Pakistan eases restrictions for banks to invest in real estate
Mukesh worked in a private company as a plumbing worker and was thrilled to see the Naya Pakistan Housing Scheme, which provides cheap loans to people with modest backgrounds who do not own a home. He tried and found a house worth Rs 3.7 million, but the bank’s paperwork delayed things. When he asked again about the house, the price had risen to 4.2 million rupees – an increase of over 13% in a few months.
Renowned economist Atif Mian recently pointed out that cheap loans will drive up property prices as a result.
“When you artificially give people more purchasing power – which is what credit does – you also increase the price of the asset,” Mian said. “Lower interest rates make prices higher. So as you give them more credit, the price of the same house they were trying to buy has gone up. ”
But the government has tried through the Federal Board of Revenue and the State Bank to make it easier for home builders and developers to build more housing units. It urges banks and development finance institutions (DFIs) to give buyers more credit and finance projects. The FBR also issued an amnesty scheme that allowed builders and developers to invest in these projects.
According to Zaigham Mahmood Rizvi, chairman of the Naya Pakistan Housing Program, there is a tremendous need for houses in Pakistan – around 11 million, growing by 700,000 houses annually. Incremental here means that if the demand for homes increased by 700,000 one year, it would be even higher the next year.
Rizvi says one of the main reasons behind the backlog was banks’ reluctance to finance the housing industry.
He found that India’s mortgages account for 11% of its GDP. “Bangladesh has 5% in mortgages, but we don’t even have 0.5% of our GDP in mortgages.”
The central bank has set mandatory targets for banks to provide mortgage loans and finance to developers and builders. Banks are now required to hold 5% of their domestic personal loans through December 31, 2021 to finance residential and construction activities.
The central bank has also put in place a carrot-and-stick scheme for the reluctant banking sector to eventually achieve these goals.
Banks that achieve the home and construction loan target will have the luxury of reducing the Cash Reserve Requirement (CRR) by the same amount that they achieved the target.
The CRR is the mandatory amount that all banks maintain at the State Bank of Pakistan. Banks earn nothing from the amount. By releasing part of the CRR, banks can make more profit as they have more funds at their disposal.
However, if banks fail to achieve the goal, they will be punished. They must adhere to a CRR level that includes a minimum CRR requirement plus the amount by which they did not meet the target.
The SBP has now changed its capital requirements to make it easier for banks and DFIs to invest in Real Estate Investment Trusts (REITs). It has reduced the applicable risk weight for investments by banks and DFIs in REIT shares from 200% to 100%.
REITs are companies that raise funds from the general public and institutions such as banks and use these funds by investing in real estate.
“Atif Mian is right when he says that house prices go up when cheap home loans are offered,” said a source who asked for anonymity. “But it would happen if the demand increased due to cheap loans and supply and the residential units remained limited.
“But the state bank and government policies will also increase the supply of housing units,” the source said. “That will keep the price of the houses in check.”
The increase in construction activity will increase people’s incomes in this sector and related industries. If they were to spend money after earning in this sector and industries, people connected to other industries would also benefit.
In line with the state bank’s policy of changing capital requirements, banks and DFIs will now be able to increase their investments in REITs without having to provide a relatively large amount of capital.
The central bank expects the banks to encourage the development of the real estate sector in the country.
“The increased involvement of financial institutions, supported by regulatory initiatives, would also encourage REIT management companies to create new REITs, which would further boost the government’s agenda for the development of the housing and construction sectors,” the SBP said in a statement.
The central bank has also changed its rules for banks to invest more in REITs by increasing the cap from 10% to 15% of their equity.
“The changes to the capital requirements will give the banks further incentives to contribute to a well-functioning capital market for the real estate sector,” said the state bank.
It has also enabled banks to count their investments in stocks, shares, bonds, TFCs, or sukuks issued by REIT management companies toward their mandatory home and mortgage finance goals, which is 5% of the total loans they grant matters.
Only one REIT – Arif Habib Dolmen REIT is listed and currently operating on the Pakistan Stock Exchange (PSX).
According to the Pakistani Securities and Exchange Commission, five new REITs have registered with them in the past two years. A total of 10 REITs are currently registered with the SECP, and two more are in preparation.
Mukesh is still looking to buy a property by availing the SBP program. But he’s frustrated as the banking process is tedious and real estate is getting more expensive.