Construction amnesty scheme, tax exemptions and Rs30 billion subsidy for Naya Pakistan Housing Plan (NPHP) will jack up construction activities, especially cement, and shall also generate employment, so says the Pakistan Economic Survey 2021. It is visible from industry data for cement and steel that construction activities have considerably recovered from their slumber. Market sentiments on construction amnesty and NPHP are also fairly optimistic, but when asked, both groups: builders/developers and cement/steel makers believe the current demand is a mere catch-up and the growth envisioned under the new projects has not even started to kick in yet.
Certainly, cement industry has a shining report card with stellar sales. By that measure alone, construction activity is happening like never before. The industry sold the highest volumes (both domestic and exports of which latter is 13-15%) for the first time ever during the months of Oct-20 and Mar-21, crossing 5 million tons and setting it as the new benchmark for dispatches. Local sales peaked at 4.8 million tons in Oct-20 which is also a historic high. At the same time, the last recorded production stats on the LSM saw long steel manufacturing grow by 37 percent in the cumulative period till Mar-21. One curious deviation here is that while cement is performing tremendously well, steel has had similar and higher peaks in the past, most notably during FY17 and FY18. In fact, cement manufacturers are selling 13 tons of cement for every 1 ton of rebar being produced. Typically, this share is around 4-5x which implies that either Pakistan is producing less steel than it should, or a lot of ungraded steel being used is going unrecorded by the PBS. It could be imports but data shows import of rebars have dropped over the years due to heavy protection of domestic players. For the context of this discussion however, there is a clear growth story here.
It is also pretty evident from credit data (of the SBP) that construction financing is growing—both in outstanding and net borrowing measures. In both instances, however, it seems one major reason for the revival in financing—perhaps even the dominant reason—is kibor movements. As kibor starts to inch up, construction financing begins to show weakness and as it moves down, borrowing begins again. Unlike the unmatchable growth in construction materials, growth in construction financing (building residential and non-residential) is showing signs of strength but is not near its peak which materialized in FY19 (see graphs). The SBP has set a target for banks to achieve 5 percent construction and housing finance as a share of total private sector loans by Dec-21. It seems this may be as ambitious as the NPHP target of building 5 million houses in 5 years. Monthly data shows, the share of construction financing in private sector loans has actually dropped, no way near touching the crests of FY18 and FY19.
The other important driver is the Rs30 billion subsidy. Nearly all the banks in the country have introduced their own version of the “Mera Pakistan Mera Ghar” product, promoting them through newspaper ads and on their websites. According to a SBP presser, as of April-21, banks have received applications for financing of more than Rs52 billion from the general public under this scheme, of which Rs15 billion has been approved and the rest is in various stages of evaluation. That’s 15 percent of the mortgages (in rupee value) doled out to consumers during the month of April according to SBP’s loan outstanding data. If the average NPHP loan is about Rs3 million, banks have extended 5,000 new mortgages. Based on that, the current loan approval rate is 29 percent considering banks received about 17,000 mortgage applications thus far (keeping consistent with an average loan size of Rs 3 million). More applications are expected to be approved. This is progress, especially considering the scheme was announced only six months ago. The subsidy will cover 100,000 mortgages so it is still a long way to go.
Overall mortgage financing numbers show that both consumer and bank employee mortgages have been growing but there are two alarming facts here worth mentioning: one, that mortgage financing to bank employees is much higher—between 1.4x and 1.5x of total mortgages offered to consumers (rather 60% of all bank mortgages are going to its employees, where credit risk is minimal) and two, mortgage as a share of consumer financing has actually fallen (likely overtaken by auto financing) over the past few years. On their own, there isn’t much growth in mortgages. Through the Pakistan Mortgage Refinance Company (PMRC), the government has created a Credit Guarantee Trust (CGT) with funding from the World Bank which would provide banks with first loss guarantee of 40 percent risk coverage, greatly alleviating credit risk pressures. Without the subsidy and the first-loss guarantee—not to mention—enforced foreclosure laws—mortgages in Pakistan don’t have a leg to stand on. The broader question then becomes whether these initiatives would help create a mortgage market in the country or mortgages would just die when the two provisions go away.
Notwithstanding that, the aforementioned trends suggest that: a) construction activities are picking up evidenced by higher building material sales. If this is prior to NPHP, there is certainly more growth to be had when the actual building work begins—steel manufacturers expect growth to be at 6-10 percent next year driven by NPHP and hydro power projects b) much like the rest of private sector financing, construction financing is catching up from two years ago as interest rates become favourable but it does not seem like banks are going out of their way to meet the SBP-prescribed target. Banks will have to literally somersault their way into this one. Based on current financing statistics, they will have to double their current financing to the construction sector to reach the 5 percent target by December. Is that do-able, and what happens after the rate hike, are important questions to ask c) beware of the self-congratulating government, because construction is the lowest-hanging fruit there is for developing countries to generate growth. But it is growth.
Perhaps the country won’t achieve the lofty—and frankly, arbitrary—targets of 5 million houses and 10 million jobs any time soon but there is enough here to push-start housing supply and incentivize demand. Sustainability, however is another question. Which invariably will come down to land availability (which is sparse in urban settings), titles deeds that are clean (which is tough in the outskirts where land is available), the kind of construction taking place and whether we are moving vertically or horizontally (horizontal development would lead to poor utilization of scarce land) and if foreclosure laws will be upheld once loans are granted (no bank would stick its head out if it cannot repossess and resell defaulted loan property without recourse to the court). If construction (and housing, by extension) is the hill the PTI government wants to die on, being its pet project and all that, it better work in the long run.
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