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EghtesadOnline: Iran Mercantile Exchange is studying three schemes to help fund the struggling housing sector via the capital market, the IME deputy head for market development said.

Plans include setting up housing funds, launching Real-Estate Investment Trusts (REITs) and offering salaf securities contracts, Alireza Nasser-Pour told state TV.

“Housing funds are not new to the capital market. These existed in the past but were restrained due to stringent regulations,” imereport.ir reported him as saying.

Nasser-Pour said that rules have been revised to both increase the diversity and improve functionality of such funds.

“Due to their inherent project-based nature, housing funds have limited timelines. This means that with the completion of the projects the funds should be repaid,” he was quoted as saying.

The IME official referred to efforts to launch the REITs, adding that the financial instruments will become operational in the near future because the Economy Ministry is obliged to use it to finance the key housing sector as envisioned in the March 2021-22 budget.

REITs own, operate or finance income-generating real estate. Modeled after mutual funds, REITs pool the capital of large numbers of investors. This makes it possible for individual investors to make a profit from putting money in real estate without having to buy, manage, or finance the properties themselves.

Many REITs are publicly traded on major securities exchanges and investors can buy and sell them like stocks. REITs typically trade under substantial volume and are considered highly  liquid instruments.

Observers underscore the role of REITs in funding housing projects, particularly the recently launched and government-backed National Housing Initiative as such funds help attract public savings into the near permanently credit-thirsty housing sector.

The NHI, one of the late projects of the former government,   has said it intends to build 400,000 affordable homes to first-time homebuyers.   

Salaf Contracts

The next major plan is to use standard salaf contracts to fund housing and construction projects, according to Nasser-Pour.  

Standard parallel salaf is an Islamic contract similar to futures, with the difference being that the contract’s total price is paid in advance.  

As per the scheme, the total value of a housing unit or a construction project will be securitized and converted into marketable salaf bonds. The bonds are supposed to be issued by the builders and offered in the stock market.

Each salaf contract will be backed by one square meter of a housing unit and each contract subject to the price of one square meter of a defined housing unit at the time of offer.

Investors who buy the contracts will receive the housing unit on maturity date if they own enough contracts that cover the total carpet area.

If the salaf contracts are not enough to buy a home, the prospective owners can sell it at the market rate before or on maturity date.  

Due to the inability of successive governments to boost low-cost home construction, Iran's housing market is facing a huge supply deficit accompanied with chronic inflation, recession and the rapidly disappearing purchasing power of fixed-wage earners.

The pattern over decades has made it increasingly difficult (most experts say impossible) for the low-income strata to afford decent housing. The same is true for the leasing sector. In short, Iran’s housing sector is in a crisis with prices and rents so high and unaffordable that even middle class households have been forced to move to satellite towns while the informal settlements swell.

In recent months the housing sector authorities have moved their focus on the stock market to possibly secure funding for home construction projects.

 

IME Housing Sector