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Pakistan Construction sectors updates

Govt lowers markup for housing finance

Shahid Iqbal
February 13, 2022

KARACHI: The government has decided to revise downward the markup rates for housing subsidy scheme with the aim to give the sector another chance to emerge as a leader in economic growth.

A latest circular issued by the State Bank of Pakistan (SBP) on Saturday said that in view of the feedback received from various stakeholders, the government has decided to revise pricing (markup rates and subsidy payment period) under Tier-I housing scheme which is used to finance housing units in the Naya Pakistan Housing and Development Authority (NAPHDA) projects.

The government has provided a number of incentives and took a series of measures to give a boost to the housing sector but growth remained much below the expectations.

However, the housing and construction collectively showed better growth in the calendar year 2021. An SBP report issued this year said the credit to housing and construction has increased by 85 per cent during the year 2021. The credit for Prime Minister’s Housing Scheme also attracted Rs38 billion for financing, while the credit for housing construction increased by Rs163bn to Rs355bn in 2021.

The subsidised markup financing for one to five-year tenor will now be 2pc. Similarly, the subsidised markup financing for six to 10 years will be 4pc, while the same financing for 11 to 15 years will be charged at 5pc.

Earlier, the rate was 3pc for five years, 5pc for next five years and KIBOR plus 250 basis points for 15 to 20 years.

However, the bank pricing will be KIBOR (Karachi Inter Bank Offered Rate) plus 2.5pc. The SBP further said that for loan tenors exceeding 15 years, market rate – bank pricing – will be applicable.

Earlier, the SBP had advised the banks to increase their housing and construction finance portfolios to at least 5pc of their domestic private sector advances till December 2021, introducing a set of incentives and penalties to ensure compliance.

Financing under the Mera Pakistan Mera Ghar (MPMG) picked up momentum in 2021 as approvals for financing by banks grew from near zero to Rs117bn in 2021.

Till end of 2021, banks received requests of financing of Rs276bn from potential customers, indicating possibility of higher approvals and disbursements in coming months.

The SBP claims that it has taken a number of steps to create an enabling regulatory environment for banks to increase flow of financing to the housing sector. Key initiatives include allowing acceptance of third party guarantee during the construction period, waiver of Debt Burden Ratio (DBR) in case of informal income and the introduction of standard facility offer letter by the banks. The SBP has also advised banks to develop and deploy income estimation models for borrowers with informal sources of income.

The government has already declared the construction sector an industry. With this brings tax relief to firms in the industry through the amendments to the tax ordinance. Reforms to tax policies provide numerous incentives to builders and developers as well as contractors. These include lower tax rates and the removal of numerous taxes previously hampering the ease of doing business in the sector.

Before the beginning of FY22, the Pakistan Banks’ Association (PBA), through a consultative process, developed and circulated among banks a baseline income estimation model.
The SBP believes that this estimation model is expected to ease difficulties being faced by general public in availing housing finance under MPMG.

Published in Dawn, February 13th, 2022
interesting. IMF had recently flagged higher credit take-off from banks for housing finance as an area that could imperil the stability of the banking sector and advised course corrections in this regard to SBP that is aggressively pushing banks to increase the share of (house building financing) HBF, housing finance (includes buying built houses) in their portfolio.
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NBP approves Rs1.5bn financing for Waves Singer's housing project

  • Project is being launched under the name 'Waves Enclave'

BR Web Desk
18 Apr, 2022

The National Bank of Pakistan (NBP) has approved financing of Rs1,500 million for an "affordable housing project" being developed by Waves Singer Pakistan Limited.

“With a commitment of Rs1,500 million, NBP will be one of the largest financiers of the project,” read a notice sent to the Pakistan Stock Exchange (PSX) on Monday.

Waves, which has been a prominent player in the home appliance market of Pakistan for almost 50 years, announced venturing into the real estate sector in 2020.

The company said it held a signing ceremony with NBP on the project and that the NBP is also the mandated lead advisor and arranger for the upcoming syndicated finance facility to further develop the project.

“This financing represents the active role NBP is playing to support the development of the real estate sector in Pakistan,” read the notice, adding that the financing will kickstart the development of the housing project.

The project is being launched under the brand name 'Waves Enclave' and will target the affordable housing segment of the market with an inventory of more than 1,000 apartments.

This will be located at the entrance of Lahore between Thokar Niaz Baig and Allama Iqbal Town on the main Orange Metro line. Waves is in the process of getting required approvals. A formal launch is expected in the later half of this year.
May 30, 2022

The World Bank’s board of executive directors earlier approved three financing projects in Pakistan worth $435 million as the country is experiencing a severe housing shortage.

According to the World Bank, “Pakistan’s estimated housing shortage is up to 10 million units, about 40% in urban areas.”

A critical aspect is the scarcity of property financing, with mortgage financing-to-GDP ratio of just 0.25%. It is one of the lowest in South Asia compared to Bangladesh (3%) and India (11%).

A large amount of property cannot be leased, meaning the pertinent building control authority does not recognise it.

Many sub-urban and semi-rural areas have a disproportionate share in low-cost rental housing, which the land development authorities do not recognise, meaning they also cannot be leased. However, due to lower rates and rents, many residents live in these areas.

In the case of urban areas, many properties cannot be leased because they do not have a completion certificate. This narrows down the option of leasing a property.

“Pakistan is mostly a cash market; a mortgage market was never developed largely due to the lax foreclosure laws and high interest rates,” said Ammar Habib Khan, Chief Risk Officer of Karandaaz Pakistan. “These factors make it unaffordable for mortgages.”

The option other than leasing a property is mortgaging it. Recently, the SBP increased the interest rate from 9.75% to the double digit at 12.25% and then to 13.75%.

With the interest rates in double digits or near double digits, mortgages are simply unaffordable. The inflation target of the central bank of Pakistan is 8-9%.

It will be a moonshot if the long-term interest rate reverses and snail walks to 9.75%. But the mortgage at 9-10% is unaffordable.

Another aspect is the rental yield. As postulated by Profit, the average rental yield for the residential urban areas is 3%. It implies that prices are rising faster than the cost of living.

Renting is less expensive than getting a mortgage. A record amount of money is either floating around in real estate files, resulting in increasing prices of dumped plots.

Buying something expensive and then seeing the price drop does not mean the owner will sell it because the real estate market is a cash market. Of course, the market rebounds even it takes a decade.

Mortgages are also long-term investments, typically lasting 15 to 20 years. If a bank or NBFC provides this long-term loan, they will also require long-term liabilities, such as bonds or some other form of security.

It is always challenging to get this from banks or NBFCs, and if it eventually happens, it will be on strict and harsh terms and conditions. That is not a suitable option as well.

“NBFC has a funding problem. We do not have a deep enough secondary market for raising funds, so it is difficult for NBFCs to raise debt, which can be further lent as mortgages,” said Ammar Habib Khan.

“All NBFCs struggle with the asset-liability mismatch. The liabilities they can raise have a maturity of less than one year while mortgages have a maturity of greater than one year.”

In comparison to this, India has a massive NBFC market that offers millions of low-income mortgages funded by long-term liabilities. As a result, banks are less effective in this domain.

India’s NBFCs, which accounted for 23% of the market in FY19, have overtaken the country’s state-owned banks, which still account for a majority of the country’s credit system.

Due to the asset quality pressures and higher capital requirements, the banks’ ability to lend has been restricted. Due to better distribution channels for rural and semi-urban retail customers underserved by the banks, NBFCs have benefited from more robust growth opportunities.

Contrary to India, Pakistani banks act as low-cost deposit collectors, ie depositing the funds with the government. A bank does not even have to consider mortgages when such a system is in place.

Moreover, why would someone take the challenging route when the government provides free cash and IOUs? It is ill to think of getting a mortgage when banks do not even allow opening an account without a salary slip.

Moreover, on the contrary, Indian banks and NBFCs have developed successful credit scoring models that assist in giving low-income mortgages to the lower middle class, which belongs to the informal sector and is unbanked.

It is a structural issue, and it can only be made effective by discouraging the rent-seeking and cash-based economy. There is cautious optimism.

The writer is an expert on political economy, cities and governance, and is working as a research associate at the Centre for Social and Political Research

Published in The Express Tribune, May 30th, 2022.
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Inauguration Ceremony of Tunneling Institute of Pakistan (TIP)

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