Monday, July 27, 2020

Naya Pakistan: Low-Cost Home Loans and Construction Subsidies to Boost Economy

Pakistani Prime Minister Imran Khan has recently announced a new housing construction incentives package that includes down payment assistance and expansion of home loans portfolios by commercial banks at discounted rates for affordable housing for the poor. Shariah compliant financing is also included in it. Pakistan’s mortgage finance to GDP ratio is just 0.25%, among the lowest in the world, according to the World Bank. The average for South Asia 3.4%.  New housing drives a large number of sectors of the economy from banking and building materials to construction and manufacturing of furniture and home appliances. These incentives are designed to stimulate the economy, boost employment and deal with the growing shortage of affordable housing in the country.




Naya Pakistan Housing:

Pakistan government's Naya Pakistan housing program offers Rs. 33 billion in direct subsidies for down payments for the first 100,000 applicants, according to media reports. In addition, the commercial banks are required to allocate 5% of their portfolio amounting to Rs330 billion for construction activities under this program. Pakistan’s mortgage finance to GDP ratio is just 0.25%, among the lowest in the world, according to the World Bank. A person earning Rs30,000 to Rs100,000 can build a house on a 5-marla lot with the mortgage financing at 5% and that of 10-marla at 7%.

Importance of Housing:

New Housing Starts are considered a reliable economic indicator in any country that collects routine economic data. Housing sector drives a large number of other sectors of the economy from banking and building materials to construction and manufacturing of furniture and home appliances.

These sectors, in turn, create jobs, improve people's living standards and widen the tax base. In the United States, for example, homes are the biggest contributors to net worth of Americans. Home equity loans allow people to take out loans for other purposes, including education, business startups and home improvements.  Hence, the governments' interest in pursuing pro-housing policies that ensure secure property rights, set aside land for housing and require banks to offer low-cost home loans.

Secure Property Rights:

Secure property rights are a pre-requisite for a thriving housing sector. Hernando de Soto Polar, Peruvian economist known for his work on the informal economy and on the importance of business and property rights, told Reuters back in 2016 that “(T)here is no such thing as an investment without property rights that are negotiable and transferable”.

In the United States, the world’s largest economy, the most important source of funds for new businesses is a mortgage on the entrepreneur’s house, de Soto wrote in his book “The Mystery of Capital”. He says that secure property rights for world's poor could unlock trillions in 'dead capital'.

Unfortunately, Pakistan's land title system is among the most corrupt in the country. A patwari, the title for the official keeping land records, is among the most resourceful government officials in much of Pakistan.  Patwaris have a well-deserved reputation for corruption. Legally protected and enforced property rights are the key source of the developed world’s prosperity, and the lack thereof is the reason why many nations remain mired in poverty, de Soto has argued.

Housing Finance:

Construction loans and mortgages at reasonable rates are essential for people to afford to build and own houses. Policies promoting discount loans and mortgages are the cornerstone of housing policies in the developed world.

Typical Low Cost Home. Source: Dawn 
In the United States, government-backed mortgage giants like FNMA (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp) deploy vast resources to buy mortgages and ensure liquidity in the mortgage market. When lenders make loans for housing based on FNMA or Freddie Mac rules, they are confident they can sell in a highly liquid mortgage market.

Other developed countries also support mortgage financing in similar ways to make housing affordable.  Pakistan’s mortgage finance to Gross Domestic Product ratio is just 0.25%, among the lowest in the world.  The average for South Asia 3.4%. It's much higher in developed nations. It is over 65% in the United States, 40% in France and 20% in Italy.

Mortgage Debt to GDP Ratios in Developed Nation. Source: Urban Institute


Land at Discount Rates:

Land is a significant part of the cost of housing, particularly in or around big cities where land is highly appreciated. The government can help reduce this cost by offering land at discount for affordable housing.  There are news reports that Pakistan government has identified tracts of land to offer it to builders at discount rates for affordable housing.


Summary:

Naya Pakistan housing program offers Rs. 33 billion in direct subsidies for down payments for the first 100,000 applicants and requires the commercial banks to allocate 5% of their portfolio amounting to Rs330 billion for construction activities. Shariah compliant financing is also included in it.  It will boost Pakistan’s mortgage finance to GDP ratio which is only 0.25%, among the lowest in the world, and lower than 3.4% for South Asia. New housing drives a large number of sectors of the economy from banking and building materials to construction and manufacturing of furniture and home appliances. These incentives are designed to stimulate the economy, boost employment and deal with the growing shortage of affordable housing in the country.


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5 comments:

Seth M. said...

Government priorities are wrong.The foremost basic need of a person is food and clothing and not shelter ,which comes in after the first two needs have been fulfilled. The government should focus on reducing inflation and unemployment, first,so that the common man can begin to think of owning a house of his own.

Riaz Haq said...

Seth: "Government priorities are wrong.The foremost basic need of a person is food and clothing and not shelter ,which comes in after the first two needs have been fulfilled"

Food and clothing require income. Housing stimulates the overall economy and creates employment and income for people.

Anonymous said...

Dear Sir

Pls check the latest news mashallah now Pakistan is producing ventilators . A manufacturing plant of ventilators was setup under the supervision of Pakistan army in collaboration with PTI government .

It is a very good news .

Mashallah

Riaz Haq said...

Two new #REITs launched in #Pakistan after unveiling of #ImranKhan's #NayaPakistan #construction program. One REIT is focused on building villas and the other on building apartments in #Karachi. Dividend payment tax on REITs cut to 15% from 25%. #economy https://www.bloomberg.com/news/articles/2021-07-01/pakistan-to-see-first-reit-in-years-on-khan-s-construction-push

Pakistan is set for its first real estate investment trust in more than six years as Prime Minister Imran Khan seeks to stimulate the economy through a construction boom.

Arif Habib Dolmen REIT Management Pvt. plans to raise 8 billion rupees ($51 million) via private placements in two REITs for a housing project in Karachi, Muhammad Ejaz, the firm’s chief executive officer, said in an interview Tuesday. It plans to purchase the land in about two months, partly from Silkbank Ltd., he said.

Arif Habib Dolmen had created Pakistan’s only REITin 2015 and the industry, which had gone silent since then, is reviving now on Khan’s incentives and regulatory changes. Pakistan is willing to forgive tax evaders if they invest in construction projects, while banks have been asked to increase their outstanding mortgages by at least 5% by December.

One of the new REITs will focus on villas and the other on apartment buildings and commercial developments. This is a developmental REIT with an expected internal rate of return of more than 30%, according to Ejaz. The older REIT, which holds rental assets including Karachi’s most prominent mall and an office tower, offers a dividend yield of around 12% a year, he said.

Pakistan has been revising rules to make REITs more attractive for investors and developers. Finance Minister Shaukat Tarin in his budget this month lowered the dividend payment tax on REITs to 15% from 25%.

“The government has chosen the right sector for growth,” Ejaz said.

Silk Islamic Development REIT is scheduled to be launched next week for the commercial and apartment building section. Its five equal shareholders are Yunus Brothers Group that owns Lucky Cement Ltd., Fatima Group, Arif Habib Corp., Liberty Group and Arif Habib Dolmen. The second Silk World Development REIT includes real estate developer World Group, which will develop the villas.

Riaz Haq said...

#Pakistan's TPL Plans to Raise $500 Million REIT to Gain From #NayaPakistan #Construction Push. It is seeking to raise 60% of the targeted funds from foreign investors, 30% from domestic investors & the rest from its parent TPL #Properties Ltd. #Karachi https://www.bloomberg.com/news/articles/2021-08-31/tpl-plans-pakistan-s-biggest-reit-to-gain-from-construction-push


A unit of Pakistan’s TPL Corp. plans to raise as much as $500 million through a private real estate investment trust, marking one of the largest such fundraisings in the nation’s history.

TPL REIT Management Co. is seeking to raise 60% of the targeted funds from foreign investors, 30% from domestic investors and the rest from its parent TPL Properties Ltd., according to Ali Jameel, CEO of TPL Corp. The hybrid real estate investment trust plans to close the deal by June, and will offer an internal rate of return of more than 30% in local currency, he said.