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The real estate industry in Pakistan has experienced a resurgence in recent months due to the government’s implementation of various incentives and regulations. The real estate sector is crucial for the country’s growing economy as it has ties with over 40 related industries, with the housing and construction sector being the primary contributor to real estate activity.

However, with the increased demand for construction projects, the cost of raw materials has skyrocketed, making it challenging for developers and construction companies to undertake new projects. This has led to a decrease in construction activity, causing people to invest more in buying plots instead of undertaking real estate development.

In response to these challenges, the State Bank of Pakistan (SBP) has recently made a landmark announcement that commercial banks will also provide financing for under-construction projects, marking a first in Pakistan’s real estate history. This move is expected to support the real estate sector and encourage further growth.

Housing and construction finance play a significant role in the real estate industry in Pakistan, with the main players and stakeholders being the government, the State Bank of Pakistan, and commercial banks. These entities work together to provide support and financing to the industry, enabling it to continue its growth and development.

Understanding Construction and Housing Finance

Construction finance, also known as under-construction projects, is a lesser-known concept for many individuals. In the past, banks have mainly provided financing for built properties through mortgages that span several years. However, with the growing demand for construction in Pakistan’s real estate sector, the State Bank of Pakistan (SBP) has recently implemented new mechanisms that allow commercial banks to provide loans for under-construction projects.

According to the new guidelines, both horizontal and vertical development projects will be covered, but the construction of high-rises will be the main beneficiary of this move. This means that buyers of properties in high-rise projects will be able to acquire units at a lower cost. The banks will closely monitor the projects to ensure their timely completion and reduce the maintenance costs for purchasers in the early years.

The new measures by the State Bank of Pakistan will make it easier for individuals to finance under-construction projects and encourage growth in the real estate sector. The role of commercial banks will be crucial in facilitating this process and ensuring that the projects are completed on time and with minimal maintenance costs for buyers.

Builders and developers have multiple options for financing construction projects. One source is their own equity, which can be used to purchase land and obtain necessary approvals prior to beginning construction. Another source is pre-selling project units to buyers through full payment, installments, or mortgages. This is a crucial aspect of obtaining construction finance as banks assess the loan-to-cost ratio for each project. Since banks do not finance the entire cost of a project, having a substantial number of units sold gives the bank confidence that the developer has sufficient equity to commence and continue construction.

A third source of funding can come from construction lenders, who evaluate the number of pre-sold units, the loan-to-cost ratio, and the feasibility of completing the project with the loan amount requested by the developer. Once the maximum loan amount has been determined, financing is only released once the developer’s equity and unit sales resources have been exhausted. In case there is a shortage of capital later on, the developer will need to provide additional personal equity. (Building and Construction CSI Specifications, 2021)

Importance of Construction Financing in Real Estate Projects

The construction of high-rise buildings involves numerous expenses and a variety of stakeholders throughout the process. Before construction can even begin, there are many hidden costs such as obtaining land and securing approvals from regulatory authorities.

Moreover, construction is a complex, multi-stage process that encompasses not only the physical aspect of building but also the integration of various technologies and professional services. This results in costs that are constantly fluctuating and high. Developers often cannot bear these costs on their own and must pre-sell multiple units of their projects to acquire the necessary resources for construction.

However, not all investors opt for full payment for an unfinished unit. A vast majority invest through installment plans or buy on mortgages. This delays the developer’s access to funding, and many construction projects stall in later stages. If the developer is unable to sell enough units or encounters other regulatory hurdles, it is possible that the project will be left incomplete.

Therefore, the involvement of construction lending institutions in helping developers complete their projects can significantly boost growth and activity in the building and construction sector. (Chileshe & Haupt, 2005)

Main Stakeholders of Construction Financing and their Roles

In Pakistan, the construction finance sector is influenced by three key stakeholders: commercial banks, the real estate regulatory authority, and the State Bank of Pakistan (SBP). Commercial banks, as lenders, create policies and guidelines for evaluating construction projects and monitoring construction progress and builder’s financial standing.

The success of a construction project is dependent on various elements, such as the market, cost, risk of rising material and labor expenses, environment, and approvals from regulatory bodies. These financial institutions are responsible for assessing the impact of these factors. The real estate regulatory authority, which varies in each province, acts as a consumer protection agency to ensure transparency and security for buyers.

Finally, the SBP provides comprehensive guidelines to commercial banks to prevent excessive risk, which can harm the market in the long run.

In Pakistan, the construction finance industry is influenced by three significant stakeholders: commercial banks, the real estate regulatory authority, and the State Bank of Pakistan (SBP). Commercial banks, as lenders, establish policies and guidelines to assess construction projects and monitor construction progress and builder financial capability.

The achievement of a construction project is dependent on various factors such as market conditions, cost, the risk of increasing material and labor expenses, the environment, and regulatory approvals. These financial institutions are responsible for evaluating the impact of these factors. 

The real estate regulatory authority, which is different in each province, serves as a consumer protection agency to ensure transparency and protection for buyers. Finally, the SBP provides extensive guidelines to commercial banks to prevent excessive risk that can ultimately harm the market in the long term.

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