Lack of an independent property valuation authority and limited investment avenues, a huge demand for real estate has been created in the economy, leading to skyrocketing prices of land and buildings, especially in urban centres.
This demand has drawn majority of investment from the public since investors see real estate as a long-term investment, hereditary of a sort. This is an innate Bhutanese trait that places inheritance, as rights.
However, in the banking sector, this special interest in the real estate has put pressure on the trade balance and INR reserve. Some even anticipate a housing bubble.
This concern was raised during the 20th session of Bhutan Dialogues hosted by the United Nations office in Bhutan.
The Deputy Governor of Royal Monetary Authority (RMA), Yangchen Tshogyel, however, said she was not sure whether there is a bubble at all or when it will burst. She said that limited alternatives for investors and the nature of real estate in Bhutan could have fuelled this trend.
“There should be policies to address this issue. Initiatives such as Jabchor and crowd-funding are aimed at providing alternative investment avenues and to diversify investment,” she said.
In the absence of a property valuation authority in the country, she said, banks become the de facto valuation authority, which in turn have their own estimations.
The Deputy Governor also said, there are regulations mandating the loan to equity ratio. For instance, an individual constructing a building should finance 40 percent of the cost as their equity and the bank will finance the remaining 60 percent. However, she said some clients have availed 100 percent of cost as loan and banks have also provided it. “This is happening because of lack of specialised property valuation authority,” she said.
The risk becomes higher when there are short supplies of tenants and owners are not able to generate the required income to repay the loan.
“The central bank has to address the issues by enhancing the capacity expertise and standardising valuation,” Yangchen Tshogyel said.
She also highlighted the economic vulnerability of an import-driven country like Bhutan. The central Bank experienced a difficult time last year because of the election transition period, which created a lapse in implementation of the new Plan. The country, she added witnessed hardly any cash inflow while there was an outflow of INR 300 to INR 500M every day. This trend continued for six to nine months.
“Entrepreneurship and Cottage and Small Industry should serve as a tool for diversification. The focus is on the young population. What we need is not a reform from the government but revolution,” she said.