Therefore, after demonstrating a promising growth trend till 2008, the housing finance sector has recently been showing a declining trend and total outstanding reported by banks and DFIs as on March 31, 2011 was Rs 65.43 billion as compared to Rs 71.97 billion as on Mar 31, 2010, depicting a decline of 9.1 percent. Quarter on quarter (QoQ) basis, the outstanding in March end quarter was also less than Rs 67 billion at the end of Dec, 2010.
NPLs as a proportion of total outstanding witnessed an increasing trend over the last twelve months, and NPLs of house financing increased from Rs 16.83 billion in Mar-2010 to Rs 18.93 billion in Mar-2011, showing a surge of 12.5 percent during the year. QoQ basis, the stock of NPLs as on December-2010 was Rs 18.54 billion, showing an increase of 2.1 percent during the quarter January-March, 2011. This rise in NPLs was primarily due to economic slowdown, and absence of buyers in real estate market resulted. Prices of most of the properties remained either unchanged or declined in recent years across the country.
"It is difficult for financial institutions to verify the character, capital, and capacity of potential clients. Besides its risk assessment and portfolio valuation is also fragile, which is another factor for the lenders' extreme caution for transaction initiated by these venture. As a result, financial institutions are reluctant to enter this market, which in turn causes scarcity of finance and constraints in the supply of housing" the SBP Development Finance Review said.
The major reason of limited participation of financial sector is low confidence in the real estate related market. Financial weaknesses and absence of clear, uniform and fair business practices have affected its credibility contributing to the reluctance of financial institutions in providing development and construction finance, it added.
There is also a strong need to strengthen the property titling and land administrative procedures including improvements of the legal provisions, standardisation of processes, and computerisation of all relevant revenue records. These steps will enhance the investment in housing and financing by the formal sector. Weakness in the existing legal framework also impedes the financing opportunities of the formal financial sector.
Though, according to SBP, the Financial Institution Recovery Ordinance, 2001 empowers the financial institutions in case of default to foreclose a mortgage property without recourse to the court of law, lack of full implementation of the recovery law in its letter and spirit dilutes its effectiveness in protection of rights of the respective parties, ie, the financial institutions, mortgagors, landlords and tenants, thus needing a major improvement.
Despite the fact that regulatory framework for land registration and transfer regime exists, the process by which land is acquired and registered is cumbersome, at times, because of a number of institutions and registration procedures required to execute property transactions, the SBP said.
Criticising the manual record system, the SBP said that land records are manually maintained, leading to errors and omissions, and resultantly they have modest commercial value for the mortgagee financial institutions, especially in rural and some urban areas. In addition, national and local master plans for town planning and housing facilities are either inadequate or poorly enforced, which lead to inefficient allocation of land and uncontrolled urban development.
Lack of transparency and accountability in the planning process also give opportunities to land grabbers/mafias to have valuable inside information as to future infrastructure developments or to be able to influence such plans so that value of its land increases.
Over-restrictive building codes and laws on subdivision limit the efficient use of urban land and increase the price to genuine consumers, especially in zones having relatively higher prices of lands.
Moreover, the large-scale projects often get delayed due to failure of utility companies in connecting new housing developments in time, absence of rules to enforce timely hand-over of the property to investor, and upward revisions in various charges comprising documentation, lease, utility, etc, to discourage the investor to get possession.
The "property valuers" have professional conduct requirements that were established by SBP and the Pakistan Banks' Association (PBA), whereas majority of real estate builders and developers are working as sole proprietorships, or partnerships, with limited capital and informal corporate governance structures.
"Without using a strong regulatory authority to enforce corporate governance and allied standards for this stratum of business entrepreneurship, the quality of availability of housing facilities across population spectrum will not improve," the SBP said. The State Bank said that in the absence of formal arrangements between the housing developers/real estate agents etc and financial institutions, the protection of individual purchasers remains limited as the market is dominated by cash transactions with limited availability of systematic information in a transparent manner.
In addition, absence of sound governance structure within the housing developer industry creates lack of good practices, illegal construction, unreliable building permits, and legally unprotected advance purchase of units that are required to be built in future, the SBP said.