The chief executives of Pacra and Nespak on Saturday signed a Memorandum of Understanding signifying their commitment of collaboration for undertaking grading of real estate developers and real estate development projects in Pakistan.
Under the terms of the MoU, Pacra would be responsible for the financial evaluation, and Nespak for technical evaluation.
The grading process would incorporate an evaluation of both business and financial risks. The business risk determinants would include market position, project composition, adherence to projects time schedule, project quality track record, project management systems, management quality, legal compliance and documentation system, dispute and litigation track record, and customer satisfaction.
Additionally, for grading of specific projects, elements like completion risk, price risk, resource risk, quality risk and policy risk would also be evaluated.
The financial risk determinants would focus on project profitability, financial flexibility, working capital management, insurance coverage, accounting quality, and contingent liability.
The real estate sector has recently assumed considerable importance in Pakistan with the expectation that this could soon emerge as the critical catalyst for stimulating investment and industrial activity in the country.
While the financial sector is sitting on a huge pile of funds and the borrowing cost has declined to historical lows, conventional credit demand is yet to gather momentum.
Again, from the perspective of potential house owners, the financing option has become feasible with the sharp decline in borrowing costs.
The tax concessions in the last budget had provided further incentives to finance house ownership through borrowing.
Thus, all the necessary--and sufficient--conditions are in place for stimulating activity in the sector.
However, there is one important factor, which could discourage both lenders and investors (home owners).
This concerns the credibility of developers and the reliability of completing housing projects on time and without cost overruns.
This factor assumes greater significance in the backdrop of a number of scams in the recent past relating to property development and housing schemes.
The Pacra-Nespak grading, which will be an independent opinion on the relative performance capability of the relevant real estate entity, aims to serve as a tool for identifying and managing the risks associated with the concerned entity.
Besides benefiting the sector participants and end-users (investors/customers), the grading is designed to provide objective opinions as inputs in the pricing and credit decisions of banks/financial institutions.
It may, however, be clarified that the Pacra-Nespak rating would only cover such developers which are legal corporate entities.
Again, for potential users of the grading system, it is important to emphasise that the grading should not be construed as a recommendation to invest in a project or a recommendation to lend funds for a project or to a developer.