Karachi: Unlock Rs500b worth of home equity by formalising informal settlements


Economist Asad Sayeed, journalist Khurram Husain and former central banker Syed Salim Raza have carried out a fascinating study on the evolution of informality in Karachi’s land, manufacturing and transport sectors.

Released by the United States Institute of Peace (USIP) on May 3, the study offers a lot of insights based on field research conducted between December 2014 and April 2015.

I wrote a news story last Sunday to introduce Tribune readers to housing-related contents of the study. You can read it here.

Here are a few takeaways:

— Land is the single largest source of income generation in Karachi’s shadow economy.

— High-income residents of Karachi occupy 27% of land in Karachi (as formal residential areas). In contrast, only 8.1% of the land is used for informal residential areas catering to more than 50% of the population.

— An estimated 55% of Karachi’s population lived in unplanned or partially planned areas in 2012. As a result, there are now 2,800 people per hectare in Karachi’s informal residential areas versus 200 people per hectare in elite residential areas, it says.

— A formal recognition of Karachi’s low-income katchi abadis (KAs) will let low-income people get their “locked” equity value of their houses released by allowing them to borrow against proper title deeds.

— The price of a standard 80-100 square-meter KA property currently equates to seven years of income for the average low-income wage earner. But the accepted industry ratio for affordability is considered to be four years of income, which was the case in Karachi a decade ago.

— Consequently, more people are now renting and, depending on the area, 33%-50% of the housing units may be rented in KAs, it says.

— Total KA properties are worth around Rs500 billion in Karachi, assuming an average (conservative) price of Rs600,000. If half of these properties were to be used as collateral for debt – 50% loan-to-value — Rs125 billion could be unlocked for home or business expansion.

I was particularly struck by the accuracy of the affordability criterion. Here’s a real-life example that — although from middle-class Gulistan-e-Jauhar as opposed to the KAs – demonstrates the validity of the four-year-income assumption of house affordability.

I know of a guy who purchased a flat in Jauhar for roughly Rs3.6 million in December 2013. (The amount excluded additional charges, such as KE bribe etc.) His salary was about Rs75,000 a month. This means the property he purchased more than two years ago was worth exactly his four years of income.

He had gotten the flat financed from the sole housing bank operating in Pakistan. Right now, the same property is worth Rs7 million. Given his current salary, that property is worth roughly seven years of his income.

“Yes. Same potential exists in KAs if titles can be made more secure,” one of the writers of the study told me when I shared this example with him on the SMS.


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