Comment by invitation: The challenge of five million houses

Published February 3, 2019
Raza Khan, a property developer and an urban development enthusiast, recommends practical solutions on the housing project.— Dawn
Raza Khan, a property developer and an urban development enthusiast, recommends practical solutions on the housing project.— Dawn

Raza Khan, a property developer and an urban development enthusiast, recommends practical solutions on the housing project announced by Prime Minister Imran Khan. His suggestions are inspired from a similar project undertaken in the UK during the early 1980s.

‘Naya Pakistan’ banner has come with a promise of hope; of achieving the impossible. To the cynics, five million houses are empty promises with no hope of actual deliverance. However, if there is any chance to achieve the target, it has to be based on market disrupting solutions.

There are two major challenges to solve: firstly, the pace of delivery, ie how to deliver one million houses every year and secondly how to finance the development.

Buying power for h ousing

Pakistan has been extremely conservative with its housing finance. With a mortgage financing to GDP ratio below 0.25 per cent, Pakistan falls far behind the average of 3.4pc in South Asia. Furthermore, the provision of such a service to the low-cost bracket is practically non-existent as they are unable to provide consistency revenue stream required by financial institutions. A proactive solution has to be through the involvement of the private sector.

In 1981, the conservative government of UK found the solution through the formation of Urban Development Corporations, which had specific areas designated for urban regeneration. These areas were developed without the involvement of the Government Development Authority rules, although corporations were reporting directly to the parliament. The advantage was quick expedition of decision making required to regenerate urban areas.

The designated areas were visited by the chief executives of financial institutions for finding ways to monetise the urban rehabilitation project. Pakistan could also follow a similar model with specific land banks. Multi-purpose projects can be designed with a mix of commercial and residential areas with a committed proportion of low-income housing. The land provided by the government can essentially be valued equivalent to the cost required for development of low-income housing.

For any such project to have viability, it is essential for financial institutions to find exit strategies for their investors. Although real estate investment trusts (REITs) provide structured development, the parameters required for devising a REIT are so extensive and complicated that they act as a deterrent for small-scale private developers. Yet, the idea of unitisation and securitisation could make the project a viable financial tool for raising investment.

Moreover, since the entire project is a mix of different real estate products, the returns could be determined via the sale of residential and commercial products to middle and upper middle income groups. The returns from these would serve as a blanket to make up for the lower returns in the low-income housing sales. Further, as the whole project would be under a development corporation (DC), the financing provided would be at a lower risk ­premium than if only low-income housing was provided.

Invariably, the relationship becomes one where the private sector gets involved as a developer working under the DC with a role similar to one of a project manager. However, by aligning them with profits of the project, the developer is driven towards completion of the project through optimised costs and timely delivery. The latent advantage for the developer is the knowledge base that will be brought in by putting the right mix together, with practical experience of marketing and sales.

Financial Institutions, on the other hand, would provide another layer of protection through products such as escrow accounts releasing funds on completion of milestones. They would also provide another revenue stream through property bonds and unitisation thereby reducing the dependency on direct real estate sales.

For legal protection, the DC would be the owner of the housing. The product would be given to deserving families with option to pay rent-to-own. The families could be provided with job opportunities within the DC with the property adjustment against years in service.

Delivery of housing

Low-income housing is for those individuals who require bare essential living space. The actual requirement is for a two-room structure, with emphasis on utility, form and repetitive design with additional finishing fulfilling basic requirements. Higher expense areas, such as bathrooms, could be communal, which would reduce construction and maintenance costs. The most enterprising solution would be the use of pre-fabricated construction (along with traditional construction), whereby we can look towards volumetric or ­panelised construction.

The challenge to the simplicity of ­pre-fabricated housing is the staff ­training. This is where the DC brings a two prong benefit. Firstly, the set up for such a pre-fab factory brings in a new industry, which disrupts the market of the traditional construction methods and a new form of manufacturing is introduced.

The second challenge is one that makes low-income housing sustainable — the training of workers with the skill set required for this form of construction. This option could be provided to those wanting to own a low-income house. As a worker willing to get trained and build the low-income housing, a barter arrangement for a house could be evaluated. This would not only bring the feeling of ownership but act as a catalyst in developing a community. The additional skill set further equips them with a new way of earning.

The attractiveness of the whole system is the blend formed between the ­government, the real estate developers, and the financial institutions with each bringing their strength to push the development forward, yet mitigating their weaknesses through the forte presented by the other.

The success of development is in provision of a roof and a sustainable way to make a living. Essentially, the solution comes through an intertwined development, rather than working in silos. The challenge of five million houses is exactly that: a challenge waiting to be ­accomplished.

Published in Dawn, February 3rd, 2019

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