By Malik Nosherwan Awan
inancial institutions are providing the right platform for the Real Estate sector by accommodating them with required amount of financial support whereby mega-housing projects can be launched and also by extending the limits of potential target customers. All of this has been possible thanks to new banking laws, curtailments in the documentation for the procurement of loans, increase in the number of financial institutions, introduction of foreign banks, incorporation of multinational companies with substantial resources, liberal policies of the State Bank of Pakistan and last but not the least, the changed attitude of the people whereby borrowing for Real Estate is not considered taboo any more.
All of these have not been achieved over night but is a result of meticulous planning and thorough reconsideration of the governing laws regarding the banking sector. The introduction of new laws and amendments in previous laws by bringing them in conformity with ground realities had a positive impact on Real Estate industry. In mid 90’s financial institutions were in crisis and there was an accumulation of losses because of ineffective legal coverage.
These and other reasons were always cited as excuses for non-development of Real Estate sector. In order to cross these hurdles initially a commission was formed by the Government to review the banking laws. Looking at the increasing demands, complexities and ambiguities faced by the financial institutions, the commission prepared a comprehensive report after consulting all stake holders and presented its recommendations for changes in existing laws regarding financial institutions. As a result some pivotal legislation regarding financial institutions was made that contributed in the growth of this sector. One such legislation is “The Financial Institutions (Recovery of Finances) Ordinance 2001”. Prior to this law financial institutions had major concerns regarding their investments in Real Estate sector as recovery and default in repayment was governed by general law and it would take ages before any legal recovery was possible.
The financial institutions wanted security and protection of the law to cover their investments and returns. These and other protections were provided to the financial institution in the form of the aforesaid law. In consequence of the law, Banking Courts were created and their foremost objective was to regulate the matters exclusively related with the financial institutions. The process for recovery of money through these Courts was made short, simple and banks were allowed to get the default amount by selling the property through auctions without any involvement by the Courts.
Coming to the second beneficiary in the boom of Real Estate, the land or housing developers because to the easy access to availability of excessive funds in the form of loans expanded their vision and instead of focusing on couple of houses, they stepped into huge projects which number to hundreds of houses. One vital factor, which also helped the Real Estate developers’ was the fact that individuals, realizing their limitation and financial capacity formed companies and entered into joint venture agreements with international companies. The example of Best Brands Company can be cited, this Company entered into joint venture agreement with Defense Housing Authority Scheme (DHA) for the construction of 100 houses, on the land which could not be developed by DHA, thus marriage of convenience took place between these two entities, which resulted in reasonable housing facilities for an average person.
The securities and guarantees allowed the financial institutions to liberally enhance their quota of advancing loans to Real Estate sector. The advent of mega “housing schemes” was the next logical step. Extraordinary profit temptations allowed the developers to initiate mega projects and in consequence, Eden City, Lake City, Bahria Town, etc became reality from a mere vision. As returns on investments were fortified, the financial institutions started experimenting with legal terms and even loans were allowed to equitably mortgage the property provided by their customers. More leverage meant less requirement even of registration of a mortgage deed of full loan amount and instead a token registered mortgage is allowed to be registered for which the customer has to bear nominal expenses to save them from additional monetary gashes.
Many borrowers buy houses by paying some percentage of purchase money while the rest is being paid by the financial institutions. One may conveniently assess that just a few years back the estate price of a Kanal house in a good housing society was low, palpably owing to poor buying power of the people. What we have seen in recent past is the convenient accessibility of soft loans by the banks to be paid in as long as 20 years. As a result, there has been a transition from renting a house to buying of homes. Obviously, people prefer to pay bank installment of their own houses rather than rent money to land-lords. The local obsession with mind boggling profit margins in Real Estate sector induced the foreign investors and multinational financial institutions to share this boom which scaled out the local investor in terms of magnitude of the loans and projects. Presently there are more than 50 financial institutions operating in Pakistan regulated by the State Bank of Pakistan. Generally, these financial institutions can be categorized into following, like public and private banks, Development Financial Institutions to Islamic and Foreign Banks.
According to 1998 official statistics, there were 19.3 million households in Pakistan, with an average household size of 6.6 persons and occupancy at 3.3 persons per room and out of total housing units 39 per cent comprises over mud houses. Currently incremental demand for housing is estimated at 570,000 units annually whereas only 300, 000 units are being built and majority of these are in urban areas. It is just the beginning as both the financial institutions and Real Estate sector can contribute for the betterment of economic growth of Pakistan. The potential is there; it is only a matter of time that this sector of economy will jump start a new era of growth. Here are a few suggestions for improvement, a) recommendation by State Bank of Pakistan to earmark substantial percentage fixed on advances for the Real Estate sector, b) direction may be given to financial institutions to start projects in rural areas and smaller cities, and c) create awareness for about-to-be-launched projects and the possible loan/mortgage options available in easy-to-understand terms. ■
Malik is an advocate and a lawyer and can be reached at: email@example.com
This article was originally published in the print edition of Valuemag, issue 3 – July 2008