S.KAMAL HAYDER KAZMI,
Research Analyst, PAGE
Oct 8 - 14, 2012
Globally, real estate continues to offer attractive value relative to the bond market with lower volatility in contrast with the equity market. Despite concerns that real estate values increased too quickly or capitalization (cap) rates fell too much, initial yield spreads are wide compared to government bonds and real estate capital values remain well below their peak levels. At the same time, public debt-to-GDP ratios are elevated and countries struggle to build economic momentum. In this environment, it is recommended that the investors target urban areas and property sectors which not only provide greater certainty of income to protect against downside risks, but also provide an opportunity to capture higher net operating income as economic growth improves over the next several years.
This sector is responsible for 40 per cent of global greenhouse gas emissions, for 55 per cent of the global usage of wood, and for about 75 per cent of electricity consumption in the US alone.
In Pakistan, rapid urbanization has become a challenge for increasing number of people. Studies indicate that lack of finance from a formal source is primarily a supply-side problem. Most of the housing finance is arranged through personal resources. The formal financial sector caters to only 1 to 2 per cent of all housing transactions in the country, whereas the informal lending caters up to 10 to 12 per cent of such transactions. Presently, the formal financial sector provides housing support through two major sources namely the Government owned HBFCL and private commercial banks.
The property development industry suffers from low public confidence. Financial weaknesses and the absence of clear, uniform and fair business practices have affected its credibility contributing to the reluctance of financial institutions in providing development and construction finance. There is a strong need to strengthen the property titling and land administrative procedures including improvements of the legal provisions, standardization of processes, and computerization of all relevant revenue records. These steps will enhance the financing by the formal sector.
Weakness in the existing legal framework also impedes the financing opportunities of the formal financial sector. Though the Financial Institution Recovery Ordinance, 2001 empowers the financial institutions in case of default to foreclose a mortgage property without recourse to the court of law, lack of full implementation of the recovery law in its letter and spirit dilutes its effectiveness in protection of rights of the respective parties, i.e., the financial institutions, mortgagors, landlords and tenants, thus needing a major improvement.
Although the regulatory framework for land registration and transfer regime exists in Pakistan, the process by which land is acquired and registered is cumbersome at times, because of number of institutions and registration procedures required to execute property transactions. Land records are manually maintained leading to errors and omissions and resultantly they have modest commercial value for the mortgagee financial institutions especially in rural and some urban areas. The lack of efficient and reliable system of ascertaining the bona-fide of property titles has forced banks to limit the access of housing finance to a certain number of urban localities within the urban centers.
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.
Over-restrictive building codes and laws on subdivision limit the efficient use of urban land and increase the price to consumers, especially in zones having relatively higher prices of lands in high land price zones. Moreover, absence of sound governance structure within the housing developer industry creates lack of good practices, illegal construction, unreliable building permits, and legally unprotected advance purchase of units that are required to be built in future.
Recently in Pakistan, 27 commercial banks, HBFCL, one DFI and two microfinance banks are catering to housing finance needs. More recently microfinance banks have also started serving the lower-middle income groups.
After demonstrating a promising growth trend till 2008, the housing finance sector has recently been showing a declining trend. The gross outstanding reported by banks and DFIs (including HBFCL) as on March 31, 2012 was Rs. 58.55 billion declined by Rs. 6.88 billion as compared to Rs. 65.43 billion as on March 31, 2011 and Rs. 59.38 billion at the end of December 31, 2011. The Total number of outstanding borrowers has also decreased from 94,497 to 89,261 since March 31, 2011; showing a fall of 5.54 per cent which was 2.34 per cent decline when compared to December 31, 2011. Approximately 766 new borrowers were extended house finance during the quarter (Jan-Mar, 2012), accounting for Rs. 1.61 billion of new disbursements.
HBFCL accounted for 47.78 per cent of these new borrowers and contributed 18.36 per cent of the new disbursements equivalent to Rs. 296 million. Outstanding portfolio for construction and renovation was 32 per cent and 11 per cent respectively.
NPLs have increased from Rs. 18.93 billion (March 31, 2011) to Rs. 20.12 billion (March 31, 2012); a 6.3 per cent increase over the year. The stock of NPLs as on December 31, 2011 was Rs. 19.07 billion. However; this rise in NPLs is not unique to housing finance and is only depicting the overall increase in NPLs of all sectors witnessed in the banking industry during the past year.