Syed Samar Hasnain Director – (Infrastructure, Housing & SME Finance Department) State Bank of Pakistan Email: [email protected]@sbp.org.pk.

Syed Samar HasnainDirector – (Infrastructure, Housing & SME Finance Department) State Bank of PakistanEmail: [email protected]

HOUSING FINANCE IN PAKISTANCentral Bank’s Perspective

SOME BASIC FACTS

Pakistan is a medium sized, lower middle income country

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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

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Source: Access to Finance Survey

The Formally Served

The Financially Excluded

The Financial Market Development Frontiers

The Informally Served

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

11% 1% 32% 56%

%

State of Financial Exclusion

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

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Current State of Housing sector in Pakistan

Housing Sector of Pakistan

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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.

Housing Market Segmentation

Demand for Housing in Pakistan

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2005 2006 2007 2008 2009 2010 2011 20120

10

20

30

40

50

60

70

80

90

55

62

76

84

77

67

5955

36

51

6467

61

53

4642

19

1112

17 16 14 13 13

Total Gross Outstanding (Rs Billion)

Gross Out-standing (Rs Billion) - Share of All Banks & Other DFIs

Gross Out-standing (Rs Billion) - Share of HBFC

2008 2009 2010 2011 20120

5

10

15

20

25

12

16

19 19 19

6

9

11 1211

6 7 7 7 8

Non-Perform-ing Loans (Rs Billion)

Share of All Banks & Other DFIs (Rs Billion)

Share of HBFC (Rs Billion)

Gross Outstanding Non-performing loans

Due to structural Impediments the sector is showing negative growth and high NPLs

Mortgage Market of Pakistan

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• 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

SBP is facilitating at multiple levels to address market failures

SBP is actively Promoting Housing Finance

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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

Housing Advisory Group was instrumental in taking all stakeholders on board

Housing Advisory Group

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• Develop the Primary Mortgage Marketo Provide financial resources to enable primary mortgage lenders

(PMLs) to grant more loans at fixed/hybrid rates and for longer tenure

o Prepare PMLs for BASEL compliance by narrowing the gap between the maturity structure of the housing loans and the source of funds

o Ensure loan standardization across primary lending institutions which is necessary for any future securitization

• Develop the Capital Markets o Provide more private debt securities (Bonds) with different

maturities and rates for investment of surplus funds o Promote ABS as a tool for raising funds from the capital marketso Create a Yield Curve to serve as a benchmark for other institutions

SBP is facilitating the industry to put in place the missing market infrastructure

Mortgage Refinance Company

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• 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:o Corporatization of large-scale developerso Bankable financial statementso Credit rating (Entity and Instrument Ratings)o Fiscal issues relating to Book Value and Market Value, declared income

and wealth etc.

Given the huge housing gap, the industry needs to provide solutions on large scale particularly for the low income housing

Large Scale Builder Finance Model

• 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

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Challenges & Opportunities

• 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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Way Forward

Thank You