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Regulating the unregulated real estate sector

Regulating the unregulated real estate sector

With around 220 million people, Pakistan is amongst the most populous countries in the world where millions of people are still living without basic necessities including proper accommodation. Pakistan’s real estate sector is traditionally unorganized and is characterized by various factors that hinder its growth such as lack of uniform laws, non-availability of bank financing, high security requirement for financing, volatile interest rates and lack of transparency in estimating transaction values. Moreover, in order to make real estate sector more attractive, it is important to bring greater transparency in registering the property with the local land departments.

Pakistan’s geographic location has always been important but post-CPEC it has emerged as an important business location, particularly in the services sector. Its favorable demographics, investment requirement and economic growth make it an attractive place for property investors especially when government plans to build affordable housing schemes.

There are indications that ill-gotten or black money is heavily used in real estate business in Pakistan. Past government tried to implement key reforms to curb the usage of dirty money in the sector and also tried to bring the sector in the tax net (withholding and capital gain tax). In order to accomplish that, federal government decided to establish a Directorate General of Immovable Properties in FBR in the finance bill 2018 for checking the valuation of the property and making an assessment of related taxes. Due to apparent pressure from the big players of the sector, FBR delayed the establishment of such directorate and was of the opinion that such measures can only be taken by FBR with the support of all the provinces.

The pre-emption right through the Finance Act 2018 became effective from July 1 2018. In addition, tax rates on the purchase and sale of properties were also reduced ranging from 1% to 4%, to only 1% of the gross value of the property. As a matter of fact, there are three different rates applicable on a property; one is the actual price, second is DC rates, and third is FBR valuation rates that are higher than the DC rates but lower than the market rates. Federal government in May 2018 decided to abolish FBR rates on property, requested provinces to end DC rates and barred non-filers from buying property exceeding Rs 5 million. It is considered that uniform tax rates will eliminate the difference among various rates and owner will only have to pay 1% tax.

Through Finance Act 2018, government prohibited non-filers of income tax returns from buying property valued above Rs 5 million; due to this condition, activities in the real estate sector were reduced and sector apparently got stuck. As per some media reports and government’s own estimates, half of foreign remittance from overseas Pakistanis is in the property and real estate sector,which the current government thinks is necessary to maintain. Therefore in the second week of September 2018, federal government in its mini-budget has again allowed non-filers to purchase properties in Pakistan, which is being widely viewed as a concession to overseas Pakistanis.



Despite above, necessary regulatory changes permitting foreign investments are required which can further increase the investment in the sector. There is a need for a Federal Real Estate Authority in the country that could help protect the rights of land allottees. Getting financing in the real estate sector for small investors is a challenge but gives a lot of space to big developers. As a matter of fact, big developers procure chunk of land,launch a scheme, get necessary consents and approval, construct roads, get utility connections and start developing the projects. On the basis of preliminary work, they market their project and get partial receipts as advances by selling the plots, apartments, or offices and thereafter develop remaining project by using those advance receipts. As per an estimate, big developers require only 25 to 30 percent of the required cash and thereafter projects are completed on the cash receipts from the allottees. A number of defaults have been seen in the sector where developers have gone bankrupt or didn’t develop the schemes as per their initial plans thus investors suffered badly. Due to this very reason, a robust regulatory authority is required to protect the rights of the residents.

It is a fact that demand for residential, commercial and retail real estate is rising throughout the country, accompanied by increased demand for hotel accommodation and improved infrastructure. Focusing on developing big cities only will gear up to a dramatic increase in size and their infrastructure (schools, roads, hospitals) and consequently housing capacities will need to expand massively. The growth in the residential real estate market has largely been driven by rising disposable incomes, a rapidly growing middle class, low interest rates, heightened customer expectations, as well as increased urbanisation and growing number of economic activities.

There is a higher income group in Pakistan as well as there are overseas Pakistanis who can participate in the luxury and super luxury residential developments. It is expected that the residential sector will demonstrate a robust growth over the next five years, assisted by the rising penetration of housing finance with favorable tax incentives and financing plans. In addition, infrastructure development is expected to be undertaken through public-private partnerships, thereby increasing the flow of private capital into infrastructure projects. Key areas of infrastructure development include hospitals, educational institutes, ports, pipelines, sanitation, water supply and irrigation.

Despite huge investment potential, there are certain snags related to investment in the sector which includes transparency, title complexities and imperfections. Ownership records and land titles are one of the biggest blind spots in property valuations. This is also one of the key issues in getting loans from the banks. As per SBP report, “Residential Real Estate Loans to Total Loans – All bank” and “Commercial Real Estate Loans to Total Loans – All Banks” in 2017 was 2.2 and 9.1 percent respectively only, which is on the lower side. In order to mobilize the sector, it is critical to address the fundamentals of the sector and remove issues which create hindrance in getting finances from the financial institutions.

It is estimated that shortage in housing sector is over 15 million housing units in the urban areas, there is a scope for building 5 million affordable housing schemes over the next five years and estimated investment of over $10 billion in next seven years; all this requires making financing schemes on a concessional rates and offering soft loans backed by partial government guarantees. It is said that Pakistan’s real estate market is relatively cheaper than other real estate international markets therefore chances of getting investment from international big players are possible only if coordinated efforts are made by the federal and provincial governments with pro-active attitude of FBR.

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