade or to transact all business at a certain place
2. Special Agent: It is authorized by the principal (seller) to transact a business affair or to do a special act. In real estate, for example, when a broker is authorized to purchase a particular house, the broker is designated as the special agent of the principal (seller)
3. The Universal Agent: It is authorized to do all acts that can be lawfully delegated to a representative.

Duties of the Broker as Agent:

1. Loyalty
2. Must account for money and property
3. An agent control delegate authority
4. Duty to obey instruction
5. Must not be negligent
6. The fiduciary concept
7. May not act for both parties
8. May not misrepresent the fact
9. Extravagant statements (Spending a lot of money)

Real Estate Mortgage

Definition:

Mortgages are written instruments that pledge real estate as security for a debt. Without a debt, there can be no mortgage. In executing a long term mortgage, the borrower typically pledges real estate and relies on personal credit as security for the debt.

Elements of a mortgage:

            An enforceable mortgage has the following elements:

Ø      A mortgage must be in written form

Ø      The parties to the mortgage must be legally competent (having the necessary ability/authority/skill)

Ø      A clause of the mortgage must pledge real estate as security for the debt

Ø      The debt must be identified, with specified terms of repayment

Ø      The mortgage must include a valid legal description of the property it covers

Ø      The borrower must have a mortgageable interest

Ø      The foreclosure conditions should be stated

Ø      The mortgage must be properly witnessed or acknowledge according to state law

Ø      The mortgage must be delivered and accepted

Types of mortgage:

Ø      Priority of liens: Up to this point it has been implicitly assumed that buyer made a down payment and then paid the seller by borrowing the balance under a long term mortgage

Ø      Methods of repayment: Lenders and borrowers may select from a wide range of amortization plans. In some cases, the mortgage repayment plan may be adopted to differed payment or to partially amortized plans and their combinations

Ø      Alternative mortgage instruments: The expression alternative mortgage instruments covers unique mortgages that represent ways in which borrowers and lenders adapt to new legal and economic conditions. Lenders now have considerable flexi in offering new types of mortgage.

Ø      The type of property mortgage: Mortgages are adapted to the type of real estate security pledged. The most popular forms of mortgages deserve added comment. Example: package mortgage financing

Ø      Mortgage covenants: Mortgage covenants are promises of the borrower and lender included as part of the mortgage. A typically covenants contain the following types:

1.      The borrower shall pay principal and interest promptly when due

2.      The borrower shall pay all taxes, assessments and other charges

3.      The borrower shall keep the improvements which is damage by hazards

4.      The borrower shall keep the property in good repair

5.      The lender may make reasonable inspections of the property

6.      Upon payment of all sums secured by the mortgage, the lender shall release the mortgage without charge to the borrower. Usually the lender holds the mortgage until the final payment.

Types of mortgage:

Ø      The priority of liens:

Þ     Up to this point, it has been implicitly assumed that a buyer made a down payment and then paid the seller by borrowing the balance under a long-term mortgage.

Þ     To illustrate, assume that the seller conveys title for $75000. The borrower pays the seller S20,000 at the time of closing, providing for the balance of $55,00 from a lender in return for a 25-year mortgage repayable monthly at 13 percent interest per annum arid a promissory note for $55,00.

Þ     The lender owns a first mortgage which has priority over other mortgages and loans executed by the borrower at later dates.

1.      Second mortgage financing

Þ     Suppose, however that tile buyer effects to pay the seller $10000 down securing the additional $10000 under a 10-year mortgage at 15 percent interest.

Þ     The second lender holds a lien junior to the first mortgage.

Þ     The second mortgage would usually include a statement that the mortgage is subordinate to the prior mortgage which is described according to the amount of indebtedness, the date of recording, the names of the parties, a legal description of the property, and other details

Þ     Such an arrangement is often called second mortgage financing or junior lien financing.

Þ     The borrower is advised to include a waiver in the second mortgage stating that the borrower has the right to refinance the first mortgage provided that the refinanced mortgage does not exceed the remaining balance of the first mortgage.

Þ     Second mortgage financing is used by borrowers with relatively high incomes but with few assets.

2.      Purchase money mortgage

Þ     A mortgage given to a seller as part of the purchase price is a purchase money mortgage.

Þ     The seller accepts a purchase money mortgage as a substitute for cash.

Þ     In the preceding example, the seller might be willing to accept 1) $10000 cash from the buyer, 2) $55000 cash which the buyer obtains from a first mortgage and 3) a $10,000 purchase money mortgage.

Þ     In this case, the purchase money mortgage constitutes a second mortgage and in some states does not require a promissory note.

Þ     Alternatively, the seller could accept a purchase money mortgage for $65,000 and $10000 cash from the buyer.

Þ     In this case, the purchase money mortgage would be a first lien.

Þ      Since the borrower is not personally liable. the seller is secured only by the value of the real estate

Ø      Methods of repayment:

1.      Term mortgage

2.      Level payment amortization

3.      Variable payment amortization

4.      Partially amortized mortgage

 

Ø      Alternative mortgage instrument:

1.      Variable rate mortgage (VRM)

2.      Graduated payment adjustable mortgage loan (GPAML)

3.      Graduated equity mortgage (GEM)

4.      Equity participation mortgage (EPM)

5.      Shared appreciation mortgage (SAM)

6.       Reverse annuity mortgage (RAM)

7.      Renegotiable rate mortgage (RRM)

8.      Price level adjusted mortgage (PLAM)

9.      Flexible loan insurance program (FLIP)

Ø      The type of property mortgage:

1.      Package mortgage financing

2.      Blanket mortgage

3.      Participation mortgage

4.      Construction mortgage

5.      Wraparound mortgage

Elements of a development lease

The elements of a development leases are given in the following:

1. Introductory materials:

Ø      Definitions (gross receipts, refunds, tax receipts)

Ø      Land description

2. Financial covenants:

Ø      Term of lease

Ø      Rental

Ø      Annual accounting

Ø      Rental bond

Ø      Performance bond

Ø      Bonding companies

Ø      Non-responsibilities notices

Ø       Holding over

3. Improvement clauses:

Ø      Improvements

Ø      Plants and design

Ø      Construction, maintenance, repair and alterations

Ø      Completion of development

4. Other rights:

Ø      Sublease, assignments and transfers

Ø      Agreements for utility lines and streets

Ø      Encumbrance

Ø      Liens, taxes, assessments and utility charges

Ø      Lessor’s paying claims

5. Insurance:

Ø      Public liability

Ø      Fire and damage insurance

Ø      Unlawful use

6. Miscellaneous:

Ø      Eminent domain

Ø      Arbitration

Ø      Default

Ø      Attorney’s fees

Ø      No partnership clause

Ø      Term or trust

Ø      Obligation of lessee

Ø      Status of subleases

Ø      Payments and notices.

Real Estate Lease

Ø      The lease is a contract between the owner (lessor) and the tenant (lessee). It is also a conveyance way of transferring exclusive use and possession to the tenant under the terms of the lease in returns for rent or other consideration.

Ø      It is not uncommon to encounter a commercial lease of 50 pages or more outlining the duties and responsibilities of the owner and the tenant.

Ø      Historically the tenant was given exclusive rights of use and possession as limited by the terms of the lease.

 

Elements of an enforceable lease:

An enforceable lease, at a minimum, must contains elements common to the requirements of a valid contract:

Ø      A beginning and ending date

Ø      Identification of the lessor and the lessee

Ø      A legal description of the property leased

Ø      The rental terms including the time and place of payment

Ø      Signatures of the parties to the lease

 

Types of leases:

 Leases may be classified by the method of rent payment. There are six main ways to vary rents:

1. Fixed rent leases:

Ø      Fixed rents are generally limited to relatively short terms, one to three years.

Ø      Without some means of providing rent increases proportional to inflation, owners are reluctant to commit property over a longer term in the face of expected price increase.

2. Graduated rent leases:

Ø      For property under development, tenants may negotiate low rents during the early life of the property which are graduated upward as the property undergoes more profitable operation.

Ø      For example, a land owner may rent his land over the first 2 years for Tk. 10000 per year, the next three years to Tk. 20000 per year, and the next five years for Tk. 50000.

Ø      In short the owner accepts lower rents when the property is less profitable.

3. Price index leases:

Ø      Leases that vary rent proportionately with changes in the consumer price or another index preserve the purchasing power of the owner.

Ø      Neither party gains an advantage under a price index lease; the index lease maintains the economic position of the owner and tenant.

4. Revaluation leases:

Ø      The revaluation lease requires selection of an appraisal board-usually appraisers selected by the owner and tenant and a third party-to reappraise the property of rental purposes.

Ø      The specified time of revaluation will be stated in the lease.

Ø      Acceptance of the revaluation is not compulsory on either party.

 

5. Percentage leases:

Ø      Retail stores are often rented on the basis of minimum fixed rent with a provision that as gross sales reach a stated level the owner will be paid a percentage of gross sales.

Ø      For example, supermarkets may agree to pay a minimum rent in addition to 1.5 percent of the annual gross sales over Tk. 2000000

Ø      As retails sales increases, rents increases

6. Net leases:

Ø      In the current context, net leases refer to leases that maintain the rent in constant price (Tk.)

Ø      Such a lease calls for two types of rent:

1.      Rent of the base year

2.      Additional rent

Ø      The additional rent equals the prorated share of operating expenses for the current year that exceeds the operating expenses of the base year.

Ø      The increase in operating expenses is prorated for each tenant according to the ratio between the square footage occupied by the tenant and the total building square footage.

Ø      Under these terms, the building owner merely earns a fixed, net operating income.

Ø      The lease does not compensate for inflation.

Ø      However it is common to have the base year rent adjusted annually according changes in the consumer price index.

Ø      The index of the net lease is to give tenants a long term lease (over 10 to 15 years) and at the same time, protect the owner unpredictable increases in operating expenses.

Ø      To serve this purpose, generally, owners must provide tenants with a statement of operating expenses to justify the claim for additional rent.