CONSTRUCTION AND HOUSING FINANCE

Post Budget Scenario

Syed Shamimuz Zaman
Aug 04 - 10 , 2003 

Indeed construction industry has the capability to kick start the economy of the country. Unfortunately Budget 2003-2004 has nothing to offer to this sector except 25% reduction in CED on cement and withdrawal of CED on electrical wires and cables. Cement comprises 18% of total cost and electrical cables 4.5% of cost of construction. There is a host of other construction cost input items such as steel, paints, tiles, marble, timber and hardware etc which have not been considered in the budget.

A major impediment in the growth of construction industry is the availability of building development sites with infrastructure and availability of electricity, water and gas. City development authorities and urban town planning institutions have miserably failed in their task to plan for the future demand. All this has resulted in unplanned development of residential and commercial buildings and townships around every urban area of the country. One also witness incomplete buildings and inhabited townships due to disputes and non-availability of utilities.

Associations of Builders and Developers have been sending out appeals through leading newspapers about cancellation of allotments of large number of plots which were allotted during 1985 and 1987 on political basis. These plots changed hands many times which the builder bought at market price, obtained building approvals from competent authorities and completed the buildings. According to Conversion and Exchange Ordinance all the buildings are practically sealed thereby freezing worth billions of rupees of investment in these projects. Due to large stuck up funds in these projects the builders of Karachi are not in a position to launch new projects. Financial institutions are not extending housing finance in these apartment buildings and on the other hand unemployment of construction workers is becoming a matter of serious concern.

Size of Housing finance market in Pakistan is worth Rs. 25 billion annually. This demand has never been met in the past nor will be met in the future. Almost all the banks and housing finance companies extend housing finance only in a few major urban areas such as Karachi, Lahore, Islamabad and Rawalpindi. HBFC is the only institution which has wider coverage all over Pakistan but at the same time it has large NPL portfolio emanating from smaller towns. Realizing the importance of construction activities the budget 2003-04 encompasses a large number of incentives listed as follows to boost construction and housing finance.

 

S #

Description

Budget 2003-04

1

Debt/Equity Ratio

80:20

2

Financing Limit to an

- Rs. 5.0 million

 

Individual/Group

- Rs. 7.5 million

3

Bank's exposure limit

10% of net advances

4

Loan Tenor

20 Years

5

Tax Credit

Rs. 500,000 (mark up only) or 40% of income whichever is less (NBFCs included). (Proposal to club principle amount not accepted.)

6

Stamp duty and Registration fee

Provincial governments to rationalize and minimize the cost.

7

Foreclosure Law

The law has been amended to allow the Financial Institutions to repossess the property without recourse to courts.

8

Housing Loan to Government Employee

HBFC will provide housing loan to government employees against the obligation of Federal Government to make deductions from the salaries of employees.

9

Cost of Housing Input(Central excise duty)

Cement reduced by 25% Cable & Wire withdrawn

10

Land for Housing Schemes

Federal & Provincial govt. will generously provide new lands in all parts of the country for housing schemes.

11

Regulations relating to registration, transfer dispute resolutions and taxes applicable to property and real estate.

A committee comprising of federal and provincial officials is being constituted to examine all matters.

12

Increase in the limit of propertyincome for withholding tax.

Tax @ 5%-
Annual rental Rs. 200,000

 

These incentives are steps in the right direction and meant to activate construction and housing finance sector. But due to the reasons mentioned earlier impetus in the construction and housing finance sector has not been visible. Under the present circumstances if the government wants that construction and housing finances do pick up momentum then it should seriously take the following steps immediately.

1. The issue of cancellation of allotment in Sindh should be resolved so that the builders may complete the apartments and financial institutions can start extending housing finance to the buyers of the apartments.

2. Rent Control Act should be revised without further delay giving due right to the investors and the landlords. Unfortunately due to unfriendly rental laws the investors in Pakistan do not build income generating properties such as large shopping malls, office towers and condominiums. With high liquidity in the country it is time to invest in the development of such projects only if the government enacts a new rent control act. Since Pakistanis are shying away from investment in industrial venture development of income generating properties it will give a boost to construction and employment.

3. Provincial government should seriously start developing new townships and satellite towns with infrastructure and utilities. Demand for new and affordable housing units is always there and according to government sources there is a shortage of about 7.0 million housing units. Housing is a major issue and therefore developing and providing land for housing is the responsibility of the government.