Although a downturn in the commodity cycle, the end of construction on the Papua New Guinea liquefied natural gas (LNG) project and long-standing ambiguities over land rights have constrained development in the real estate sector, changes are afoot that could lead to significant improvements. About half a dozen major housing projects are now under way, and homes at reasonable prices are fast becoming available. A culture of home ownership is taking hold, driven by rising prosperity and aspiration.
Longer term, fundamental questions related to land use are starting to be addressed to correct the supply-demand imbalance that has held the market back for years. However, there remains an oversupply of high-end properties and a shortfall of affordable housing, despite house prices coming down from the peaks of the PNG LNG construction phase in 2013-14.
By the Numbers
Real estate contributed an estimated PGK4.18bn ($1.3bn) to GDP in 2017, representing 5.6% of the overall economy. This exceeded the contribution of most other non-mineral sectors, including finance, transportation and ICT. The industry has continued to expand in recent years, with growth peaking at 6.5% in 2010 and averaging 3.4% through to 2017. While expansion slowed to 1% and 2% in 2016 and 2017, respectively, this was still above total non-mining GDP growth of 0.7% and 1.9%, and the figure is forecast to rebound to 3% in 2018.
Historical Limits
However, the market is complex and many challenges persist. Approximately 97% of land is under customary ownership, and recorded land titles rarely exist. This structure is not unusual in the Pacific region. In Vanuatu, for example, 98% of land is customary, while in Fiji the figure is 90%. Though possible, it is very difficult to buy or lease customary land as all community members must agree to the transfer, and such agreements may face legal challenges if others contest the transaction at a later date. A number of attempts have been made to register customary land, but these efforts have failed due to communal owners’ concerns that the land would eventually be taxed or seized. “From a legal perspective it must become easier to make customary land available for commercial activities,” Stephen Massa, local managing partner at Dentons, a global law firm, told OBG. “Investors need to have the security their titles on land are safe and uncontested. There are currently too many uncertainties.”
Non-citizens are forbidden from purchasing land freehold, though it is possible for foreign investors to acquire leaseholds over customary property. However, most prefer to source land from the state as these agreements are relatively secure and transaction costs are lower due to the lack of uncertainty about ownership. Land use is governed by the Land Act 1996, the Land Regulation 1999, the Land Registration Act and the Land Registration Regulation. Upon transfer, stamp duty of up to 5% is payable.
Urban Growth
Demographic trends suggest that land and property concerns will become more acute over time if not properly addressed. PNG is a young country, with the government forecasting that the population could more than triple to 30m by 2050. As the population expands, the country is expected to become more urbanised, with infrastructure development facilitating greater mobility. Given that only about 12% of the population currently lives in cities, these demographic and migration projections suggest there will be a rapid and consistent increase in demand for property for years to come.
Home Ownership
In its 2017 Real Estate Consumer Sentiment survey, property classifieds site Hausples.com.pg found strong demand for property. Some 45% of respondents were interested in renting within the next two months. Of those, 39% reported to be looking for condominiums or apartments, 33% were seeking local-style housing and 25% were in the market for Western-style housing. More than half hoped to spend less than PGK2000 ($624) a month, and 60% considered housing to be unaffordable. Additionally, Hausples.com.pg found widespread enthusiasm for buying property. More than half of those surveyed indicated they would be making a purchase in the next 12 months, and more than 60% said now is a good time to buy. Of those looking to buy, over 80% said they would be taking out a mortgage for their purchase, while 71% said they would be spending less than PGK500,000 ($156,000) on their homes. The survey also noted increased financial literacy among potential homeowners, with more than three-quarters planning to insure their property, for example.
Support For Home Buyers
Those looking to get on the property ladder have been helped by official policy, especially the First Home Ownership Scheme (FHOS). Introduced in 2013 and funded through an annual PGK200m ($62.4m) allocation from the budget, the FHOS allows Bank South Pacific (BSP), as the facilitating institution, to offer housing loans to approved first-time home buyers at an interest rate of 4% per annum over a 40-year period – contingent on an equity contribution of 10% from the buyer. FHOS loans are only available for newly built structures. Under normal commercial terms, the bank would charge about 8% over a 25-year period in addition to an equity contribution of 20%, resulting in fortnightly payments of PGK1425 ($445). Under FHOS, fortnightly payments are approximately PGK771 ($240). Critics have argued that even with the low interest rate, it would take the average low-income resident in Port Moresby some six decades to pay off an FHOS loan for a modest home costing PGK300,000 ($93,700).
Others, however, have lauded the project for fulfilling its remit. “The FHOS has been a success, and many people who previously could not buy a home have now entered the market,” Ken Richardson, general manager of Strickland Real Estate, told OBG. “Mortgages for upgrades and older houses might still be difficult to get, but it is mostly about getting more people to participate in the market.”
Pipeline
Despite difficulties in obtaining land and weaknesses in the wider economy, a considerable amount of real estate projects are under way or in the pipeline. Hausples.com.pg is forecasting 5000-6000 new homes will hit the market in Port Moresby by mid-2019, and as many as 50,000 through to 2020. One project that should contribute to this figure is the PGK7m ($2.2m) social housing development known as Duran Farm, which is being undertaken by the National Housing Corporation (NHC). The project will provide affordable homes at 8 Mile, just outside Port Moresby, specifically targeting public servants. A three-bedroom home at Duran Farm will cost around PGK350,000 ($109,000), and land title will be conveyed with the property.
The development has faced difficulties since it was initiated in 2012 and stalled for two years due to the lack of surrounding infrastructure. Approximately 48 houses had been built by 2017, when the project was halted again. The NHC and the Housing Department are responsible for obtaining the land, but landowner claims have frustrated the programme, while concerns have also been expressed about the houses not being suitable for the country’s climate.
Meanwhile, a number of smaller projects are planned. These include Mediterranean Apartments at 7 Mile, with 48 units, and Community Housing‘s proposed 160-unit development at 9 Mile. Land around the new Gerehu-9-Mile highway is now open for development with space for up to 4000 units.
EDAI Town is one of the larger private developments designed for primarily for local clients. Located north-west of Port Moresby, about a 20-minute drive from Harbour City and 15 minutes from Waigani, it will accommodate up to 10,000 people. EDAI, a joint venture with local landowners, is a mixed-use development that will include commercial, residential and industrial assets. Four styles are available, ranging from the 88-sq-metre Bougainvilla home costing PGK356,166 ($111,200) to the Hibiscus house valued at PGK623,975 ($195,000). By mid-2017, the first phase of EDAI Town was completed and comprised 161 houses, of which 120 had been purchased. The population at that point was about 600 people. Phase 2A is now under way, with 141 homes being built.
Private developers remain quite active. NPL Development’s Touaguba Hill Paradise was 85% sold as of early 2018. The project started in June 2016 and will have a total of 113 units by completion. Prices range from PGK900,000 ($281,000) to PGK2.2m ($687,000). NPL says that the project will be finished in 2018. The company has already built the 32-unit Ela Beach Paradise and will develop another project after Touaguba Hill Paradise. Other new residential projects on the market around the capital include Rainbow Heights, at Gerehu, and Koki Bay City.
Reforms in the Works
For most of PNG’s history, no written rules governed how customary land would be divided or utilised. The process was guided by traditional systems maintained by customary landowners and passed on verbally through the generations. However, as development has picked up, especially with the influx of foreigners to the market that followed the resource boom, land reform has become a key concern, comprising a major goal in PNG’s Development Strategic Plan (DSP) 2010-30.
In the 2017 Hausples.com.pg survey nearly 60% of respondents stated that they would like to see reforms to title and land ownership regulations. Indeed, the government cites a weak legal framework and insufficient administration as factors hindering the productive use of real estate, and under the DSP aims to have 20% of land under formal administration by 2030, from a baseline of 5%. The authorities hope to develop mechanisms that will allow landowners to place their assets on the market while also protecting their rights. Incorporated land groups (ILGs) are one way to balance market needs with customary rights, as they allow for the signing of long leases, with the lease payments going to the landowners. The government also initiated the National Land Development Programme in 2005, which is focused on improving the administration of customary land, including dispute resolution, and on strengthening the ILGs. If it is successful in releasing more land onto the market, officials believe 700,000 jobs could be created by 2030, along with an added PGK18bn ($5.6bn) in GDP thanks to the investment spurred by secure tenure and transparent market conditions.
However, progress with these initiatives has been slow due to some setbacks. While a Customary Land Development Office was formed in February 2016 for the purpose of transforming customary land to a more usable form, by 2017 the office was closed due to objections from interest groups. Customary landowners remain generally opposed to releasing their land for fear of exploitation and taxation.
Affordable Housing Shortage
The Ministry of Housing and Urbanisation has asked the Independent Consumer and Competition Commission (ICCC) to explore the reasons behind high property rents, as it tries to identify ways to make housing more affordable. Paulus Ain, the ICCC’s commissioner and CEO, told media in late 2017 that while regulation may not be the answer, the commission would be examining whether anti-competitive behaviour exists in the market that is harming consumers.
In addition, in early 2018 a commission was formed to analyse the ceiling rates for NHC accommodation, where rents have been capped since colonial times. As a result, the corporation lacks adequate resources to maintain its existing properties or undertake sufficient construction of new housing.
In a survey of property prices advertised for rent from March 2015 to March 2016, which was conducted by the Property Development Programme at the National Research Institute, the highest rents in Port Moresby were found in the Town area, where housing rates averaged PGK3500 ($1090) per week. The next most expensive location was Boroko (PGK2100, or $656), followed by Korobosea and Sabama (PGK2000, or $624). Meanwhile, the most affordable housing was located at 6 Mile (PGK600, or $187). Overall, the rates for advertised apartments ranged from PGK550 ($172) to PGK8000 ($2500), with the average standing at PGK1700 ($531).
The median wage of a public servant in the country is PGK2115 ($660) per month, meaning that housing in the capital is unaffordable for the average worker. Indeed, some public servants continue to live in informal settlements, a situation that developments such as Duran Farm are designed to alleviate. “Demand for affordable housing is increasing rapidly, but supply remains limited. New affordable housing projects sell out immediately,” Tom Snelling, general manager of Hausples.com.pg, told OBG. “Prices are high, but it’s difficult to quantify fluctuations since sales are often of new projects and as they have not been sold before we don’t have a baseline.”
The private sector has a role to play in solving the affordable housing shortage. A 2010 ICCC report found that the government simply does not have the capacity to provide the necessary housing, and private expertise and investment is required. The Institute of National Affairs (INA) recommended the development of public-private partnerships, in which private companies would be contracted to build housing developments under state-defined policies while the government retains responsibility for constructing the required infrastructure.
Market
Though additional supply at the affordable end of the market is needed to address the current shortage, there has also been a reduction in rental rates of late, which should support access in some market segments. Rents have been falling across the board, but the most acute drops have occurred at the higher end of the spectrum. Port Moresby continues to be a buyer’s market. While higher-end demand exists, individuals and companies cannot pay the rates demanded in the boom years of the PNG LNG construction phase. Property seekers are able to be more selective, and marginal and poorly maintained units are no longer in demand.
The positive side of the decline in rents is that housing is becoming more affordable, which is stimulating demand as people can target properties previously out of their budget range. However, some sellers are refusing to lower their prices despite the interest. This mismatch is causing trade to freeze in some areas. Nevertheless, bargains may be available, especially in situations where sellers are looking to move property quickly. With more developments in the pipeline, and the political will to release more land onto the market, the price of housing is hoped to come down for the average Papua New Guinean.
Sustainable Urbanisation
Ultimately, the longterm development of the mass market will depend upon the use of innovative construction techniques and the building of structures more appropriate for the environment. Questions have been raised as to whether the current trend of constructing rows of stilted houses will remain appealing in the long term. The building of single-family homes in Port Moresby has also been the subject of some criticism, as such developments use considerable amounts of valuable land for relatively few people. The development of high-rise blocks has been suggested as one viable alternative, and although such buildings may run counter to traditional living styles, property seekers could make significant savings by investing in vertical properties, as developers are able to offer more homes at one site without expanding the footprint.
Prefabricated homes, known locally as kit homes, could also help in meeting the country’s housing needs by providing new units at affordable prices and over a short time frame. At present, about a dozen companies offer these products in PNG. The list includes Atlas Steel, Steel Industries, PNG Forest products, Rhodes PNG and Stratostream.
Brokerage
As an increasingly aspirational citizenry look to rent or buy a home, regulation is becoming more of a concern. Some 39% of those surveyed by Hausples.com.pg in 2017 said they would like to see better regulation and certification of real estate agents. At present, almost anyone can act as a broker in a transaction, and some home buyers are making sizeable purchases without the benefit of a trained intermediary. The Real Estate Industry Association (REIA), a voluntary industry body, advocates integrity in the sector. Members subscribe to a code of ethics and annual auditing of trust account funds. Dealing with a member of the REIA can help to remove many of the risks that are often associated with the real estate market in PNG.
The 2010 ICCC review made a number of relevant suggestions to professionalise the industry. It called for the development of a code of conduct in the sector; the reduction of information asymmetry through the collection and publication of data; mandatory licensing of estate agents and builders; more state land to be released on the market; improved record keeping; and the introduction of a property capital gains tax to reduce speculation. However, eight years later, many of these key recommendations, including those regarding mandatory licensing and capital gains tax, have yet to be implemented.
Outlook
Despite the challenges, PNG’s real estate sector has evolved considerably in recent years, with a wide range of offerings made available. Many developments are now hitting the market at prices attainable for Papua New Guinean professionals and salaried workers. If political discussions on making more land available lead to concrete action, prices would be expected to lower further, readying PNG ready for the development of a true mass market. More people would be able to afford housing, which would create more opportunities for investors.
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