Soon after joining office, PM Imran Khan announced his mega plan to meet the growing housing gap in the country and build 5 million houses, which would reduce the current shortage by almost half. The focus is on low-cost housing since majority of the supply gap is in the low-middle income segment. The plan for Naya Pakistan Housing Programme (NPHP) has started to finally take shape now. To get a better understanding of what the plan entails, BR Research had a detailed discussion with the current Chairman of Association of Builders and Developers (ABAD) Mohammad Hasan Bakshi. In the second of this two-part interview, Bakshi discusses the progress made in NPHP to develop a low cost housing market and private sector's prominent role in making it a success (read: part I here, June 10, 2019).
Here are edited transcripts.
BR Research: What is the minimum household income of an individual in Pakistan at present who can purchase a house, given builders' cash flows are dependent on the collection of cash installments and down payments, and little to no financing is available? This historically has been the case for construction of housing in the country.
Mohammad Hasan Bakshi: At present, you cannot get a house or flat in Karachi for less than Rs 4 million, which will be located in the outskirts of the city. Here I am mentioning legally approved projects. One can get a plot in outskirts where one has to construct a house, which is again a costly affair. The area in which you can buy a plot for less than that amount will not have proper development or infrastructure facilities. With the steep devaluation of the rupee, the development and construction cost has risen by 35 percent whereas real incomes have gone down. At such high costs and higher interest rates, affordable housing is becoming a dream, unless the government chips in with their own land and provides incentives to the builder and buyers.
As to your question, either an individual must have substantial earnings, savings or inherited funds. If the savings are around Rs 1.5 million, then monthly cash installments can be Rs 50,000 or so, which can be paid in four years. If one is paying that amount as monthly installment, one's household income should be at least Rs 150,000. That takes you in the middle income segment.
On the other hand, if one is able to acquire a loan of Rs 2 million, the monthly installment comes to Rs 20,000 at subsidised rates under the low cost housing policy, and for that monthly household income has to be Rs 60,000. Keeping our religious sentiments in mind, Islamic financing may be encouraged in this segment.
BRR: Tell us about the low cost housing project you and others are planning to launch under NPHP.
MHB: There was a lot of excitement about low cost and affordable housing in the market a few months ago. Some of our members were discussing and planning new projects on a massive scale. A very senior member was planning to build 10,000 flats in Karachi's outskirts and his intention was to sell it for Rs 2.5 million each. Recently, he informed me that he has temporarily shelved the scheme due to unimaginable increase in dollar value resulting in higher cost of construction.
In a similar case, I was planning a scheme with 450 flats costing Rs 3 million each. This scheme is again on hold due to the daily changes in construction costs. The mechanism of the project was that Rs 2.5 million would have been raised through debt financing at 5 percent annual interest. The customer had to chip in Rs 500,000 as a cash component and the rest was to be paid in 12 years while living. This was to be under the SBP low cost housing finance policy. SBP is providing this loan to banks at 1 percent, the bank will keep 4 percent as its risk premium thereby lending to the eligible customers at 5 percent. Low cost housing by SBP is defined as a house costing up to Rs 3 million, but I believe after devaluation, this should be revised up to Rs 4 million.
BRR: So the SBP will absorb somewhere around 11 percent interest rate, after the monetary policy tightening?
MHB: Yes, they have earmarked Rs 250 billion to implement this policy up to 2023. That can cover mortgage for 0.2-0.3 million houses at Rs 1-1.25 million per unit. I am quoting this figure of 0.3 million units keeping in mind financing for both rural and peri-urban housing. The funding is on a rolling basis. Plus, installments will be coming in soon after the first set of disbursements. By 2023, we will have created a reasonable financing for low cost housing.
I believe, it is absolutely essential as majority of the Pakistani population with an average combined household income of Rs 50,000-Rs 60,000 cannot afford to buy a house on cash.
BRR: A popular measure for affordability is 30 percent of your income ie. if mortgage payment is 30 percent of income, it is said to be affordable. But consumption expenditure as share of total income, mainly food, in our country is one of the highest in the world-estimated to be around 42 percent. How will these households meet the mortgage payment requirements?
MHB: We need to develop a savings culture in this country. That's imperative. With the financing now available, a household income of Rs 60,000 can buy property in the outskirts of Karachi. In Lahore, the amount may be even as low as Rs 40,000. If this takes off, it will substantially improve financial inclusion in the country. The SBP and banks need to be promoting this policy across the nation.
BRR: One of the major issues in urban centers is the higher incidence of sprawls and low rise construction but it seems under the NPHP as well, the plan favors low-rise. These constructions are 58 percent of total (23% one-unit, 16% self-construction, and 19% additions to existing), while high-rise are 9 percent of the total units. Why isn't the focus on high-rise, especially since PM Imran Khan has been vocal about building high rise cities?
MHB: Low rise typically have lower costs of construction. A ground+10 building will have a construction cost of Rs 3000 per sqft while ground+4, the construction costs will be Rs 2500 per sqft. Meanwhile, a ground floor unit will cost Rs 1500 sqft in construction.
For high rise construction, a very heavy foundation has to be built which costs more. Though in urban areas land is very expensive so high-rises will be built. But remember that NPHP is not only for urban centres. More than 40 percent of the supply will be in rural areas, 40 percent in peri-urban while 20 percent will be in cities. The price of housing will be substantially lower in rural areas-a unit will cost somewhere between Rs 0.4-0.5 million. We cannot go vertical in rural areas as construction costs will be higher, though land is available at cheaper rates. Their culture also does not encourage vertical households.
BRR: It seems the housing will be built where there is availability of public and private land. Would it fit into the development planned under the cities' master plans?
MHB: For a city like Karachi, a master plan "Vision 2020" was prepared and approved by the City Government in 2007 and later notified by Sindh government. It shows how the city will expand in future and areas have been earmarked under the vision for educational purposes, medical facilities, industrial schemes, wholesale markets, entertainment purposes, housing schemes, low cost housing, mid-rise and high-rise construction. Land was allotted for low-cost housing years ago and the NPHP projects will be constructed on these lands. Since most of the land is already allotted land, the government only has to incentivise construction of low cost housing in these areas to encourage investments by the private sector.
BRR: What incentives has the government planned to encourage private sector developers and what is required so more builders can throw their hats in the ring?
MHB: Under the SBP policy, financing on subsidised rates is available for allottees, the same should be available for builders as well. Foreclosure laws need improvement. From the FBR side, final tax regime must be introduced. Moreover, availability of government land at a reasonable price, availability of construction material at internationally competitive prices, strict action against cartelization by the local manufacturers, introduction of private sector representatives to head regulatory bodies, digital approval of construction permits within 45 days, and so on. All above steps would result in increased supply at much cheaper prices of housing. The current approval times for construction permits is two years or more, which causes an increase in cost and results in short supply. This needs addressing on priority.
BRR: You have said that land has already been earmarked for low-cost housing in the outskirts; do you think this would widen the gap between low-income and high-income households, pushing low-cost areas further away from high-end areas. However, some of the more popular models in low-cost housing in recent history have been modeled on a cross-subsidy framework.
MHB: Cross-subsidy will remain the foundation of most of these projects. Builders will build mixed-income housing where 20-30 percent will be for the higher income bracket. The only way to boost a housing scheme in the outskirts is to cater for different income segments. The price of the low-cost will be fixed while the rest will be market based. The projects will be properly planned by best available town planners.
BRR: If most of the construction is in the outskirts, how well-prepared is the NPHP team in providing the transport and road infrastructure, water, gas and electricity lines to these locations? Without this required infrastructure, the projects are bound to fail because even low income households would not want to move to areas not connected to the city.
MHB: Housing is a provincial subject and provinces will have to do the work to develop infrastructure in the outskirts. In Karachi, they need to revive the Karachi Circular Railway. NPHP is moving forward and gaining ground in Punjab and KPK, but not in Sindh. The PTI government is present in these provinces and has the required support in place. It is unclear whether Sindh government is interested in low cost housing of the federal government or whether they will come up with their own scheme. I believe they should be the most motivated since the slogan "roti, kapra, makaan" was pioneered by Shaheed Zulfiqar Ali Bhutto. However, that motivation is not visible as yet.
BRR: Nearly half of the urban population in Pakistan is living in slums. Are there any plans under the NPHP for slum conversion?
MHB: We have worked on an urban regeneration proposal that has been presented to the government. There have been successful models in Sri Lanka, Singapore, and India. As a pilot project, we have proposed that the government provides us one of the unregularised katchi abadis in Karachi. After collecting data, we will provide free of cost housing to the slum dwellers and while the construction is undergoing, we will also provide advance rental to them so they can live elsewhere while the building is under construction.
The building will be vertical and it will include commercial spaces as well. Assuming that land spreads across 10 acres. The slum dwellers can be accommodated in 3 acres, another 3 acres will be utilised for road and infrastructure, mosque, school and playground etc., the rest of the 4 acres will be allocated to high rise luxury buildings, which will cover the cost for free slum dwellers. Each slum dweller will be given free of cost unit equivalent to what he was occupying earlier.
We can take inspiration from the Sri Lankan model. The land belongs to the federal government in Sri Lanka. The model is that one or more builders can identify the location where they want to develop this model. The project is awarded and land is given free of cost to the builder whomever can get 60 percent of the occupants to sign off. Once 60 percent agree, the rest of the slum dwellers have to get on board, and the project kicks off.
When we made this presentation, a few government officials inquired why would the state land be given for free? The answer is simple. Land is already occupied by slum dwellers since decades, can the state vacate this land that has been occupied for over 40 years? Moreover, the ecosystem as well as the living standards are low in the city due to these informal settlements. Nearly half of Karachi's population is living in slums with no clean water, proper sewerage infrastructure and almost no access to law enforcement agencies. I would argue that these poor living conditions contribute to the higher crime incidence in the city.
The advantage of this model is that it not only provides decent housing to those who cannot afford it but will also provide a chance to their next generation to live a respectable life and help in wealth creation. This will create a much bigger economic activity than expected resulting in huge employment opportunities and revenue generation. The houses built under the project cannot be sold for the first ten years and later on, can be sold in the open market. This is the only way to convert slums in decent and improve living standards of the lowest segment of the society. Most importantly, it's a proven model that has been successfully tried in various parts of the world.