Rental prices fall as supply exceeds demand in PNG

 

The business climate for real estate stakeholders in Papua New Guinea deteriorated in 2017, with rental rates at upmarket residential properties in the capital, Port Moresby, falling by as much as 50% since 2016. A macroeconomic slowdown and lower numbers of expatriate employees living in the country will weigh on growth in 2017, with agencies reporting that hundreds of units are sitting empty in the city, even as demand for more affordable rentals rises.

However, this also marks the end of a period of extreme real estate inflation, which drove office and residential prices in Port Moresby to among the highest in the world. Although the industry is experiencing a downturn, a moderation of unsustainably high prices will benefit long-term growth. Affordable housing also retains considerable potential for future expansion, and recent consumer sentiment surveys reveal pent-up demand for mid-market properties. Government efforts to launch low-cost housing and mortgage schemes have had some success, although long-standing land acquisition challenges remain an obstacle to expansion of the property market.

Oversight 

Modern real estate development in PNG began in 1968 with the establishment of the National Housing Corporation, the government’s primary housing agency. The organisation was created to focus on building houses for government workers at a time when there was virtually no housing market in the country because both private and public players provided worker accommodation.

As Port Moresby’s population rose and economic growth progressed, shortfalls prompted the government to launch a National Housing Taskforce in 2007, which recommended that government agencies should play a facilitating role in housing provision, rather than undertaking construction of new units. This opened the door for private development in the real estate sector, and dozens of private residential projects were launched from the mid-2000s onwards.

The Department of Lands and Physical Planning (DLPP) is one of the most important government actors in the sector. It is responsible for administering all alienated land, including state-owned and freehold land, as well as customary land, which is owned by PNG citizens. Major private real estate agencies operating in the country include Century 21 Siule Real Estate, the Professionals Real Estate Group, DAC Real Estate, Pacific Comfort Real Estate and PNG Real Estate.

Port Moresby 

PNG’s real estate sector is highly concentrated in Port Moresby, with the 2008 launch of the $19bn PNG LNG project propelling the sector into extremely rapid growth, as an influx of new residents – both expatriates and locals – flocked to the city.

A November 2016 report by PNG’s National Research Institute (NRI) found that Port Moresby’s population rose from 364,125 in 2011 to over 400,000 as of 2015, with an average population density of 16 people per ha. Housing supply was insufficient for rising demand across all segments of the market, driving rental and sales prices to the same levels as Manhattan, in the US, in some cases, and driven by a chronic shortage of secure land for economic development. The NRI reports that 60% of land in Port Moresby is state-owned, and supply is almost exhausted. Building costs are also high, due to import dependence, kina depreciation and an ongoing shortage of foreign currency, which have impacted contractors and importers.

Although the sector recorded tremendous growth between 2008 and 2013, with the aggregate finance, real estate and business sectors expanding by 69% between 2008 and 2013, the industry has struggled since the completion of the PNG LNG project.

An exodus of expatriate residents – a significant pillar for upmarket rentals in Port Moresby – has had a dramatic impact on rental rates. “In 2015 and 2016 we began to see a flattening of the real estate sector, and then a downturn. The PNG LNG project made a major impact on real estate in Port Moresby and Lae, but it created a big bubble. After the contract finished the market did not anticipate the extent of the downturn that would follow,” Mike Quinn, managing director of Professionals Real Estate in Lae, told OBG.

The real estate sector, like the broader PNG economy, has struggled in the wake of several domestic and external headwinds, including declining global commodities prices and government revenues, budget cuts and a general slowdown in business activity.

The Department of Treasury reports that the real estate and business services sector was forecast to have grown by 3% in 2016, although this was largely due to financial services growth, while the central Bank of Papua New Guinea reports that the consumer price index’s housing expenditure category rose by 4.1% during the third quarter of 2016, compared to a 0.2% decline in the second quarter of 2016, driven by a 7.5% increase in rental costs. However, rental rates have slumped over the previous year, as an ongoing macroeconomic slowdown continues to impact business activity and residential demand in Port Moresby.

“We understand there are now about 5000 fewer expatriates in Port Moresby than two years ago, meaning that demand for high-end housing has dropped significantly,” Ken Richardson, general manager of Strickland, told OBG. “Mid-range housing at PGK2000 ($628) to PGK3500 ($1100) a week is seeing the strongest demand. There is a vacuum in the market here, and accommodation in this range is rented almost immediately. Landlords that have reduced their rental expectations to match the market have generally maintained their previous occupancy levels.”

Rental Market Downturn 

Port Moresby is divided into 15 suburbs: Badili, Boroko, Erima, Eight Mile, Five Mile, Gerehu, Gordons, Hohola, Korobosea, Nine Mile, Sabama, Six Mile, Tokarara, Town and Waigani. The five most popular expatriate suburbs in the capital are Town, Waigani, Boroko, Gordons and Korobosea, according to a March 2017 report on the expatriate real estate market by Christian Arek, sales and marketing manager at Century 21 Siule.

Rents are paid in kina, generally on a weekly basis, and furnished apartments and houses are standard. Century 21 Siule found that rental prices had decreased by between 10% and 50% for high-end housing in the 12 months to March 2017, reporting that there has been a supply increase as more expatriates are leaving the market than entering it.

The company reports that employers have also reduced the rental budget for expatriate staff over the past 12 months owing to a downturn in business across most sectors, while several new apartment buildings have come on-line since 2016, with more new units anticipated in 2018, when the Hilton Port Moresby adds an additional 128 apartment units to existing supply. Century 21 Siule expects average rental prices across the expatriate market will decline by a further 10-20% in 2017 and early 2018, even as demand for more affordable rentals rises.

Meanwhile, PNG-based real estate portal Hausples’ May 2017 real estate consumer sentiment survey found that roughly 45% of PNG residents were considering renting a property over the next two months, and 45% of respondents were prepared to spend more than PGK2000 ($634) per month on a rental unit. Around 40% of respondents reported that renting is either somewhat affordable or very affordable.

Town 

In Town, which includes Paga Hill, Touaguba Hill and Ela Makana, rents for a furnished one-bedroom apartment range from PGK1500 ($476) to PGK2500 ($793) per week, according to Century 21 Siule, while two- and three-bedroom apartments average PGK1600-3500 ($507-1110) and PGK1800-PGK4000 ($571-1270) per week, respectively. A four-bedroom furnished apartment costs between PGK2000 ($634) and PGK4500 ($1430) per week. Century 21 Siule reports that one-bedroom apartments are rare in this area and generally command a higher price point. With employers moving to reduce staff accommodation costs, demand for four-bedroom apartments is low.

A three-bedroom furnished house rents for between PGK2200 ($697) and PGK4000 ($1270) per week, while four- and five-bedroom furnished houses cost PGK2500-4500 ($793-1430) and PGK4000-5000 ($1270-1590) per week, respectively. Century 21 Siule repeats that demand for furnished houses is also low, again due to reductions in accommodation budgets, with Touaguba and Ela Makana Hill seeing the most drastic reduction in rental rates, as they cater to over 50% of demand for expatriate rental accommodation.

Waigani 

Properties in Waigani command a higher price point compared with Town, according to Century 21 Siule, since the area does not have as many vacancies. One-bedroom furnished apartments command a premium rate, with rents averaging from PGK2000 ($634) to PGK3000 ($951) per week, while two- and three-bedroom units go for around PGK2500-3500 ($793-1110) and PGK3000-4000 ($951-1270), respectively. Four-bedroom furnished apartments in the area are priced the same as three-bedroom units.

Although Waigani has seen less of a drop in rental rates than other areas, house rental prices have moderated, with three- and four-bedroom furnished houses priced at PGK3000-4000 ($951-1270) and PGK4000-5000 ($1270-1590) per week, respectively. Five-bedroom houses are priced between PGK4500 ($1430) and PGK5500 ($1740) per week.

Boroko, Gordon & Korobosea 

Expatriates generally favour Town and Waigani over the neighbourhoods in Boroko, Gordon and Korobosea, and thus rents in this area are lower. A furnished one-bedroom apartment rents for between PGK1200 ($380) and PGK2000 ($634) per week, while two-bedroom rents range between PGK1300 ($412) and PGK2500 ($793) per week. Rents for three- and four-bedroom apartments average PGK2000-3000 ($634-951) and PGK2500-3500 ($793-1110), respectively.

Office Space

Grade-A office space remains concentrated in Port Moresby, with prices ranging between PGK500 ($159) and PGK2000 ($634) per sq metre per year depending on the location.

While they have not recorded as big a decline as that seen in the residential segment, Century 21 Siule reports that office rental rates fell by approximately 20% between 2016 and 2017, and oversupply is now becoming an issue. The higher cost of utilities and internet access also presents a challenge.

“The problem for businesses and entrepreneurs here is that it costs so much money to enter the market,” Chey Scovell, CEO of the Manufacturers Council of PNG, told OBG. “If you were trying to start an internet café in Indonesia, for example, it would cost you between PGK63,000 ($20,000) and PGK95,000 ($30,000). Here the cost of the same venture would be closer to PGK1.1m ($350,000), because rent, utilities and internet services are so expensive.”

Some commercial property owners have taken note, and while office rentals remain elevated, companies in Port Moresby have diversified their offerings to target a broader section of the workforce. For example, the Harbourside West Tower, which opened in 2015, offers serviced office options ranging from a five-sq-metre single-person private unit for PGK4576 ($1450) per month, to a 70-sq-metre, fully equipped 12-person office for PGK23,100 ($7320) per month. Freelancers and entrepreneurs can also rent “hot desks” for PGK60 ($19) per day, with hourly rates also available.

Much like the residential segment, there are few major office building projects currently under development in Port Moresby, although the Hilton Port Moresby development will also include office space.

Lae 

Although Port Moresby remains the hub of real estate activity, PNG’s second city, Lae, is expected to record the most robust future real estate growth, as a major new mining project comes on-line, and residential units remain in short supply. “Port Moresby is feeling the effects of the downturn more than anywhere else in PNG. Lae and the rest of the country are more stable,” Quinn told OBG. “The Wapi Golpu gold mine will also have a big impact on Lae, so I expect prices there to increase significantly, simply because Lae has less available state land. There’s also been a push from foreign companies to decentralise, so they can move their staff to operational locations where rents are less, for example with NGOs, which are increasingly sending their people to Lae, Madang and Goroka.”

Savvy developers are already moving to invest in new residential projects in the city. In March 2017, for example, Venture PNG Properties opened six new high-end units in Lae, targeting corporate clients and offering amenities including backup power and water supply, a gym and recreational facilities.

Housing Prices 

Although upmarket residential rentals in Port Moresby have come under considerable pressure in the years since 2014, land acquisition challenges have kept property prices extremely inflated in PNG, while recent government reforms aimed at putting an end to land-grabbing have shaken investor confidence, with the issue likely to continue posing a major challenge to real estate growth in the country.

A March 2016 report in The Diplomat found that prices for non-customary land are exorbitantly high in PNG, with average house prices hovering around $510,000 as a result. This has exacerbated housing challenges for locals who often find themselves homeless in the city centre – PNG’s minimum wage is $45 per week, putting property ownership out of reach for most people – and The Diplomat reports that slum settlements proliferated outside of the city prior to a police crackdown in November 2015.

With land scarcity pushing home prices beyond the budget of most citizens, the government has taken steps to improve prospects for home ownership for locals, launching the Affordable Land and Housing Programme and the First Home Ownership Scheme, the latter in partnership with Bank South Pacific.

A number of private contractors, including EDAI Town and the Glory Group of Companies, are also moving forward on affordable housing developments, lending an optimistic outlook to mid- and long-term affordable housing development (see analysis).

Land Acquisition 

Land acquisition represents a major challenge to economic growth in PNG, extending beyond the real estate industry and impacting nearly every sector of the economy. PNG’s customary title system is one of the most unusual globally, with an estimated 97% of land in the country placed under customary ownership following independence in 1975. All other land is known as alienated land and administered under the 1996 Land Act.

Sales negotiations for customary land are extremely difficult, with any exchange requiring the agreement of all members within the applicable clan, or more recently, incorporated land group (ILG). However, clan and ILG rights have increasingly been overridden by government-issued 99-year special agricultural and business leases (SABLs), which were launched in 1995.

Section 11 of the 1996 Land Act states that an approved lease executed by or on behalf of a group of customary landowners is conclusive evidence that the state has a good title to the lease, and that all customary rights to the land will be suspended for the entire duration of the lease.

However, between 2003 and 2011 an estimated 5m ha of land, or 11% of PNG’s total area, was leased under the SABL scheme, often without the knowledge of the clan that owned it. Most of these leases covered more than 10,000 ha, with some covering more than 100,000 ha. Over 80% of SABLs were approved between 2009 and May 2011 alone, following which mass protests erupted over perceived land grabbing.

In the same month Sal Abal, then acting prime minister, announced a moratorium on SABLs, with a 2013 Commission of Inquiry into the system later highlighting extensive corruption and irregularities in the SABL system, finding that just four of 42 leases studied had received landowner consent, and characterising the remaining 38 deals as “seriously compromised”.

Reform Efforts 

In March 2009 Parliament passed a series of amendments to the Land Registration Act of 1981 and the Land Groups Incorporation Act of 1974, which took effect in 2012. The amendments were expected to make long-term leases redundant, as they would allow customary landowners to register their own titles to customary land without granting any title to the state. However, the amendments also mandated that all existing land groups must be incorporated within a five-year period as ILGs.

According to a May 2016 report published by researchers at Papua New Guinea University of Technology, incorporation requirements are extremely onerous and include information on all the assets of a particular clan, a list of all members including those who are absent, a certified birth certificate for each member, a map of the land concerned, a list of all property owned by the clan, annual updates on all members, including deaths and births, and minutes of annual meetings, which must be reported to the DLPP.

In a January 2017 report titled “Accessibility of Customary Land for Residential Property Development in PNG: Challenges and Prospects”, the NRI found that the current customary land registration process comprises 17 steps involving 17 state agencies and generally takes over a year. Following ILG approval, buyers must navigate a complex and lengthy system of procedures to register the property, during which time any member of the clan may retract the sale.

Pros & Cons 

Land reform supporters have argued that without changes to the system, PNG will fail to achieve growth, attract investors and develop new manufacturing, extractive industries, real estate and construction investment. Two recent surveys – one published by online real estate portal Hausples in May 2017 and one published by Niugini Land and Property in November 2016 – have both identified land acquisition and development challenges as the most significant constraint to growth of property ownership in the country, while other sectors – including industry, manufacturing, construction and energy – have also cited lack of available land as one of the biggest challenges to long-term expansion.

Opponents argue that the customary title system is a critical backbone for the agriculture sector, which provides a livelihood for more than 85% of the rural population. Many indigenous landowners see the erosion of customary tenure for economic purposes as unwarranted and unwanted, with NGOs reporting that the reform movement has been interpreted as an externally imposed policy. Land disputes are also the primary source of violence in many provinces, increasing security risks and associated costs.

Cancellation Of Special Leases 

Following the most recent land reforms in 2012, the DLPP drafted an amendment to the 1996 Land Act which would nullify the SABL scheme, transferring any unlawful SABLs into state-owned leases. Since 2013 Prime Minister Peter O’Neill has also promised to cancel any SABLs that are deemed to be unlawful, with the proposed amendments expected to eliminate any leases or sub-leases held by any foreign company, including local companies with foreign shareholders.

In June 2014 the National Executive Council endorsed the Commission of Inquiry’s recommendation to revoke unlawful SABL leases, and while amendments to the Land Act have not yet been passed, in March 2017 O’Neill announced that the National Executive Council had cancelled all unlawful SABL licences, and that the SABL scheme is now illegal.

With just 30,000 ha of freehold land available in the country, solving the land crisis will be a critical priority for the government, particularly given the negative impact that cancelling SABLs could have on new investment. Indeed, stakeholders including the Manufacturers Council of PNG and various real estate agencies have warned that the country’s investment climate will suffer if investors cannot hold a state or head lease. “This potentially creates an enormous issue. Our banks lend against title and valuation, so if changes to the Land Act go ahead, land values will crash and lending will stop,” Quinn told OBG. “It has very serious implications for the property market.”

Konebada Petroleum Park 

Land acquisition challenges are also impacting industrial property development, specifically a major planned petrochemicals complex near Port Moresby. In February 2017 the DLPP declared that a significant portion of land on the western side of Port Moresby would be allocated to the proposed Konebada Petroleum Park, which has been under development since 2008.

The 23,325-ha park covers an area including the Napa Napa oil refinery, a new international port under construction on Motukea Island, other areas currently managed by PNG Ports, and potentially some customary and privately owned land. In an April 2017 legal analysis of the decision to allocate the land to the park, multinational law firm Dentons wrote that this declaration “is self-evidently missing one of the necessary way-points establishing the boundaries of the park, and as a consequence it also seems to wrongfully include part of the PNG LNG plant”.

Although the Konebada Petroleum Park Act of 2008 was intended to provide the appropriate space for development of large-scale greenfield petroleum processing and energy products, with petrochemicals development to play a critical role in the future of PNG’s energy sector (see Energy chapter), Dentons writes that the minister of lands and physical planning does not appear to have consulted with relevant interested parties prior to publishing the gazette notice.

The boundaries of the park are expected to cause issues for a wide variety of stakeholders who own or have interest in Konebada Park-designated land, including banks which have mortgaged land falling within the park’s boundaries. In addition, questions linger as to the legal veracity of the declaration, with Dentons reporting that it is possible that the decision will be challenged in court in the near term.

Outlook 

Although PNG’s real estate sector will continue to face a challenging near-term operating environment, there are considerable opportunities for future expansion in the affordable housing segment, with growth expected to pick up in Lae on the back of rising industrial and minerals development.

While rental rates have fallen from their early 2010s peak, this downturn also marks the end of an unsustainable bubble, and should help moderate elevated real estate prices and rental rates. Industry moderation will provide a measure of stability and predictability moving forward, even as the ongoing land reforms continue to raise some questions about the future of property development in the country.

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The Report: Papua New Guinea 2017

Construction & Real Estate chapter from The Report: Papua New Guinea 2017

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