HOUSING FINANCE IN PAKISTAN Central Bank’s Perspective Syed Samar Hasnain Director – (Infrastructure, Housing & SME Finance Department) State Bank of Pakistan Email: samar.husnain@sbp.org.pk

Pakistan is a medium sized, lower middle income country SOME BASIC FACTS Pakistan is a medium sized, lower middle income country General Facts Size: 796,095 Sq. km. Nearly 200 million inhabitants 100 million inhabitants are below the age of 25 years Economic Facts Currency: Pak. Rupee. GDP: US$ 202.8 Billion in 2011 GDP Per Capita: US$ 1,145

Source: Access to Finance Survey State of Financial Exclusion The Financial Market Development Frontiers The Formally Served The Informally Served The Financially Excluded Source: Access to Finance Survey

Current State of Housing sector in Pakistan Housing Sector of Pakistan Current State of Housing sector in Pakistan There is a large and widening gap in Housing market in Pakistan World Bank estimated a shortfall of 8 million housing units in Pakistan in 2009 According to estimates the annual incremental demand is 600,000 units, of which 50% is met by the private/public investment The ever widening housing demand and supply gap requires huge investment With 600,000 incremental demand and 500,000 units from the backlog, total annual housing needs comes to 1.1 million At an average price of Rs. 3 million per unit, total funding requirement is estimated at Rs 3.3 trillion per year (around US$ 35 billion) Assuming only 10% housing needs as effective demand, total funding needs are Rs.330 billion (around US$3.5 billion) At 70% LTV (Loan–to-Value Ratio), this translates into Rs. 231 billion per annum housing credit requirement

Housing Market Segmentation Demand for Housing in Pakistan Housing Market Segmentation Low Income Group Most of the gap in the housing market is for the low income/affordable segment The existing dwellings are non-standardized and of the low quality The development needs are currently not served by the formal sector. High Income Group and Middle Income Group This segment have some access to formal financing and the quality of units is of some standard. Significant potential for the formal sector to participate in commercially viable high and middle income housing segments through development of housing schemes and standardization which will lower the cost of production Developers – Banks/ DFIs This segment is mostly unorganized but currently supplying some of the housing demand for middle and high income and commercial property in most of the major cities This segment is gaining momentum.

Mortgage Market of Pakistan Due to structural Impediments the sector is showing negative growth and high NPLs Gross Outstanding Non-performing loans

SBP is actively Promoting Housing Finance SBP is facilitating at multiple levels to address market failures Formation of Housing Advisory Group Implementation of HAG recommendations Development of secondary mortgage market in Pakistan by creating a Mortgage Refinance Company (MRC) Review of Prudential Regulations for Housing Finance Preparation of Housing Finance Guidelines Development of a Model for Builders/Developers Finance Capacity Development of Financial Institutions in housing finance through seminars, workshops and training programs Effective coordination with key Stakeholders – ABAD, AMB etc

Housing Advisory Group Housing Advisory Group was instrumental in taking all stakeholders on board HAG recommendations are actively pursued by all stakeholders including SBP: Reforming Legal Framework affecting Foreclosure, Transfer, Tenancy, Rent Control and Credit bureaus etc. Rationalization of Transaction Costs Establishing an integrated land registration information system Increasing supply of land for affordable housing Structuring and streamlining Large Scale Developer’s Finance Facilitate low-cost/low-income housing models and products Facilitate Real Estate Investment Trusts (REITs) Provision of long term funding for housing loans Housing Observatory (housing market information system) Capacity building of the mortgage banking industry in Pakistan

Mortgage Refinance Company SBP is facilitating the industry to put in place the missing market infrastructure Develop the Primary Mortgage Market Provide financial resources to enable primary mortgage lenders (PMLs) to grant more loans at fixed/hybrid rates and for longer tenure Prepare PMLs for BASEL compliance by narrowing the gap between the maturity structure of the housing loans and the source of funds Ensure loan standardization across primary lending institutions which is necessary for any future securitization Develop the Capital Markets Provide more private debt securities (Bonds) with different maturities and rates for investment of surplus funds Promote ABS as a tool for raising funds from the capital markets Create a Yield Curve to serve as a benchmark for other institutions

Large Scale Builder Finance Model Given the huge housing gap, the industry needs to provide solutions on large scale particularly for the low income housing SBP is working to develop financing models to facilitate large-scale builders/developers’ access to formal financial sector. Guidelines would be issued to banks/DFIs for providing financing to builders/developers Key stakeholders including the Association of the Builders and Developers (ABAD), Investment Bankers, Association of Mortgage bankers (AMB) and Rating Agency have been consulted Key challenges include: Corporatization of large-scale developers Bankable financial statements Credit rating (Entity and Instrument Ratings) Fiscal issues relating to Book Value and Market Value, declared income and wealth etc.

Challenges & Opportunities High cost of land in metropolitan cities hinders affordable housing Need for development and uplift of Urban infrastructure Single window clearance for approvals for building Investment in experimentation in low-cost building technologies, Investment linked tax incentives for developers to increase the supply of affordable housing More effective public private partnerships to tackle the shortage of housing especially in the low income group Deepening of the debt market to ensure availability of long-term funding Development of new funding instruments

Way Forward Adopting Innovative Approaches to Affordable Housing Promoting Value Chain in Housing Development Exploration of Credit lines for Institutions offering Housing Finance Putting in place a Housing Credit Fund or Refinance Window at SBP (Central Bank) Arranging a Credit Guarantee Scheme for low-Income Housing Finance Promotion of Microfinance Banks to support borrowers with undocumented income Establishment of a Housing Observatory

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