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Outlook for real estate financing amid declining interest rates

The housing finance market is among the most important in the economy. It accounts for a sizeable portion of the production activity of a country, through its backward linkages to land markets, building materials, tools, durable goods and labor markets. During the last few years, favorable developments in the economy have facilitated the offering of housing finance by financial institutions. The increasing scope of finance for housing in Pakistan has led many local and foreign banks to be engaged in house financing activities. Low interest rates stimulate the real estate sector by encouraging home-buying activity and by making it less expensive for individuals and businesses to borrow money to invest in all types of real estate.

There is a need for an efficiently organized finance system in the real estate market to ensure that the capital value held in the real estate market is not grossly underutilized. Real estate finance is a vital element in the development of a dynamic housing and construction sector. Theoretically, bank lending is one of main sources of real estate funding, and there exist close connections between real estate prices and bank credit. To avoid over-exposing the banking system to the real estate market the relationship between the real estate and the financial sector needs to be understood and regulated.

Low interest rate spread is an important indicator of the efficiency and competition in the financial systems and helps in economic growth through increased investments. Restoration of peace and order in Karachi is encouraging real estate developers to offer new housing schemes for different categories of middle income groups, although shortage of utilities remain a big problem. A surge in housing loans seen during last fiscal year is strong enough to keep up growth trend in overall consumer financing. Approximately 200 mega housing projects are coming up and urbanization and public craze for better lifestyle is creating demand for consumer finance.

The demand for real estate is driven by population growth, personal income, employment rates, interest rates, and access to capital. The single biggest factor when it comes to the growth of Pakistan real estate is foreign remittance. Only in the year 2015-16 approximately US$ 6 billion was injected in the economy of Pakistan for real estate sector through foreign direct investments. Migration away from major cities, infrastructure improvements and increased international interest from investors are just some of the expected developments for Pakistan’s real estate market. Industry professionals have already noted the increased attraction of second- and third-tier cities in emerging urban cities such as Gujranwala, Faisalabad, Multan and Hyderabad. As the bigger cities such as Lahore, Islamabad and Karachi are becoming slowly saturated, real estate developers and investors alike are turning their attention to smaller cities.


In June 2015, Pakistan’s first ever REIT was launched, paving the way for unprecedented growth in the country’s commercial property sector. More REITs are expected to follow this lead over the next 12 months. Real Estate Investment Trust (REITs) is a mutual fund that invests in a pool of properties/mortgages bundled together and offered as a security in the form of unit investment trusts. These units can then be traded on stock markets. Each unit in a REIT represents a proportionate fraction of ownership in each of the underlying properties/mortgages providing its holders a simple way to invest in real estate without the cost or illiquidity associated with owning a property directly. There are two main types of REITs: equity REITs and mortgage REITs (mREITs). Equity REITs invest in real estate by acquiring properties and developing or renting them. Mortgage REITs invest in the debt required to finance real estate, including mortgage loans and Mortgage Backed Securities (MBS).

A new entity named Mortgage Refinance Company (MRC) will be formed which will serve as a window of housing refinance to facilitate large scale lending to construction industry. The creation of MRC follows the introduction of a separate set of prudential regulations for housing finance. Presently, home financing offered by 24 commercial banks is largely limited to high-net income earners, and the House Building Finance Corporation hardly gives out loans anymore. Mortgage rates are currently between 15 to 18 percent, the lowest that they have been in the last decade and the State Bank of Pakistan (SBP) has established a dedicated Infrastructure and Housing Finance Department to strengthen the market-based housing finance mechanism. However, mortgage rates are still significantly higher compared to other countries in the region: Hong Kong (2.15%), Japan (2.7%), China (7-8%) and India (8-12%).The share of non-performing loans in mortgage finance declined considerably in 2016, causing an overall dip of 7.07 percent in the NPL ratio. However, the NPL ratio for mortgage finance still remains to be the highest.

The government has done well in initiating the process of documentation and transparency, but there is a long, long way to go before Pakistan’s real estate sector can work for the benefit of all and not just a few Pakistanis. Even with all the right policies, House Building Finance Corporation (HBFC) is a policy alternative that the government needs to develop further. This should be the starting point as it will allow home loans for most of the people in lower and middle-income groups. The government should provide for a subsidized rate on these loans as a way of ensuring more people are able to pay the instalments. With the economy expanding and newer opportunities for ventures exciting the public, the implementation of housing laws would account for greater proximity to a fully functioning lending sector.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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