Is the Prime Minister Imran Khan’s Naya Pakistan Housing Program (NPHP) being set up for failure?
This short note will focus on the financing challenges of Naya Pakistan Housing Program (NPHP). The only prerequisite is simple arithmetic.
Background
Government launched first phase of Naya Pakistan Housing Program in three locations namely Lodhran, Renala Khurd and Chishtian. A total of 5,792 units comprising of two storey bungalows will be built with each bungalow made up of two units: One unit on the ground floor and one unit on the first floor. Distribution of units among the cities is as follows:
The price of the units range from Rs. 16.5 lacs to Rs. 23 lacs. A downpayment of 20% is required at the time of allotment and with balance payable in 18 “easy” monthly installments. There is also an option of getting a mortgage of 20 years from one of the three financial institutions.
Crunching the numbers of Phase I
Supply Side
For the sake of simplicity, lets assume average price of unit at Rs. 20 lacs. Total sell out price of Phase I comes to around Rs.11.5 Billion (Rs20 lacs x 5,792 units).
From cost perspective, ignoring costs of infrastructure (roads, utility connections, street lights, schools, park etc) and assuming developer profit at 15% (not unreasonable), the cost of project comes to around Rs.9.8 Billion. Let’s assume 50% as land costs (reasonable assumption) and the construction cost comes to around Rs. 4.9 billion for Phase I.
If the government wants to show delivery of the project for optics, it will build hase I by diving into PSDP. It only has to spend Rs. 4.9 billion to deliver Phase I. Land already is government owned so cost of land does not have to be financed. Even with slashed down PSDP budget, extracting Rs.4.9 billion from it is something I believe the government can easily manage.
However, government can’t do it for every phase as those billions add up quick.
Demand Side
You may be thinking that constructing the housing units was the challenging part. You couldn’t be further from the truth.
NPHP is asking for 20% downpayment. This requires low income people in Chishtian, Renala Khurd and Lodhran to mobilize Rs.2.3 billion (5,792units x PKR20 lac x 20% downpayment) in savings. Let me admit, I have no idea of savings of the low income groups but I would never have thought that 5,792 low income families in Lodhran, Renala Khurd and Chishtian can scrounge Rs.2.3 billion for a project down payment i.e Rs.400,000 per household (I will not dwell on it further as the last time I raised this issue, I was attacked by pro-government trolls schooling me how mortgage markets work in the West).
Aforementioned presumes that 100% sales is required to launch the project but if we are assuming the government is delivering Phase I from PSDP, it is not a valid constraint for now. However for later phases to be delivered on commercial terms, government will need to think about from where the low income buyers will arrange the down payment.
The government advertisement mentions that it expects low income buyers to pay off the remaining sales price in in 18 “easy” monthly installments. Unless the low income group can manage around Rs.90,000 per month installment, all of the buyers will need mortgages.
This means 5,792 mortgages will be required. The advertisement mentions there is mortgage facility available through HBFC, Meezan Bank and NBP. Do you know how many mortgage loans Pakistani banks collectively issue in one year? Take a guess. Pakistani finance sector collectively writes around 1,500 mortgages per year and that includes mortgages to banks’ own staff and mainly people working in corporate sector with Loan to Value (LTV) of 50% with maximum tenor of 13 years. Does the Government of Pakistan expect these three banks to issue 5,792 mortgages to LOW INCOME GROUP at LTV of 80% and a tenor of 20 years? And that is just Phase I. All I can say is ¯\_(ツ)_/¯
Banking sector helping out GoP
GoP must have very high hopes of banking sector coming to its help . Based on the sector’s performance in two very recent fund raising drives, I would not have counted on them without a carrot and a very big stick.
One, when the Supreme Court ordered bank’s to collect money for the PM and Supreme Court’s Dam Fund, the bank’s fund mobilization exercise comprised of ....wait for it…. hanging banners outside their branches.
Two, at the end of January 2019, Government of Pakistan announced Pakistan Banao Certificate and designated four banks to mobilize investments forit. The banks went all out for raising the funds by …. wait for it …. tweeting on February 21 as shown below (all of three of them on the same date. My guess they got the stick on that date as the carrot wasn’t working) directing everyone to GoP website. That was the extent of the total marketing drive.
Any way, let’s assume that all three banks in mentioned in the Phase I advertisement ie HBFC, Meezan Bank and NBP got both the carrot and the stick and Phase I will be a spectacular success.
Crunching the numbers for subsequent phases
GoP has since launched two more Phases:
1. Lahore (three locations) where average unit cost is Rs.45 lacs
2. Sialkot/Chiniot
and has hinted at plans to launch more phases.
You can see those billions are adding up and government can’t continue to build them from PSDP. Now it will have to tender them out. Low Income groups in Lahore would need to arrange some serious moolah for downpayment.
I consider myself in upper income salaried class and I will be hard pressed to arrange Rs.200,000 per month and that too for 18 months.
There are no details on the number of units to be built in these phases but it appears safe to assume that Sialkot/Chiniot phase will be same size as Phase I and Lahore will be twice the size (collectively these two phase will be three times the size of Phase I).
This requires around Rs.15 billion in construction financing [Land costs are being ignored as ruling party’s website mentioned that builders/developers will not be charged for land and the cost will be recovered from the final purchasers of the units]. Assuming 50% equity (unless banks get another stick to accept less equity) the builders need Rs.7.5 billion in equity and Rs. 7.5 billion bank loan to deliver these phases. Arranging Rs. 7.5 billion in equity is not difficult for the builders but almost all of the residential builders are tax evaders and they will not be inclined to show that they have Rs.7.5 billion in equity.
For argument’s sake, lets assume builders have arranged Rs.7.5 billion equity. Next step is to ask the banks give construction loan. Banks offer construction loan assuming full repayment at construction completion. In the West, it comes from the mortgages of final purchasers of the units. The question you need to ask is that are the Pakistan banks, which offer 1,500 mortgages a year to upper income group, geared up to offer 17,000+ mortgages (5,792 Phase I, same number for Sialkot/Chiniot and twice the number for Lahore)?
Total sell out value just for Lahore/Sialkot/Chiniot Phase is Rs. 34.7 billion so the banks need to issue new mortgage loans of around Rs. 28 billion (after deducting 20% downpayment). For reference, all the Pakistani financial institutions collectively issued around Rs.9 billion mortgages in 2016 and that too mainly to upper income groups.
Can the banks issue this many mortgages to low income group? All I can say is ¯\_(ツ)_/¯
Conclusion
This is just a superficial analysis of first three phases. There is no denying that Prime Minister Imran Khan is compassionate and wants to deliver the maximum relief to population in general and to under-privileged in particular. However, it appears that the consultants and advisors surrounding him aren’t showing him the true challenges in achieving those objectives.
Provision of affordable housing is a complex issue. First world countries have been grappling with it for decades. If a few talking heads believe launching projects left, right and center will solve the issue in Pakistan, all I can say is ¯\_(ツ)_/¯.
Post script
A different topic altogether for a different post but I just want to touch upon it to hint at the complexity of the challenge. It would have been observed that price of units in Lahore is Rs.45 lacs. The mortgage policy announced by the government for low income group caps out at Rs. 30 lacs. Either the Lahore phase is not targeted at low income group (as defined by government) or the government has to revise the policy which it announced just a few months ago__ a policy that breaks down by the second phase doesn’t bode well for future.
