Recently Pakistan Credit Rating Agency (PACRA) has released a research paper about construction sector of Pakistan mentioning the industry contributed Rs1,409 billion to Pakistan’s Gross Domestic Product (GDP) in FY2021, up from Rs1,231 billion in FY2020.
The construction sector of Pakistan grew 14.4% year over year in FY2021, although its contribution to GDP fell from 3.2 percent in FY2019 to 2.8 percent in the previous fiscal year.
Construction activity in the industrial sector, on the other hand, surged 14.4% in FY2021, thanks to higher government concessions and aggressive private sector investment.
Between FY2020 to FY2021, the private sector’s gross fixed capital formation (GFCF) increased by 6.6 percent. The GFCF from the private sector accounted for more than 72% of the total.
The funding of construction sector of Pakistan reached Rs211 billion in the first eight months of fiscal year 2022, an increase of 70% year on year.
Steel, cement, bricks, aluminium, cables, fixtures, glass, kitchen and bathroom fittings, marble, paint, ceramic tiles, transportation, warehousing, and wood all contribute to the construction industry, which employs 7.61 percent of the total workforce in the construction sector of Pakistan.
The Public Sector Development Programme (PSDP) spending on uplift projects, followed by private investments, are the main drivers of demand in the construction sector.
The majority of construction revenue comes from government contracts, which include anything from infrastructure to motorways. The building sector has gained considerable speed with the beginning of CPEC. Furthermore, government relief packages and subsidies are fueling the industry’s expansion.
Construction of private and residential structures and housing units, particularly in rural regions, is also a key driver of the industry. Residential housing demand is increasing in lockstep with population growth. According to the State Bank of Pakistan, Pakistan has a housing shortage of 12 million homes.
The federal government has set aside Rs24 billion for the housing and works division, with another Rs36 billion set up for discounts on housing loan markups under Prime Minister Nawaz Sharif’s Mera Pakistan Mera Ghar plan.
The construction material of construction sector of Pakistan accounts for more than half of the industry’s cost of goods sold. Due to rising material prices, the sector’s gross margins have fallen to 10% in FY2021. Material prices throughout the world are continuing to rise, putting downward pressure on gross margins.
However, the sector’s net margins increased to 4% in FY2021 from 2% in FY2020, showing higher retention, thanks in part to a number of incentives offered to the industry.
The government has made adjustments to its incentive plan for subsidised mark-up rates on home loans in an effort to encourage the building sector.
It has been separated into three tiers according to the updated design. A tier 0 category has been introduced to make it easier for microfinance institutions to participate. Disbursement of finance up to Rs2 million per housing unit has been included to the plan.
Because microfinance banks (MFBs) specialise in providing loans to low-income families, it is expected that their participation will greatly increase the reach of programmes to these groups.
For houses up to 5 marlas in the tier 1 category, markup rates are 3% for the first five years and 5% for the next five.
Tier 2 funding ranges from Rs3 million to Rs6 million, with interest rates of 5% and 7% for the first five years and next five years, respectively. Tier 3 funding is limited to Rs6 million to Rs10 million at a rate of 7% for the first five years and 7% for the next five. So, there is a lot of boom expected in the construction sector of Pakistan in next 7 years.