If there is oversupply, why are we building?

Editorial

IT seems ironic that while real estate experts are saying rental rates are dropping mainly due to low occupancy, new multi-million kina multi-storey residential units continue to sprout in Port Moresby.
The capital city looks like it is anticipating another boom phase, fueled by the explosive growth of the second LNG and, of course, the Asia-Pacific Economic Cooperation leaders’ summit in November.
Ten years ago, there was a similar hive of activities in Port Moresby – and other municipalities such as Lae – as demand for high-quality accommodation, in anticipation of the first liquefied natural gas project, soared.
The high-rise buildings completely changed skylines, and with it a hike in business activities with locals very much benefitting from the spin-offs.
The big residential units targeted a high-end clientele – company executives mostly expatriates with rates as high as K4000 per week.
The real estate market in PNG outperformed others in the region in terms of growth, bolstered by a decade of sustained foreign direct investment into the hydrocarbons industry.
A World Bank report in 2011 noted that the LNG project had a large knock-on effect on the economy spurring growth in construction, real estate and other sectors.
The influx of wealth caused rents for upmarket units to double between 2008 and 2012, reaching between K5500 and K8000 per week. As a result, developers in the high-end segment were garnering returns of between 10 and 15 per cent on building projects.
But the high-end expatriate residence market, flagged as an area of concern by the IMF back in 2011, had been oversaturated, leading to significant losses for development firms during the latter part of 2011 and 2012 as skyrocketing construction costs eroded both investor and buyer interest.
The targeted clientele – the company expatriate executives – left the country after the completion of the LNG construction.
It definitely was an oversupply and today 40 per cent of residential units have been vacant for months with realtors struggling to lease them out. For one, ordinary Papua New Guineans will not be able to afford such accommodation – let alone purchase a home.
Given the high cost, most individuals do not have enough savings on hand to pay the entire amount outright.
The real estate industry now realises that the boost expected from the Apec meeting in Port Moresby is unlikely to benefit everyone.
Brian Hull, from Century 21, explains that most of the world leaders are likely to stay in the main hotels or serviced apartments.
For that reason, new hotels such as the Hilton at Waigani and apartments nearer to downtown are continuing to change the look of the city.
The ordinary people can only wonder what the new hotel and apartment owners are foreseeing that is prompting them to invest big time in what is already an “oversupplied” market.
Some middle-level and bottom-end landlords who took out loans to support them are struggling to pay the banks, with interest rates accumulating, and no one likely to win in the end.
It will be interesting to see what the scene in Port Moresby will be after Apec and other major events in the next two years at least are past us. Right now, one end is dipping while the other is rising.