Delivering 5m homes via markets

Incentives will push private sector to deploy resources for building housing units

ISLAMABAD:

The most important promise that Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) made to the people in the economic domain was the construction of five million homes targeting the poor segments of the populace.

Three years on, we have seen the launch of Naya Pakistan Housing Programme (NPHP), along with the announcement of subsidised mortgages for the low-income customers.

As of today, 1,500 housing units have been delivered whereas another 5,000 units in different cities are being built. Even then, the attribution of these units exclusively to NPHP is debatable as housing is technically a provincial domain.

At this rate, if the government is lucky, NPHP will hardly deliver 1% of its target by the end of PTI’s tenure.

Home ownership matters not only for urban planning, but also for providing an asset-backed security for people. One may also spot a case of market failure – all new housing schemes launched by the private sector attract only the middle and upper classes.

And arguably, 40% of Pakistan’s population comprising low-income and low middle income will remain deprived if we were to depend on the private sector. That is why we need the government to fill this gap and deliver.

This is the basic premise of all housing programmes that governments launch. NPHP is no exception. However, this approach is fundamentally flawed.

Last week, Safiya Homes, a private organisation working to provide affordable housing solutions for the low income, delivered keys to the first batch of 400 owners in Lahore. These families could not have imagined owning a house of their own as their average monthly income is a meagre PKR 40k-60k.

This organisation is currently developing a number of projects across the country with plans to deliver 5,000 houses by 2023. They have successfully mobilised both domestic and foreign investment to the tune of Rs4 billion.

The private sector works for incentives. In the case of housing market, the incentives, largely driven by a set of rules, practices and demand, mainly disfavour any business model for the low-income people.

This “market failure” can be corrected by altering the incentive structure. Once this is corrected, we will see vast resources being deployed by the private sector in the low-income housing segment, thus not only helping the new homeowners, but also achieving the prime minister’s vision.

The missing insight is that affordable housing is not a game of margins but a game of time.

Typically, the maximum margins on an affordable housing project would be 50% over the life of the project, ie five years, resulting in an annualised ROI of 10%. This is not attractive for private capital, especially in the financial scenario of Pakistan, where inflation is touching 10%.

However, if these five years can be reduced to half – 2.5 years – the annualised ROI will double to 20%, thus making it attractive for the private capital.

The challenge is to re-engineer the planning and approval process. The time that it takes from planning to execution of a housing scheme can be reduced by cutting down the time required to issue an NOC from the current maximum of 36 months to six months.

The good news is that in the case of Punjab, the government has passed legislation to allow Punjab Housing and Town Planning Agency (PHATA) to effectively reduce the time to below six months in the case of affordable housing. This needs to be executed, replicated and demonstrated by all provincial governments.

After approval, the next stage is to develop the scheme, lay down trunk infrastructure and build houses. The time required for development and building houses will be largely a function of the developer’s capacity and demand.

While the private sector can be mobilised to increase the speed to deliver in about nine months, the time required to sell the units can be minimised too.

There is a lack of trust by the citizens in private sector developers, and for the right reason. The government or a regulatory body can help in the certification of developers.

At the same time, the government can assess aggregate demand of the applicants and can channel it to the private sector after appropriate screening.

Obviously, to make it work, transparent criteria for the selection of beneficiaries and transmission of information to the private sector will be critical.

If the demand can be aggregated and developers certified, the sales time period can be cut from a matter of years to a few weeks, thus helping the private sector to achieve financial close.

The end-result of altering the set of incentives will be increased annual ROI for the private sector – to the tune of 33%, more homes delivered in a shorter time and finally no more fiscal burden on taxpayers’ money.

As the project location decision is made by the private sector, supported by the demand data shared by the government, the success probability of the project goes up significantly.

If one private group like Safiya Homes can deliver affordable homes, this can be replicated and scaled by other private groups as well. This needs to be aided by reforms in mortgage laws about which significant progress has been made already.

Thus, it is possible to correct market failure of the private sector in the housing market by changing rules and by bringing in government where it really matters.

The writer is founder and executive director of PRIME, an independent economic policy think tank

 

 

Published in The Express Tribune, June 28^th, 2021.

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