The government is striving hard to find a workable model for low cost and affordable housing segment. There has been some progress. A doable model is shaping up. The key is for the government to provide regulatory, fiscal, and monetary incentives to the end consumer while the risk will have to be borne by builders and bankers – though some risk sharing mechanism (in the form of a credit guarantee scheme) could be in the making.
Risk participation by private sector will ensure that the houses constructed are occupied which will reduce the chances of housing projects turning into ghettos or ghost towns. This is common in the case of social housing provided by government where housing provided to occupants is never occupied.
It is hard to predict how many housing units will be constructed and financed in the next few years. But if the model is kickstarted, private sector – builder and banks, will find a way to provide sustainable housing units where housing mortgage is provided to end consumers. And in some cases, end to end would be financed – builder financing for developers and consumer financing to the end users in a clubbed model.
The challenge at this point is how to cater to the very low-income groups – those at the bottom of the pyramid. The price of even a 600 square feet housing unit is not falling in the range of Rs2-2.5 million (including the land and development cost). The government is working backwards to come up with a monthly installment of Rs12-13 thousand for those who are living at rent of Rs8,000-10,000 in urban centers. Even with Rs300,000 upfront down payment subsidy and interest subsidy for end user to make the consumer payable rate at 5 percent, the numbers are not adding up.
In that case, government must provide land at cheaper rates and let the builders build and develop low cost housing – with construction cost of Rs2,000-2,200 per sq. ft. A unit of 600-700 sq. ft can be built at a price of Rs2-2.2 million including land development cost and builders’ margins. The PM is keen on providing housing to this segment. That is why NPHDA and other stakeholders are searching for a viable solution.
The issue is the land which is to be provided by government. People would like to live in places near work. Usually these are residing in slums or at rent. They might not be interested in moving to far-flung areas. Now the challenge is to find land in city centers – for this, the solution has to be vertical. But for vertical, there are issues of operating lifts, standby generators, lack of firefighting infrastructure in addition to the culture in Pakistan which is not as open to high-rise home residences.
The Naya Pakistan Housing Development Authority (NPHDA) is aware of all issues. It received 16 parcels of lands from provincial governments; but shortlisted three for development as rest were far from city centers and not livable. The best option at this point is to go for Ground +3, as beyond that, elevators have to be installed by law. This will lead to an increase in the cost of construction as the building structure has to move from concrete to steel structure. In the case of slums’ conversion, government has to find a way to develop high rise as G+3 will not be sufficient.
Then the other model may come up in the form of Public Private Partnership (PPP). Land can be provided by government at lower rates or arranged by builders themselves. This would be a mix construction of low cost, commercial and market rate middle class housing. The latter two segments will cross subsidize the low-cost housing.
Nonetheless, there are some teething problems and hiccups in all low-cost housing models. But builders are confident that in low middle-income groups, housing can be provided without any government subsidy – apart from the interest subsidy. The model of providing 5 marla house (or up to 850 sqft apartments) in price range of Rs4-5 million and 10 marla houses (or up to 11sq ft apartments) in price range Rs6-8 million could be the hot cake. Given the financing rate is offered at 5 percent and 7 percent, respectively for 5 marla and 10 marla houses.
Once builders are confident that banks will lend to end users, they will start construction. Such a project can be delivered in 12-18 months. The builder is planning to provide ten thousand apartments in Lahore Ferozpur Road of around 1,000 sq each and is also ready to mix some very low-income group houses of 600 sq ft within the scheme at the price of around Rs2.5-3 million. Similarly, builders in Karachi are eager to do projects in low-middle income group as well.
Apart from the costing of low-income housing, banks have to cover a long mile to provide mortgage to the bottom of the pyramid. Commercial banks have never reached out to this segment – it’s a domain of microfinance banks. But for microfinance institutions, the upper limit of financing is Rs 1 million – even if it is increased – the interest rates they charge are much higher. At this point, micro finance’ cheapest loans are at 25-30 percent interest. These have a higher cost of fund and the processing cost per unit of loan as percentage of loan is much higher – as compared to commercial banks.
Talks with microfinance banks suggest that they are ready to explore the segment as well. The processing cost per unit of loan can be lowered as the housing loan size would be much higher than their existing average loan size. A seasoned microfinance banker said that they can provide these loans at K+6 while commercial banks may provide these at K+3 to 4 percent.
Government may have to provide higher interest subsidy to microfinance banks. The edge microfinance institutions have is in handling these customers. They are better geared up on the income estimation and credit risk profiling of very low income households.
Commercial banks need to design these proxy models from the scratch. That is why commercial banks are asking for first loss guarantees. The Pakistan Mortgage Refinance Company (PMRC) under World Bank funding is designing a product. But even with the first loss guarantee, commercial banks might be slow in this segment. The government should consult with microfinance segment for such loans.
The initial success might be in the low middle-income groups – households earning around Rs50,000-80,000 per month. They will find housing affordable at 5 and 7 percent interest rates. They may be able provide higher down payment to lower the burden of monthly installment – this will lower the credit risk of banks.
Commercial banks usually don’t provide loans to this segment either – but they will be more comfortable to indulge in this segment versus the low-income groups. It’s better to start here. Let the banks design products and optimize these by learning. The builders usually don’t target very low-income housing either. They are more comfortable in low-middle income group. Once a three-way partnership of banks, builders and consumers is developed in a clubbed model – by providing end to end financing for low middle income group, it would be easier to approach the low income groups.
Moreover, SBP should look into its own specialized housing loan institution, the Housing Building Finance Company (HBFC). The institution has a legacy of bad loans and ill-management – like any other PSE. The current top management looks eager. They have designed and are providing loans to low middle-income group at fixed rate of 12 percent (this rate was fixed when policy rate was 13.25 percent). Now they are lowering the rates. Not all the eggs should be in the commercial banks’ basket.
Lastly, the experiences from other countries suggest that to provide housing to the very bottom of pyramid, rental model is more suited. The objective should be housing for all; not ownership for all. Just like implementable foreclosure laws are prerequisite for spurring any kind of housing consumer finance, effective rental laws to ensure eviction in case of tenant not paying rent is imperative for developing commercial viability of builders for rental housing.