PNG gets to work building affordable housing

First-time and low-income homebuyers in Papua New Guinea face significant obstacles to property market entrance. A five-year construction boom due to the recently completed PNG liquefied natural gas (LNG) project placed upward pressure on inflation, rents and property prices, while the nation remains one of the poorest in the Pacific, putting homeownership out of reach for the majority of citizens.

However, with robust GDP growth forecast for 2015 on the back of new energy revenues, the government is moving to address the affordable housing shortage, launching a host of new initiatives aimed at expanding home ownership across the country. Although some challenges persist, particularly in terms of land allocation and high construction costs, several of these new initiatives have already met with considerable success, lending an optimistic outlook to homeownership growth in PNG.

Housing Challenges

Although the nation’s $19bn PNG LNG project, which began commercial production in April 2014, has offered PNG enormous economic benefits, with GDP growing by 8% in 2014 and set to reach 15% in 2015, the project has also created significant challenges for the real estate sector. Rapid growth has seen inflation, and housing and rental inflation in particular, soar in recent years, with the housing consumer price index (CPI) reporting average annual growth of 11% between 2011 and 2014, and rental rates in the high-end segment roughly doubling between 2008 and 2012.

By 2012 the median home price for high-end residences in Port Moresby stood at $670,000 for houses and $200,000 for apartments. Affordable housing prices also rose significantly, with non-profit affordable housing company Community Housing Limited estimating the average price of an affordable home was close to PGK480,000 ($181,600) in August 2014.

According to the IMF, the poverty rate hovers at 40% and the nation ranks 156th out of 187 countries on the human development index as of 2014, making PNG one of the poorest and least-developed countries in the Pacific. This presents considerable challenges to residents hoping to climb the property ladder, challenges which have been exacerbated by high rental and lending rates (see overview), while housing inflation has recorded double-digit average annual growth between 2011 and 2014. The government and private sector are both moving to address these challenges, with the National Housing Corporation (NHC) set to play an increasingly prominent role in addressing PNG’s housing shortage.

NHC

Established in 1990, the NHC is charged with facilitating the development of an affordable, private market for low to mid-tier housing. The state-owned NHC is overseen by the minister for housing and urbanisation and the National Executive Council. In 2012 the National Executive Council endorsed a comprehensive review of PNG’s existing public-private partnership (PPP) framework, and in 2014 the country passed its long-awaited PPP law, which could have significant implications for the NHC’s activities.

With authorities reporting that the corporation had not been sufficiently proactive in redeveloping PNG’s current stock of housing supply, the NHC underwent an extensive review in 2011. The NHC’s updated objectives now include land and materials development, as well as provision of homes, home financing, and property and project management services.

The NHC has also adopted a new approach to providing low-cost housing. It is currently in the process of rolling out tens of thousands of new affordable housing units in partnership with the private sector, most notably domestic banks, although property developers, construction companies and real estate brokerages will almost certainly benefit as well.

Build-Sell-Share

In its first major effort to boost low levels of home ownership in PNG, the NHC has implemented a flagship build-sell-share (BSS) scheme, which aims to profitably develop low-cost housing. Under the scheme, private developers will build homes on NHC-registered land, which will then be sold at reduced and affordable prices.

The NHC is targeting a profit margin of 20% of the principal investment cost, with ANZ Bank purchasing the homes for around PGK300,000 ($113,500) and distributing them to approved buyers. The NHC plans to subsidise the bulk of the cost of developing land and civil works, making homes affordable for the average citizen and offering a more promising forecast for mid-tier and affordable housing growth.

40,000 Homes

The BSS scheme gathered momentum in February 2014, when the NHC announced plans to build 40,000 affordable units nationwide. This will see the launch of the first phase of the Duran Farm project, worth PGK7m ($2.6m) and expected to supply some 5000 new homes just outside of Port Moresby. According to an October 2014 report in Loop PNG, the homes being built in Duran Farm will range from 400 to 600 sq metres.

NHC officials expect that the price of a house and land package will be within the PGK300,000 ($113,500) to PGK350,000 ($132,500) range, with land development costs, estimated at PGK60,000 ($22,700) or less per plot, to be covered by the state. The NHC has already secured two urban development leases, one at Duran Farm and one in Waigani, with construction expected to kick off within three years.

Land Allocation

The scheme faces a significant challenge, however, as land allocation remains problematic for real estate development in PNG. The Land Act is the primary legislation regulating land ownership in PNG, although recent reforms have sought to clarify and simplify the land allocation process (see overview). Under the act, all land in PNG other than customary land is the property of the state and subject to any estates, rights, titles or interests in force under any law. JLL reports that 97% of land in PNG is held under customary ownership, although the Land Act has provided mechanisms by which the state may acquire and lease new parcels. Land dealings are usually undertaken using state leases, which generally range from 50 to 99 years, with the state able to grant an extension upon expiration.

In a February 2014 roundtable interview, the NHC’s managing director John Dege told the press that the corporation’s 40,000-home plan will involve construction of 2000 homes annually over the next 20 years; however, Thomas Webster, director of the National Research Institute (NRI), noted in the same interview that land allocation challenges will need to be addressed before this construction moves forward.

“In fact, the 40,000 houses that they're talking about, they have to build on land that they don't have at the moment. So we propose that the state should look at improving the planning systems and the administration systems, so that more land is released for development both by state agencies and [the] private sector,” Webster told Radio New Zealand.

According to the NRI, the best approach to successfully deliver these new, affordable units requires development of a new multi-pronged housing strategy, which should include detailed guidelines for design and construction of affordable housing and finance schemes, highlighting the recently established ministerial committee on housing as the entity most likely to successfully develop such a policy.

First-Time Buyers

Home ownership schemes continue to gather pace in PNG, and Bank South Pacific (BSP) has also moved to bolster purchases of houses and mortgage penetration by improving access to affordable home financing.

BSP has partnered with the national government to launch the First Home Ownership Scheme (FHOS) in September 2014. The programme aims to establish a long-term deposit base supported by the national government, with the goal of offering a series of 40-year home loans of up to PGK400,000 ($151,400) to first-time borrowers, with affordable interest rates set at just 4% per annum.

The scheme is not a guarantee facility, but rather a product offered by BSP, which has adopted a commercial approach, despite the favourable tenure and rates of FHOS mortgages. Although the government scheme initially required homebuyers to supply a land title as security for the home loan – a provision that was expected to severely constrain its nationwide rollout – the government later announced that it would supply 2000 new land titles in each of PNG’s 20 provinces to support the FHOS. The FHOS is also launching a pilot programme to allocate new plots near Jackson’s International Airport in Port Moresby.

In March 2015, just six months after the FHOS programme was launched, BSP announced that it had funded a total of PGK4.2m ($1.6m) in loans, the majority of which are located in the national capital district. With the affordable housing segment witnessing unprecedented demand for home financing and long-term government efforts expected to deliver a significant influx of affordable units over the next two decades, both the near- and long-term prospects for rising home ownership in PNG are largely positive.

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The Report: Papua New Guinea 2015

Construction & Real Estate chapter from The Report: Papua New Guinea 2015

The Report: Papua New Guinea 2015

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