For the past half-decade the real estate market in Brunei Darussalam has been dominated by massive government housing projects that cater to the unfulfilled residential demand in the Sultanate. According to the Ministry of Development, 17,500 units will be built by 2014, which should meet demand levels through 2012, and another 18,000 units are planned for completion by 2017. The scale of the National Housing Scheme underscores the dominance of public spending in the market, but sector figures report that demand for private housing, buoyed by demographic trends and a rising GDP, is also strong. At the same time, unclear and often contradictory regulations have caused difficulties for developers, brokers and estate agents. The state’s announcement in April 2012 that it would close “loopholes” allowing foreign ownership of property worried developers, who tended to agree with the sentiment but demanded further clarification. Similarly, the government has passed forward-thinking legislation such as the Land Strata Title Act and the Valuers and Estate Agents Law in recent years, but implementation has lagged, leaving the industry in legal limbo. The Sultanate’s limited size and restrictive development laws suggest that most of the action in real estate will continue to be in the residential segment and will cater to the domestic market. However, the government’s economic diversification plans will ultimately require the development of tourist properties and modern commercial and industrial space. The challenge for both foreign and domestic investors will be in identifying the most promising opportunities and navigating the Sultanate’s complex business environment to take advantage of them.

FOREIGN OWNERSHIP: The most dramatic development in Brunei Darussalam’s property market in the past year was the government’s decision to effectively prohibit foreign ownership of real estate. This has never been officially permitted – the Sultanate’s regulations have always restricted ownership to citizens – but foreigners have for years been able to use legal devices such as the power of attorney (PA) or trust deeds to buy property.

The issue was first mooted in a session of the legislative council in March 2012, when the minister of development, Pehin Dato Suyoi Osman, announced that “effective immediately”, all property purchased through PA or trust deeds would be converted to 60-year temporary leases. The decision would apply both going forward as well as retroactively to the 47,000 trust deeds already issued, according to the minister, who stated that the ruling had come into effect in October 2011. Later, however, it was clarified that the restriction had yet to be codified and thus was not yet effective.

MIXED REVIEWS: Observers noted that at a minimum, the stated volume of real estate transactions represented at least $10bn in private investment in the country, a figure rarely matched outside of the oil industry. Some have contested the retroactive nature of the announcement, which they argued would make both individuals and corporations wary of the Sultanate’s respect for the rule of law. However, others in the industry welcomed the announcement as a boon to local Bruneians looking for a home. “This is having a positive effect on the industry as a whole. It is clarifying who are the legal owners of land in Brunei Darussalam,” Yusuf Flynn, the sales director of local agency Rumahku Real Estate, told OBG. “I am witnessing a lot more potential local homeowners gaining access to property as a direct result of the law changes.” Flynn said that for foreign investors looking to invest in properties, a 60-year lease period should be more than enough.

A CALL FOR CLARITY: One constant request from industry figures, regardless of their actual views on the policy, has been for clarity and precision from the government. The legal justification for ending the PA appears to come from Section 23 of the Brunei Land Code, which dates to 1909, and seems to require written approval from “His Majesty-inCouncil” for any transfers or leases. However, the antiquated law is poorly defined, lacking guidelines about what sort of applications should be approved or rejected. It was in this grey area that the use of PA evolved, with the tacit support of the government.

In the wake of its decision to end the current practice, the government has drafted a law that would convert all PAs to 60-year leaseholds, but those who have seen the law say it does little to patch over the holes that remain in the Land Code today. Moreover, the bill that would accomplish these changes had not yet been gazetted as of January 2013, leaving the sector without any hard and fast guidelines. Without decisive action from the government to respond to the concerns of the legal community and the private sector, Brunei Darussalam may see some fallout in terms of its foreign investment figures.

HOUSING CRUNCH: The push to further limit foreign ownership has been driven by concerns about foreign domination of the economy and worries about the availability and affordability of homes for locals. Housing demand in the Sultanate has long exceeded supply – according to the Housing Department at the Ministry of Development, the number of applicants on the waiting list for public housing units stood at 33,746 in 2011. Some applicants to the National Housing Scheme have been waiting since the programme began in the early 1980s, and the government had built just 15,763 housing units by 2010. But major construction projects that have been launched over the past several years are scheduled to produce 17,312 units by 2014, in part through large-scale developments implemented by the BEDB in concert with foreign contractors. The Ministry of Development aims to build an additional 18,000 by 2017, by which time it hopes to have cut the waiting time for new homes down to 10 years.

SOCIAL SCHEMES: Public housing in Brunei Darussalam is supplied through two avenues. The main programme, dubbed the National Housing Scheme, is restricted to citizens of 18 years of age or older, who own no land and earn between BN$445 ($347) and BN$3030 ($2360) per month. Additionally, the Landless Indigenous Citizens Housing Scheme (Skim Tanah Kurnia Rakyat Jati, STKRJ), introduced in 1984, targets lower-income residents and offers a long repayment period. As much as 50% of the development costs are subsidised by the government, with end-user prices varying between BN$43,000 ($33,488) for central terraced units, and BN$92,000 ($72,647) for detached deluxe properties. According to the housing development department, some 8000 homes had been allotted by 2010 under the National Housing Scheme and 4000 under the STKRJ.

As attractive as the financing terms are, however, the wait times of 12-20 years and the simple, sometimes poorly constructed units on offer have encouraged those who can afford it to purchase their own homes. The Housing Department reports that 70% of public housing applicants earn less than BN$1200 ($934.5) per month; by contrast, most private developers cater to young executives with salaries of BN$2500 ($1947) or more, according to Flynn. “Young professionals who previously would buy a nice car as their first major purchase are now looking at investing in properties instead,” Pg Aki Ismasufian, head of corporate strategic initiatives at Standard Chartered Bank, told OBG. A combination of factors, including the continued growth of the economy, restrictions on land development, and increased financing options, have helped to push the average price of properties to the BN$250, 000-300,000 ($194,700-233,640) range.

FINANCING: Brunei Darussalam’s real estate market is supported by a healthy selection of financial products from the government and leading private financial institutions. Like the market for homes, this is segregated, with the bulk of homebuyers using financing vehicles offered by or supported by the government, which is looking to promote 100% homeownership, while others rely on the private market. The newest development is the announcement of a housing fund under the existing Employees Trust Fund (TAP), through which employees can save for their homes. To qualify for the scheme, participants must be at least 25 years old, earning less than BN$2000 ($1557) a month, and must consistently contribute at least 5% of their income to the fund for 48 months. The government will then provide BN$20,000 ($15,576) toward the purchase of a home under the National Development Scheme, or BN$25,000 ($19,470) for those looking to buy privately or build their own home. Under these rules, the programme would not pay out until four years had elapsed, but the Ministry of Finance has said that Bruneians older than 45 who have saved continuously within the normal TAP fund for four years will be eligible to receive loans after six months.

The government has been careful to emphasise the TAP programme as a savings device rather than a credit instrument, aware of the trend of indebtedness among the population. Pehin Dato Abdul Rahman Ibrahim, the second minster of finance at the Prime Minister’s Office, reported in March 2012 that civil servants owed the state BN$485m ($377m) in unpaid housing loans, equal to more than BN$7000 ($5451) per household. It calls into question the efficacy of the loan expansion programme for civil servants given the existing levels of debt.

A PRIVATE AFFAIR: On the private home financing front, the market is roughly split between conventional and Islamic financing. Islamic loans come mainly from two local institutions – the Brunei Islamic Trust Fund (Tabung Amanah Islam Brunei, or TAIB), and Bank Islam Brunei Darussalam (BIBD), which is the overall market leader. Both lenders have sought to capitalise on demand for Islamic financing and home loans, with BIBD introducing the BIBD Rumah Plus mortgage product in 2012. Offering a repayment period of up to 30 years and as much as 97% financing, Rumah Plus is based on the sharia concept of musyarakah mutanaqisah (MM), in which the borrower and lender take joint ownership of a house and the borrower gradually assumes full ownership.

MM is a relatively novel form of financing that has become more popular in response to doubt among sharia scholars that the prevailing home finance instrument – bai bithuman aajil (BBA) – too closely resembles conventional interest-rate lending. TAIB, for its part, recently advertised that it was lowering the “property financing rate” on its BBA-based Islamic home loan to 4.5%, a figure commensurate with interest rates offered by conventional banks.

The success of Islamic banks has drawn attention from conventional banks like Standard Chartered, which announced in October 2012 that it would consider setting up an Islamic financing unit in Brunei Darussalam, drawing on experience offering similar products in Malaysia. Housing finance could be a part of that, especially since a tightening of credit in the past several years has cut into the profitability of consumer loans and led banks to put more emphasis on other sources of revenue. Indeed, some conventional banks are ramping up their property activities, increasing staffing levels for mortgage products and tying up with property agents to promote real estate sales, often through roadshows.

Housing sales in Brunei Darussalam are almost exclusively done on the sell-then-build model, which allows developers to finance construction from presales of the units being built. The Sultanate faces the same issues with project abandonment as some of its neighbours, like Malaysia, albeit to lesser extent.

PENDING LEGISLATION: Despite the increase in demand for housing for the Sultanate’s growing population, private development is still highly restricted thanks to a number of factors, including limited land availability, lengthy delays in the approval of land transfers and changes of land use petitions.

One solution to the shortage of land is vertical housing, which is also being explored under the National Housing Scheme through a mid-rise complex in Lambak Kanan. Apartment living poses its own challenges in the Bruneian context, especially since citizens often live in multigenerational households with at least five family members. The lack of effective strata title legislation has also been a contributing factor holding back multi-story development.

STRATA TITLE: Strata title, which permits single units within a building to be sold individually, without a corresponding land deed, is key to developing sophisticated real estate markets and attracting foreign investment. After being discussed for years, the Land Strata Act was passed in 2009, allowing both citizens and foreigners to purchase strata units for 99 years. Despite being celebrated by the private sector, however, the legislation has not proven successful: the Ministry of Development reported that as of July 2012 no strata titles had been actually approved.

One reason for this is that Brunei Darussalam’s development pattern has tended to favour the construction of houses that are not easy to subdivide, potentially subduing demand, and indeed in late 2010 just three applications for strata title conversion had been received, according to the Ministry of Development. However, this may also have been the product of scepticism and confusion from developers that are unsure about how the process works and who have not received clear guidelines from the ministry. Other sources reported that thousands of applications had been received, and that there were issues with the approval process.

Another key component for building an apartment and secondary housing market is a strong and well-regulated corps of estate agents and other real estate professionals, which the Sultanate lacks. “The real estate industry needs to be properly regulated, with standardised training and clear requirements for realtor qualifications,” Flynn of Rumahku Real Estate told OBG. Legislation intended to address this has been formulated as the Valuers and Estate Agents act of 2009, but while the bill has been passed, it is still awaiting implementation. When regulations are put into place, they could cut down on cases of fraud and unscrupulous behaviour from estate agents, increasing trust in the housing market. At the same time, private sector advocates warn that excessively heavy-handed regulation could add to the considerable bureaucratic obstacles facing the market.

COMMERCIAL REAL ESTATE: One reason for the focus on housing in the sector is the weakness of the commercial and office market. Dedicated office buildings have rarely been built in the capital in the past decade, as businesses tend to prefer the more traditional two- or three-storey shophouse. Central office rentals averaged $20 per sq metre in 2011, according to an ASEAN Valuers Association report, while similar offices were priced at $60 per sq metre in Singapore. Prices were lower in the outskirts of the city, averaging $800-1500 per unit per month, which suggests a rate of between roughly $7 and $13 per square foot for a 120-sq-metre office. Meanwhile, shophouse space rents are on the market for between $2500 a month for the ground floor to $900 a month for the second floor space.

SHOPS & HOTELS: The ASEAN Valuers Association report also described a trend away from shophousebased retail and toward “mall-type” development, but even these prospects are lukewarm, with the entire sector largely seen as being oversupplied. The only major recent development in retail has been the August 2012 announcement from the local business cooperative, Koperasi Bumiputera Bersatu Berhad (KBBB), that it would build a mall in Mukim Mentiri. The 4-ha project, which is due to begin construction in 2013 if approved, is designed to help Malay entrepreneurs expand into new markets.

The hotel sector is in a similar situation – the ASEAN Valuers Association report lists 15 hotels in the Brunei-Muara area, most of which are owned by individual or familiar investors, making transactions rare. The relatively small size of the tourism market, meanwhile, has not helped to boost the demand for hotels, with the latest hotel, the Radisson, having opened in 2010. Here as well, the most notable project being considered comes from another cooperative – Koperasi Rimbun Berhad (KOPRI) – which plans to build a five-star hotel near the Brunei International Airport. KOPRI intends to favour local contractors in the design, construction, and operation of the hotel, which is currently in the approval stage.

MASTER PLAN: Another catalyst for growth in the next several decades could be the revitalisation and expansion of the capital city. Bandar Seri Begawan has evolved within a century from the “water village” of Kampung Ayer to accommodate more than 100,000 people. But with little industry and few cultural attractions, it lacks dynamism: the sparse downtown is surrounded by several kilometres of urban sprawl that resembles suburbia more than a capital city. This has fostered dependence on cars, decreased civic engagement, and depressed downtown commerce and tourism. Over the past several years, however, city planners have drafted a master plan for the city, aiming to make it more liveable. The final document, produced by global design and planning firm HOK International Asia Pacific, won a Merit Award for Urban Design from the Hong Kong chapter of the American Institute of Architects. Many of its proposals do not impact real estate development outside of a potential uptick in property values. The waterfront is to be a key focus area, with plans for a riverwalk along Sungai Menglait, and more public access trails. But the master plan also contains five “detailed study areas,” including Kampong Ayer, the Central Business District, a Gadong Kiulap Lifestyle Centre, a Civic Centre, and the “riverfront corridor” including the Brunei Airport City.

If done successfully, these developments could have a dramatic effect on the property market in the Sultanate, breathing life into the office sector and offering apartment living in the heart of downtown. There is no clear timetable for implementation, although city officials assured press that redevelopment efforts would be completed by 2035.

OUTLOOK: Ultimately, even the most sophisticated of plans requires an enabling environment of private sector interest and supportive government regulations. Years of conservative land use policy, restrictions on development, and increasing bureaucratisation, have given the private sector little to do but rely on government contracts, but that might change, especially as the housing market adapts to vertical developments and new financing scheme enabling more Bruneians to buy in the private sector.

Economic diversification plans designed to boost financial services, education, and health care, will necessitate new schools, hospitals, offices and other facilities, expanding the real estate market. Much of this development must come from the private sector if the overarching goal of reducing dependency on the government is to be achieved. The opportunities for expansion exist, and can be realised if the Sultanate establishes a balance between government and business participation in the sector.