EDITORIAL: The Prime Minister's dream of building a vibrant housing market is not possible without developing an appetite for mortgage finance. The developed world did that long ago while neighboring India has also strived forward over the past 15 years. Unfortunately, in Pakistan out of 32 million households, mortgage financing is availed by less than 100,000 unique borrowers. In terms of GDP, mortgage financing is less than 0.5 percent. The metric was similar in India 15 years ago, but now it is over 10 percent of the country's economic output. In Pakistan, it seems that finally there is a push from policymakers to develop the housing finance market. One of the impediments for banks to go for long-term mortgage financing is absence of matching tenure liabilities. A bank's maturity profile of liabilities is short term as 80 percent of deposits are CASA. Interest rates are highly volatile in Pakistan which create a higher risk of default in the absence of fixed rate mortgages. The debt capital market is small with not many liquid instruments to hedge against long-term lending.
To address these issues, Pakistan Mortgage Refinancing Company (PMRC) was formed a few years ago with funding received from the World Bank at concessionary rates. The company also has equity investment from the Ministry of Finance and National Bank of Pakistan. Recently, IFC has also invested in the company. PMRC is using World Bank funding of $130-140 million along with its bilateral funding of Rs1 billion to lend to banks and non-banking financial institutions for mortgage financing to end consumers. It is similar to the role of mortgage refinancing performed by Fannie Mae and Freddie Mac in the US.
To date, PMRC has funded around Rs11.8 billion to financial institutions including over Rs3 billion each to HBFC and Askari Bank. Other PMRC borrowers include JS Bank, BankIslami, HBL, Bank Alfalah, and few micro- finance institutions. PMRC provides mortgage refinancing at a discount to prevailing market rates, which varies with the income levels of the ultimate borrowers. With the recent initiative of Naya Pakistan housing and State Bank of Pakistan's (SBP's) directive for banks to maintain at least 5 percent loan portfolio in housing finance which includes both mortgage borrowers and builders and developers, the appetite for PMRC refinancing is growing, especially for Islamic finance. The company is planning to raise Sukuk from the market to fill in the pipeline. Initially, PMRC was planning to raise Rs2 billion. Encouraged by the high appetite from corporate, Development Finance Institutions and High Net Worth Individuals, PMRC has been asked to increase the issue size to Rs3.5 billion. The issue rate is fixed at 7.7 percent for 3 years. Since it is tax exempt - for all but banks - the effective bond yield translates into 10.27 percent. This is much better than the current 3-year Pakistan Revaluation rate at 8.25 percent. The issue should be very attractive for investors.
Historically, supply of housing was largely confined to middle and upper middle-income segments. Since the buying is on cash or at 2-5-year installment plans by builders and developers, demand for affordable segment has remained dearer. Now with affordable rates being offered under Naya Pakistan Housing and growing penetration of PMRC, the supply of housing for affordable segments may increase as mortgage financing availability will help solve the demand puzzle. In the absence of bank financing, builders and developers were financing projects through installment plans from buyers. With no regulatory check on builders, there was no surety of deploying buyers' money in developing projects. There is no rating architecture for builders and there is no mechanism to safeguards buyers' payments. There are several incidents where builders and developers failed to deliver the project; whereas delay in projects is the norm.
It is, therefore, imperative to regulate builders and developers to boost a vibrant housing market as well as the builder finance market. Establishment of Real Estate Regulating Agency (RERA) is critical, as is creation of a mechanism of escrow accounts for projects. Back in the 1960s, the builder finance market was good, and at that time Hassan Square neighborhood in Karachi's Gulshan-e-Iqbal was developed. Later, however, malicious practices swayed the financial institutions out of the housing sector. For consumer housing finance market, which is the main area for PMRC, implementation of foreclosure laws and clarity of land titles are imperative.
Copyright Business Recorder, 2020
Comments
Comments are closed.