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Structural issues behind property leasing, mortgage

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The World Bank’s Managing Board has previously approved three funding projects in Pakistan worth $ 435 million as Pakistan faces a serious housing shortage.

According to the World Bank, “Pakistan’s estimated housing shortage is up to 10 million, about 40% in urban areas.”

An important aspect is the lack of real estate lending, where mortgages as a percentage of GDP are only 0.25%. It is one of the lowest countries in South Asia compared to Bangladesh (3%) and India (11%).

It is not possible to rent a large number of properties. That is, the relevant building management authorities are unaware of it.

Many suburbs and semi-rural areas have an disproportionate share of low-priced rental housing, which land development authorities are unaware of and cannot rent. However, due to the low prices and rents, many residents live in these areas.

In urban areas, many properties cannot be rented because there is no certificate of completion. This will narrow down the options for renting the property.

“Pakistan is primarily a cash market,” said Ammar Habib Khan, Pakistan’s Chief Risk Officer, Karandaaz. “These factors make mortgages unaffordable.”

The only option other than leasing the property is to mortgage it. Recently, SBP raised interest rates from 9.75% to double-digit 12.25% and then to 13.75%.

With double-digit or near-double-digit interest rates, mortgages are not just affordable. The Pakistan Central Bank’s inflation target is 8-9%.

When long-term interest rates reverse and snails reach 9.75%, it becomes a moonshot. However, 9-10% mortgages are not affordable.

Another aspect is the rental yield. As Profit envisions, the average rental yield in residential urban areas is 3%. That means prices are rising faster than living expenses.

Rent is cheaper than getting a mortgage. A record amount of money is floating in the real estate file, so the price of the dumped parcel is rising.

The real estate market is a cash market, so buying something expensive and lowering the price does not mean that the owner sells it. Of course, the market will recover even if it takes 10 years.

Mortgages are also long-term investments, usually lasting 15 to 20 years. If a bank or NBFC offers this long-term loan, it will also require long-term liabilities such as bonds and other forms of securities.

Obtaining this from banks and NBFCs is always difficult and, in the event of a final occurrence, it will be strict and strict. That is also not a good option.

“There is a funding problem with NBFC. It is difficult for NBFC to raise debt because there is not enough secondary market to raise money, and it can be further lent as a mortgage,” Ammar Habib Khan said. Says.

“All NBFCs suffer from an asset-to-liability mismatch. The debt they can raise has a maturity of less than a year, but a mortgage has a maturity of more than a year.”

By comparison, India has a huge NBFC market, offering millions of low-income mortgages funded by long-term debt. As a result, banks are not very effective in this area.

India’s NBFC, which accounted for 23% of the market in 2007, overtook state-owned banks, which still dominate the country’s credit system.

Banks’ lending capacity has been limited due to asset quality pressures and higher capital requirements. NBFC has benefited from stronger growth opportunities due to better distribution channels for retail customers in rural and sub-city where banks are not fully serviced.

In contrast to India, Pakistani banks act as low-cost deposit collectors. In other words, deposit funds with the government. With such a system in place, banks don’t even have to consider mortgages.

In addition, why would someone take a challenging route for the government to offer free cash and IOUs? It’s bad to think about getting a mortgage when a bank doesn’t even allow you to open an account without a pay slip.

On the contrary, Indian banks and NBFC have developed a credit scoring model that helps provide low-income mortgages to the middle class, who belong to the informal sector and do not have a bank account.

This is a structural issue and can only be effective by discouraging rent-seeking and cash-based economies. There is a cautious optimism.

The writer is an expert in political economy, cities and governance, and works as an assistant to the Center for Social and Political Studies.

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Posted on Express Tribune on May 30thth2022.

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