July 2 - 8, 20

Access to finance and high cost of money are two major hindrances in development of property sector in Pakistan, besides lacklustre mood of investors on the security risks. In a situation where housing finance is a low priority portfolio for the commercial banks—formal financial sector finances only one to two per cent of all housing transactions in the country, according to the state bank of Pakistan—high interest rate has left an important sector of the economy financially-strained.

Property development is important for the economy because of its catalytic power to run various industries. Housing construction creates direct and indirect employments in industries such as cement, steel, plumbing, electrical equipments, paints and so forth. Additionally, given the significant shortages of housing units in Pakistan due to rapid urbanization and growing population, robust real estate development is all the more important.


At present, property development industry has two sources of funds: formal financial sector and informal lenders. Formal financial sector consists of banks and house building finance company limited (HBFCL). Informal lenders are making up for unfelt presence of formal financial sector in the real estate sector as they account for 10 to 12 per cent of property transactions in the country, according to the latest housing finance quarterly review released by the SBP.

Real estate sector was booming during 2001 and 2004 when policy rate was hovering around seven to eight per cent. Real estate tuned up to change the fate of all its stakeholders in fiscal year 2004/05 when the economy recorded marvellous growth of 8.4 per cent.

Speculation effect was evident at that time due to easy access to money and profit seekers jumped in to inflate market value depriving needy of shelters. People pulled easy money from banks to build up their holdings creating artificial shortage.

Notably, mega housing projects were rolled out at that time. Emaar Pakistan, subsidiary of UAE's property developer Emaar Properties PJSC, launched master-planned community living projects that comprise of villas, retail marts, business centres, recreational and leisure facilities all at one place. Emaar is operating in 36 countries around the world. Canyon Views in Islamabad and Crescent Bay Karachi are two of its premier housing projects.

Housing finance sector continued to witness glorious days until 2008. Unfortunately, the economy got disturbed all along since then. Housing finance is on downward trend.

According to the housing finance quarterly review, total house finance outstanding of 31 banks, development finance institution (DFI), and microfinance banks dropped Rs7.62 billion, or 11.37 per cent, to Rs59.38 billion as on December 31, 2011 from Rs67 billion as on December 31, 2010.

Only 786 borrowers were issued house loans during Oct-Dec 2011, said the review. Conventional banks, Islamic banks, and HBFCL accounted for 61 per cent, 17 per cent, and 22 per cent of the total outstanding as on December 31, 2011.

High cost of borrowing, though, kept private sector to the side, yet it has not affected the voracious money appetite of the government, which has proved a profitable client for the banking system. SBP has also disclosed the fund guzzling capacity of the government in its recent report that left banks indifferent to private sector. Reports have it that banks loaned Rs873 billion to the government through investment in its securities from May 2011 to May 2012 while private sector was able to receive only Rs11 billion from banks in this period.


Banks are eager to loan public sector because of increasing incidences of defaults from private sector due to high interest rate. Until March 2012, total nonperforming loans (NPLs) of banks and DFIs crossed Rs625 billion mark, said SBP. Housing sector's NPLs rose about three per cent to Rs19.07 billion at the end of 2011 from Rs18.54 billion a year ago. NPLs of banks and DFIs increased three per cent to Rs11.73 billion from Rs11.41 billion while those of HBFCL also shot three per cent to Rs7.33 billion from Rs7.12 billion.

Unquestionably, there is also a trust deficit, which restrains lenders to give financial assistance to real estate and property development. This stems from the irregularities in real estate sector. Informal companies mainly drive Pakistan's real estate sector, making use of loopholes in laws or ride roughshod over them in connivance with the government officials. Land records are still maintained manually despite several attempts of digitizing them. This also results in conflict about ownerships. Genuine investors keep themselves at distance from making collaboration in construction projects on controversial lands misappropriated by land mafias under the patronage of political and religious parties, which often use human shields to excuse their misappropriations of lands of high commercial value by encouraging building of shantytowns/katchi abadis on them.

"The unstructured and unsupervised nature of business of real estate brokers/agencies, which could serve as natural arrangers for the provision of financial services, is also a significant constraint to the provision of housing finance...it is difficult for financial institutions to verify the character, capital, and capacity of potential clients," noted the SBP's review.

"National and local master plans for town planning and housing facilities are either inadequate or poorly enforced, which lead to inefficient allocation of land and uncontrolled urban development. Lack of transparency and accountability in the planning process also give opportunities to land grabbers/mafias to have valuable inside information as to future infrastructure developments or to be able to influence such plans so that value of its land increases," it said.

Government should encourage financial institutions to lend support to real estate development by addressing their misgivings and apprehensions. Low interest rate is essential to increase share of housing sector in public deposits in banks.