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Pakistan Construction Sector: Housing Finance Subsidy getting more clearer; First 100,000 units will get Rs300,000 subsidy per unit

• The government has further shared details of its Naya Pakistan Housing Program. The government aims to revive the economic activities affected by COVID-19 through housing and construction sectors.
• The banks have been asked to allocate 5% of their advances portfolio for the construction sector, while the government intends to provide Rs300,000/unit subsidy to first 100,000 units built under Naya Pakistan Housing scheme. This will be conjoined by low rate financing of 5% and 7% for 5 and 10 Marla houses, respectively.

Banks

• Banks current exposure to the construction sector is 2% of the overall Credit to Private sector and 1% of the overall Advances. The government’s directive is expected to increase liquidity towards the construction sector by Rs300-350bn.  
• While we expect further details from State Bank of Pakistan (SBP) on how this scheme will materialize, we take cue from SBP’s earlier financing facility for Low Cost Housing for Special Segments. The borrower rate for SBP refinance was 5%, which included bank’s spread of up to 4%.
• The key risk for the banking sector remains implementation for Foreclosure Laws, as banks still remain reluctant to lend to the housing sector, even after the favorable decision by the Lahore High Court on this matter.
• Based on back of the envelope working, assuming 3% spread, Banks can earn an additional 3-5%, unadjusted for risk.

Cement, Steel and other allied sectors

• We estimate additional cement demand of ~1mn tons (2% of overall sales) and steel rebar demand of 150k tons (2-3% of overall sales).
• Our base case assumption for cement sales growth is already 7.5% for FY21E, which already incorporates developments pertaining to construction package. However, this additional demand can increase cement and steel sector (rebar) profits in range of 4-6%.
• Other sectors like, Tiles, Glass etc. are also likely to be beneficiaries.