The real estate market is picking up after taking a plunge in the first half of this fiscal year. This has come as good news for banks and financial institutions eyeing credit expansion.
In FY16, loans to the construction industry more than doubled — from Rs14bn to Rs31.5bn — with a fresh lending of Rs17.5bn. Add to it the Rs16bn lent to the real estate sector (trading, renting and business) and the total amount (given to the two sectors) soars to Rs33.5bn.
Real estate trading activity almost froze in the first half of FY17 due to the revised land valuation for capital gain tax. But that did not reflect in bank lending to the sector that rose by Rs16.5bn in six months till December 2016.
“There are two major reasons for this,” explains a senior executive of one of the top five banks. “First, lending to real estate (trading, renting and business) covers not only the loans offered for purchase of land, but a lot of other things as well — from land development to rental payments to investment, advisory, valuation and other services. Secondly, a six-month period is too short for serious borrowers to stop renewing bank credit lines even if the market is down.”
Bank lending to the construction industry also consumed fresh loans of Rs12.2bn in the first six months of FY17 when the real estate market survived on just genuine buyers of housing units, minus big investment-hoppers who pump in cash.
Banks expect more loans for the real estate (trading, renting and business) and construction sector this year
This happened chiefly because unlike loans for real estate (trading, renting and business), construction loans are for much longer periods and their growth pattern normally remains undisturbed by a temporary slump in the real estate market, senior bankers say. Besides, both the loans (real estate and construction industry) as a whole do not just cover the household sector but also the corporate sector.
And, bankers say that the corporate sector’s activity (in land buying and and in construction of new or extended business facilities) remained normal. Moreover, borrowings by companies involved in land development and construction activity of some ongoing CPEC-related infrastructural projects went on smoothly.
After the introduction of the tax amnesty scheme for the real estate sector last month, land buying in major cities, particularly in Karachi, Lahore and Islamabad, has started rising, industry sources say.
Realtors in Karachi say the real estate business is picking up pace in Defence, Clifton and Bahria town with investors gradually returning to the market. Media reports from Lahore and Islamabad also indicate the same. But it’s too difficult to predict the extent to which investment-hoppers will be able to dominate the real estate business, they say.
Transactions for genuine buying and selling land and housing units, too, never came to a halt even during the first half of FY17 and is definitely picking up pace now not only in posh localities but also in such middle and lower-middle income group neighborhoods like Gulshan-e-Iqbal, Gulistan-Jauhar, North Nazimabad, North Karachi, Nazimabad and Surjani town.
Ads posted on Dawn Real Estate, the largest source of newspaper based real estate advertising, are now also showing a rising trend.
Under the tax amnesty scheme, a window has been opened to those who own land and properties, purchased earlier in the name of others, to retain them for some years by paying an additional tax of three per cent.
Through the same window, grievances of those, who think that the Federal Board of Revenue has ascertained the value of their land transactions at higher rates, could also be addressed.
On the back of increased activity in the real estate market, prices are also rising, though they might take some time to reach the levels of June 2016. Realtors who deal in lands of Defence, Clifton and Bahria town say that prices are now up around 10pc from the lows they hit between July-December last year.
In this backdrop, banks expect more loans for the real estate (trading, renting and business) and construction sector this year. “Housing finance (being a part of real estate and construction loans but not entirely covering them), should
also expand this year, though in the third quarter of 2016 it showed the weakest quarter-on-quarter growth of 0.3pc,” says a senior official of the House Building Finance Company.
Several top and mid-order conventional banks are now focusing on their consumer and housing finance, the two areas where rates of return are high and where risk management, too, is not as tricky.
Published in Dawn, Business & Finance weekly, January 23rd, 2017