Alawol Ahmed, assistant manager, consumer division

PRELUDE

Being one of the most densely populated countries that has one of the lowest land-person ratios in the world, for Bangladesh, providing housing facility for its citizens is becoming increasingly expensive day by day. According to Asian Development Bank (ADB) data, 20.5% of population still live below the poverty line in Bangladesh as of 2019. Hence, most of the people in Bangladesh find it challenging to adjust with the rising cost of construction materials and build a roof over their heads. In order to cut back on construction cost, majority of the population build their houses in rural areas so that benefit of cheap labor can be availed. However, Bangladesh is emerging as one of the fastestgrowing nations in the world. According to a report published by the Boston Consulting Group (BCG) titled, “Bangladesh, The Surging Consumer Market Nobody Saw Coming”, every year around 2 mln Bangladeshis join the ranks of the middle and affluent class (MAC). The report also predicts that, if Bangladesh maintains this pace, the MAC population of the country will grow by 65% over the next five years. Housing needs for this large population is one of the biggest challenges for the government of Bangladesh today. In recent months, construction materials have experienced significant price increase not only in Bangladesh but all over the world and this surge in the price of construction materials is most likely to continue and it will eventually result in the rise of development costs of megaprojects, commercial and residential projects. These high prices are not only creating a significant impact on the real estate developers but also affecting the construction industry and contractors. This massive rise of construction material prices is affecting real estate developers so badly that the developers and the constructors have to consider whether or not to initiate any new residential or commercial projects. Further, contractors of the development projects are not only hesitant to bid for new projects but also demanding price adjustment for ongoing projects.

OVERVIEW OF THE HOUSING MARKET OF BANGLADESH

Housing Market at a Glance Bangladesh has been experiencing rapid urbanization over the last few decades. Although the majority of our population lives in rural areas, the importance of this sector has been declining over the years. The contribution of the agricultural sector in GDP has come down from about 50% in 1972 to only 16% in 2015 (BBS, 2015). The rural population reached a peak of 107.8 mln in 2011 and is projected to decline further to 89.5 mln by 2050. Conversely, the urban population, which was 43 mln in 2011 is projected to reach 112 mln by 2050 and would still be growing according to IFC. Bangladesh is one of the most densely populated countries in the world. The pressure of the rapidly growing urban population has significantly contributed to the scarcity and cost of urban land for housing and other purposes. Land prices are high and permanent housing is rare. Bangladesh will need to construct approximately 8.5 mln new houses in the next five years to overcome the existing shortage in urban areas and meet the future demand for housing. Most of the need is concentrated in the lower and lower-middle income groups. In the urban areas, the housing deficit grew from 1.13 mln units in 2001 to 4.6 mln units in 2010. This deficit is projected to reach 8.5 mln units by the end of 2021:

Nearly 44% of the urban households live in purely temporary structures while 29% live in semi-permanent structures. The overwhelming majority live in poor quality houses and only 28% of urban households live in pucca structures. So, in terms of both quantity (housing deficit) and quality, urban housing presents a major policy challenge for Bangladesh.

HOUSING FINANCE TRENDS AND DEMANDS

Compared to advanced economies like Europe and America, the Asian mortgage market is rather diverse. For South Asian countries Mortgage debt to GDP ratio is still in a single-digit where Singapore has already crossed 50% compared with Bangladesh 3.5% only. Moreover low housing loan as a share of the total credit ratio is an indicator that housing development throughout the region is constrained. Where Indonesia poses little over 29% and neighboring Bhutan poses a little lower 23% show comparatively bright performance in disbursing housing loans, the most densely populated Bangladesh gives a gloomy picture (just 9.1%), indicating there is a severe gap between demand and supply. The following table exhibits estimated annual house finance demand among the low and middle-income group from 2017 to 2020.

OVERVIEW OF THE CONSTRUCTION MARKET OF BANGLADESH

Agriculture used to be the main contributor to the economy of Bangladesh. However, construction sector started to flourish from 1990 and has been growing since then. In 2006 this sector contributed only BDT 2,982.5 mln to the national GDP but in 2019 the contribution reached BDT 8,068.14 mln. The sector has witnessed a massive boom in recent years, thanks to some massive megaprojects like Padma Multi-Purpose Bridge, Dhaka Metro Rail Project, etc. It is one of the 15 major sectors that contribute to the GDP and one of the major employment generating sectors of the country. Over 5 mln workers are currently working in this sector directly along with 4 lac contractors according to The Business Post.

The construction industry of Bangladesh is expected to recover by 8% in 2021, after shrinking by an estimated 1.2% in 2020 being heavily impacted by pandemic. In the upcoming year, the industry is expected to continue to recover, with output increasing by 7.2% and then expanding by 7.1% per year over the next few years. From 2022 - 2025, the industry’s output is expected to be supported by the government’s focus on the development of infrastructure, as well as through investment in energy and utilities construction projects.

CONSTRUCTION MATERIAL PRICES ARE ON THE RISE: REASONS and ITS IMPACT

The construction sector impacts socio-economic expansion development in developing countries like Bangladesh by contributing substantially to their gross domestic product (GDP). Building materials cost can comprise half (50%) of the total cost of all projects executed by the construction industry. Furthermore, the cost of building materials is influenced by supply and demand, as well as quality, quantity, time, place, buyer, and seller during the construction process. Currency exchange, material specifications, inflation pressure, and the availability of new materials in the country are some other additional factors. Construction materials play a pivotal role in building as a substantial input in project development. The constant rise in the price of building materials poses a significant challenge to the construction industry’s ability to deliver projects of high quality and on time. The fluctuating market value for construction materials tends to cause high project risk to all stakeholders like suppliers, contractors, and clients involved in the construction production. The demand for housing of all types, combined with inflation and constrained monetary supply, has posed a significant challenge to the construction industry’s cost of building materials. Therefore, the cost of construction materials is essential to improve and deliver sustainable projects within budgeted time, cost, and it is also essential to maintain quality and meet the expectation of the customers. Over the last few months, overall construction costs in Bangladesh have gone up by over 20% because of the surge in the price of raw materials. Prices of iron rod, cement, bitumen, and stone chips have increased in the last year due to the rising demand for raw materials globally after economies reopened following the ease of the coronavirus pandemic. From steel to bitumen to imported stone to cement to brick, all have become very costly.

IMPACT OF INCREASED RAW MATERIAL COST ON THE SUPPLIERS

The construction cost has gone up by 20% because the price of materials has increased. The cost of raw materials is experiencing increasing trend in the international market which is paving the way for the rise in construction material prices.

For the manufacturers of construction materials (especially steel and cement) nothing seems to be working in their favor due to unfavorable tax measures to escalating raw materials price, intensified competition, price war, weakening domestic currency and slow demand. Demand is expected to rise shortly and further appreciation of raw materials price would worsen the situation.

Steel- The continuous upward direction in price trend is alarming for the real estate industry. The reason behind it is the price of raw material has increased in the global market and as we have to import the raw material, the price is rising in the local market as well. The main raw material for steel is the imported scrap which is worth about USD 550-USD 590 per ton now and just a year ago it was USD 300-USD 350 per ton. The change is almost 57% which has also affected the local market. At the very beginning of 2020 the price of steel (per tonne) was BDT 53,000 and it just took a year for the price increased by almost 51%. And now it will cost BDT 80,000 to get 65 grade MS Steel (per tonne). The analysts of the industry can predict that the increase in steel price would raise the construction price by 10%-15%.

Cement-The rise in the price of Clinker, the main raw material for cement in the international market has impacted the price of cement in the local market. The production of cement fully depends on the import of raw materials and as a result, the price of raw materials rising in the global market is forcing local manufacturers to increase cement prices. On the verge of the pandemic cement price (per 50kg) was BDT 360 and now it has risen to BDT 430 which is almost 20% increase in the price.

Others- The price hike in every construction material is alarming which is directly affecting the economy. For example, Brick would cost twice more than the current market price in 2022 as the coal price has increased from BDT 9,000 to BDT 22,000. The price change in the raw material is affecting the construction material industry, and also the real estate industry. The stone price has changed by 56.41% within a year. At the start of 2020 Bitumen cost USD 420 (per tonne), the price has now increased to USD 670 (per tonne) showing a rise in the price by almost 60%. These skyrocketing prices of construction inputs along with the recent price hike of fuel by the government of Bangladesh might translate into a big blow for many mega projects, such as Padma Bridge Rail Link Project and converting Elenga-Hatikamrul-Rangpur Road to a four-Lane Highway project. The government’s ongoing projects amount to BDT 2.36 lakh cr. and around 80% of those are construction projects. A large portion of these construction projects will be impacted by these surging material and fuel prices. Contractors are demanding to adjust the contract price considering the increased costs and they are threatening to stop the works of ongoing projects. Such measures may slow down the economic activities of the country.

IMPACT OF INCREASED CONSTRUCTION MATERIAL ON REAL-ESTATE PRICE

The apartment prices has also been impacted by this massive price hike of building materials. Thus per square-feet (sqft) price has increased by as much as 6.4% depending on the location and amenities but according to construction material price hike it is estimated that the price of the apartment may go up by at least 15-20%. The scenario has completely changed from before the pandemic to after the pandemic. The change between 2021 and 2019 is significant which is approximately 15% depending on the location. The prices in the areas like Badda, Aftabnagar, Banasree, Mohammadpur, Adabar have risen in an alarming manner, it only took a year for the price to increase by 15% on an average. And in the areas like Gulshan, Dhanmondi, Bashundhara, Uttara, the change is around 6%. This change has resulted because of the skyrocketing cost of building material prices. The average price per sqft in Gulshan was BDT 15,900 during the pandemic which increased to BDT 16,500 during 2021, showing a 4% increase in the price. In the case of Dhanmondi, there is 3% increase in per sqft price in East Dhanmondi and a 7% increase in West Dhanmondi. Similarly, the prices in Banasree, Aftabnagar, Adabar, and Mirpur increased by 11%, 10%, 9%, and 8% respectively. As the price of construction material is through the roof, the impact on the price of finished, unfinished or even proposed development projects will be on rise.

CONSUMER RESPONSE TO THE INCREASED MATERIAL AND HOUSING COST

Due to the increased cost of raw materials and housing, individual house owners and real estate developers are hesitant to start new projects. As a result, less houses are built causing a decline in the housing supply. This leads to further increases in housing prices and rentals. From a consumer point of view, they might face a price difference because of time interval. If a customer buys a flat from a developer at the initial stage then the price will differ once the project has been completed. This is because as the material prices are increasing, the cost of flats will increase as well. The consumer, as a result, will have to purchase at an inflated price. The Government is encouraging the customers to invest in real estate by limiting investment opportunities, lowering bank deposit rates, cheaper loans and legalizing untaxed money.

CONCLUSION AND RECOMMENDATIONS

Thanks to certain policies such as allowing the investment of untaxed money, lower interest rates cap for banks, and reduction of registration fees, the real estate sector has seen rapid recovery since the opening of the economy after the shutdown. All these policy changes, paired with a quick recovery of the economy, have helped the real estate sector bounce back strongly from the effects of a global pandemic and its economic fallout. However to solve housing needs for a large group of people government of Bangladesh needs to step up and solve various obstacles that the housing and housing finance sectors are facing such as inefficiency of the regulatory regime, land administration frameworks, poor legal infrastructure, inadequate financial systems, lack of long-term funding and limited avenues for developer finance during construction. The current skyrocketing prices of construction materials will eventually affect the housing and construction markets of Bangladesh. To survive, companies need to react according to their requirements as there is not a single solution that will fit everyone. Even so, one possible solution is to work closely with technology. While some technological advancement does require an investment of time, training, and money, those costs could be offset in the long run with efficiency and safety.

The writer of the content is working as an Assistant Manager in consumer division in IDLC Finance Limited and he can be reached at Alawol@IDLC.com.