SBP eases restrictions for banks to invest in real estate

Working at a private company as a sanitary worker, Mukesh was excited to see the Naya Pakistan Housing Scheme that offers cheap loans for people with humble background who don’t own a house. He made the efforts and found a house worth Rs3.7 million but the bank paperwork delayed things. When he again inquired about the house, its price had gone up to Rs4.2 million – over 13% increase within a few months.

Renowned economist Atif Mian recently pointed out that offering cheap loans will subsequently push the property prices up.

“When you give people more purchasing power artificially — which is what borrowing does — you raise the price of the asset as well," Mian said. "Lower interest rates make prices higher. So, while you are giving them more credit, the price has also risen of the same house they were trying to buy before.”      

But the government, through the Federal Board of Revenue and the State Bank, has been trying to facilitate builders and developers to construct more housing units. It has been urging banks and development finance institutions (DFIs) to provide more loans to buyers and finance projects. The FBR also gave an amnesty scheme that allowed builders and developers to invest in these projects.

According to Zaigham Mahmood Rizvi, the chairman of the Naya Pakistan Housing Programme, there’s a massive need for houses in Pakistan – around 11 million which is incrementally increasing by 700,000 houses yearly. Incrementally here means that if the need for houses rose by 700,000 in a year, then it would be greater than that the next year.

Rizvi says one of the main reasons for this backlog has been the reluctance of banks to finance the housing industry.

He noted that India’s mortgages are 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 extend mortgage loans and financing for developers and builders. Banks now have to maintain 5% of their domestic private sector credit by December 31, 2021 to finance housing and construction activities.

The central bank has also introduced a carrot-and-stick scheme for the reluctant banking industry to eventually achieve these targets.

Banks achieving the target of extending house and construction loans will have the luxury to reduce the Cash Reserve Requirement by the same amount with which they achieved the target.

The CRR is the mandatory amount all banks maintain with the State Bank of Pakistan. Banks don’t earn anything on the amount. By unlocking a part of the CRR, banks can get more profit as they would have more funds at their disposal.

However, if banks fail to achieve the target, they will be penalized. They will have to maintain a CRR level that includes a minimum CRR requirement plus the amount by which they failed to achieve the target.

The SBP has now amended capital adequacy regulations to facilitate banks and DFIs investment in Real Estate Investment Trusts (REITs). It has reduced the applicable risk weight from 200% to 100% for banks and DFIs investments in the units of REITs.

REITs are companies that raise funding from the general public and institutions such as banks, and deploy these funds through investment in real estate properties.

“Atif Mian is right to say that the price of property will increase if cheap house loans are offered,” said a source, who asked for anonymity. “But it would happen if demand increases due to cheap loans and supply, meaning housing units remain limited just as before.

“But the State Bank and government policies will also push the supply of housing units to rise,” the source said. “That will keep the price of houses in check.”

The increase in construction activity will increase the income of the people in the sector and related industries. When they will spend after earning through this sector and industries, people associated with other industries would benefit too.

Following the State Bank's policy -- the change in the capital adequacy regulation -- banks and DFIs will now be able to increase investment in REITs without the need to allocate a relatively large amount of capital.

The central bank expects investment from banks to promote the development of the real estate sector in the country.

“The enhanced participation of financial institutions, backed by regulatory initiatives, would also encourage REIT Management Companies to launch new REITs, providing further boost to the Government’s agenda for development of housing and construction sectors,” the SBP said in a statement.

The central bank also amended its regulations for banks to invest in REITs more by increasing the cap to 15% of their equity from the previous limit of 10%.

“The amendments in capital adequacy regulations will further incentivize banks to contribute towards a well-functioning capital market for the real estate sector,” the State Bank said.

It has also allowed banks to count their investment in shares, units, bonds, TFCs or Sukuks issued by REIT Management Companies towards the achievement of their mandatory targets for housing and construction finance, which is 5% of the total loans they extend.

Only one REIT – Arif Habib Dolmen REIT is listed at the Pakistan Stock Exchange (PSX) and functioning at the moment.

According to the Securities and Exchange Commission of Pakistan, five new REITs have registered with them in the last two years. A total of 10 REITs are currently registered with the SECP, with two more in the pipeline.

Mukesh is still looking to buy a property by availing the SBP scheme. But he is frustrated as the bank process is tedious and property is getting more and more expensive.