Economic Update

Published 26 May 2017

A lift in activity is expected for Papua New Guinea’s residential property market heading into next year, boosting both rentals and sales after a recent cooling from a slowing economy and rising costs.

However, government support for the real estate sector – directly through investments in housing and infrastructure developments, or indirectly through state spending to boost economic growth – is likely to remain restricted in the shorter to medium term.

Weaker commodity prices and a slowing economy last year – GDP expanded by 2.4%, down from 6.8% in 2015 – caused the state to slash spending by PGK200m ($62.6m) in the 2017 budget, according to the World Bank. This prompted cuts to capital works programmes for this year.

In mid-April the World Bank warned that, while fiscal measures were necessary in the face of lower oil prices, PNG also ran a risk of further moderating growth, which it forecast at 3% for this year and around 4% over the next five years.

Ensuring delivery of services and infrastructure will be a challenge this year in the face of such belt-tightening – and slower rollout of infrastructure could hamper real estate development in the near term.

Dwindling top-end demand

A slowing economy and lower overseas investment have seen a draw-down of foreigners seeking housing, impacting the upper end of the rental market in the capital city, Port Moresby, though demand remains solid in certain segments of the market, according to Ken Richardson, general manager of Strickland Real Estate.

“We understand there are now about 5000 fewer expats in Port Morseby than two years ago, meaning that demand for high-end housing has dropped significantly,” he told OBG. “Mid-range housing, which ranges from PGK2000 ($628) to PGK3500 ($1100) a week, is seeing the highest demand. There is a vacuum in the market here, and accommodation in this range is rented almost immediately. Those landlords that have reduced their rental expectations to match the market have generally maintained their previous occupancy levels.”

Price pressure

Although demand for up-market rental and sales properties has eased, dragged down by prices for older properties, the cost of new residential units is being pushed up by a number of factors.

One of these is limited availability of land, which inflates costs. In response to such constraints, there will be a rise in multi-story developments rather than free-standing housing units, Jason Yip, managing director of DAC Real Estate, told OBG.

“It is hard for any outward city expansion in terms of growth in PNG,” he told OBG. “The shortfall of land availability is why prices in real estate will continue to be expensive, and developments will move upward.”

Greater vertical development should help project operators to maximise returns on their land banks and reduce infrastructure and support costs.

Property prices have also been inflated by higher materials costs for new construction work. The decline in the kina’s value – which fell 5.3% in 2016 and has fluctuated further this year – has driven up the cost of imported materials, increases often passed on to buyers or tenants, according to consultancy Niugini Land and Property.

Positive prospects

While the pace of infrastructure developments in PNG has slowed, some investments supporting the real estate sector have continued.

Public works to support PNG’s upcoming APEC events next year should have a downstream effect on the property market, especially in the capital city.

Plans to pave new roads, build new housing and improve utilities services in Port Moresby should help to boost connectivity in some districts, raising their appeal to developers.

Along with the spur provided by APEC events, a new wave of energy developments set to break ground before the end of the decade may help rejuvenate the local real estate market.

Plans by oil giants ExxonMobil and Total to develop new or upgrade existing liquefied natural gas (LNG) projects – dubbed PNG LNG and Papua LNG, respectively – could bring about a rise sharp in demand for residential units and office space.

The World Bank said the two major energy projects improve prospects for the PNG economy in the medium term, an optimism that could flow into the real estate market.

Not all industry stakeholders agree, however. According to Richardson, the new projects will not see the sort of market overheating experienced in the period leading up to ExxonMobil’s LNG project in 2015.

“The real estate market should not expect as big of a boom as with the first LNG project,” he told OBG. “It will just stabilise the market, but it will not over-inflate prices in the way that it did last time.”