Real Estate in Pakistan:
Real estate is one of the major pillars of any economy :
The country to which it belongs, where it is located, is, in the end, all the critical factors where wealth is concentrated and where human society will organize itself.
According to the World Bank, almost 60-70pc of a country’s total wealth is stored in its real estate assets.
Apply these estimates to Pakistan, and you look at a real estate sector worth between 300 and 400 billion dollars.
With every number in the billions, let alone the hundreds of billions, it will not gain attention and importance.
But for a host of financial, economic, and political challenges, real estate was a disaster last year and does not look brighter in 2020.
The positive thing, however, is that things are stagnating for the time being, and that means the possibility of growth.
“A NEAR COMPLETE ABSENCE OF INCENTIVES FOR THE INVESTORS WAS IMPOSED AS THE GOVERNMENT TRIED TO SOMEHOW WRANGLE A TAX NET TOGETHER. BANS WERE IMPOSED ON NON-FILERS FROM BUYING PROPERTY WORTH MORE THAN RS 5 MILLION UNLESS THEY REGISTERED WITH THE FEDERAL BOARD OF REVENUE (FBR).”
The current impasse in Pakistan’s real estate sector can be traced back to 2017 when a strange mix of political instability, fiscal confusion, and uncertainty in economic and fiscal policy initially caused the once-dynamic sector to break up anxiously and eventually came to a halt.
A near-total lack of incentives for investors was imposed when the government tried to somehow merge a tax network.
Non-Filers prohibited the purchase of properties worth more than Rs 5 million unless they registered with the Federal Board of Revenue (FBR).
This was followed by strict controls on non-filers’ banking operations by the Board of Directors, higher taxes on asset transfers, and active deterring investors from putting their money into the year 2018-19. No one can really say what this has achieved.
What is clear is that she has managed to make things more chaotic.
“DESPITE THE GLOOMY OUTLOOK AND THE BRUISING IN THE LAST FEW YEARS, THERE IS COMPELLING EVIDENCE THAT 2020 WILL BE AN EXCITING TIME FOR INVESTORS, ESPECIALLY PRIME MINISTER IMRAN KHAN’S BLUE-EYED DEMOGRAPHIC: OVERSEAS PAKISTANIS.”
Another factor contributing to the slowdown in the real estate sector was the under-utilization of the development budget, which led to a contraction in the construction sector and thus in the real estate sector.
Just thinking (and writing) about the last few years in Pakistani real estate is a hope that robs.
Where could it go from here? Don’t be surprised if it’s up, even if it’s not even down yet.
Despite the bleak outlook and bruising in recent years, there is compelling evidence that 2020 will be an exciting time for investors, especially prime minister Imran Khan’s blue-eyed demography: the Pakistanis overseas.
First of all, and this is not an easy factor, there has been a serious boom in the tourism industry.
Inbound tourism in Pakistan has seen a significant increase of more than 70 percent in 2019, mainly due to several government initiatives and in particular the improved security situation.
The number of foreigners visiting Pakistan on tourist visas in 2018 is 17,823, according to a report, up from 10,476 in 2017, according to a report.
This significant growth in the tourism industry will definitely force foreigners to buy real estate in Pakistan, especially in Lahore, a historic, central, and tropical place. Similarly, Pakistan is on the right track by creating a favorable business environment, with the World Bank ranking Pakistan 108th in the global ranking of its Doing Business 2020 report. That’s a jump of almost 30 places, with Pakistan ranked 138th just a year earlier.
The improved business environment will attract foreign direct investment in the country and create employment opportunities for young people.
According to a World Bank report, an increase in foreign investment and an expansion of the market has a direct impact on the value of the real estate.
Improved economic indicators suggest that 2020 will be a year that will increase demand from commercial and luxury housing associations in metropolitan areas such as Lahore, Faisalabad, Multan, and Karachi.
Digital Vision Pakistan is also a much-needed project to modernize the governance system, and bodes well for investors, especially overseas Pakistanis, who longed for the digital revolution in governance and taxes.
E-governance provides platforms for reporting corruption, convenience for citizens, and minimal interaction with government officials. Besides, the Federal Government has also authorized the competent authorities to carry out a digital survey on the sale and purchase of a real estate in Pakistan, which will provide citizens with easy access to the information of all properties.
There is also the CPEC factor.
It was a buzzword, and now it’s being treated as just that, but that doesn’t do much to end its reality on the ground and the impact it has on potential investors. However, the positive effects of CPEC can be seen in the form of an improved situation in the energy sector and the partial completion of the Lahore-Karachi motorway. The distance between Lahore and Multan was reduced from an earlier 5-hour distance to 3 and a half hours. Companies and investors are now looking to Multan as Pakistan’s new business location. The development of DHA Multan, DHA Bahawalpur are some of the examples that demonstrate the blessing of CPEC and its ultimately positive impact on real estate in the country.
However, there are still some challenges. The withholding tax on non-filers in banking transactions, FBR communications to bank customers to authenticate their sources of money are still haunting for customer confidence. Up to 37 percent of banking is in cash, which diminishes the financial industry’s creditworthiness, says Asad Umar, a former finance minister. This must be reduced to at least 25pc if we want to have a prayer.
Likewise, the Pakistanis of the diaspora still need to be properly courted. According to the State Bank, Pakistan received a record sum of USD 21.84 billion in 2019/20. The only way ex-pats can invest in Pakistan is in real estate, as they cannot possibly run businesses in the country. To this end, they must be facilitated in every possible way. Awkward procedures, the collection of high taxes on non-filers abroad, and the requirement to visit Pakistan for the completion of the real estate acquisition process are some of the many reasons that have prevented overseas Pakistanis from investing their money in the real estate sector. The demand for remittances will never suffice, and the government will now have to win them over.
The state of affairs is that the real estate market has been overtaken by uneducated agents and traders who do not have the skills to lead people, and in most cases leads to fraud and ruin – which continues to give the sector a bad name and keeps domestic and foreign investors out. There is an urgent need for a federal and state real estate agency in the country that could help regulate the profession and protect the rights of land allies.
Besides, there is an urgent need to inspect the development of the companies by developers and builders, as it takes many years for the land clearing process to be completed. Supervision by a real estate regulator will give the company some legitimacy and, above all, certain accountability. Those abroad do not have to worry about being cheated.
Across the world, real estate and stock markets play a key role in a country’s economic growth. But real estate in Pakistan is unable to reach its maximum potential due to over-regulation by the FBR. Currently, there is no tax on properties that have been owned for more than four years. But a five percent tax is levied if the assets are sold to rs 5 million over four years and a 15 percent tax is levied on properties sold within 10 years of ownership.
Raising the tax rate and banning non-filers is not a solution and serves no real purpose, except that the government feels more control over the sector. Only well-articulated research is needed to expand the tax network by incentivizing non-filers to become filers. The government seems to be doing the opposite by punishing people who want to invest and circulate wealth.
Someone has to tell the government that their two projects, with 5 million housing programs and 10 million jobs, will only succeed if the real estate sector grows because there are more than 100 industries that are directly and indirectly related to them. The housing boom will boost growth in other industries, such as construction, which accounts for 2% of Pakistan’s GDP. It will not only help to overcome the housing shortage but will also provide employment opportunities for our aspiring youth, who make up 60% of the total population of 220 million. The government must also build new cities along with major metropolises to overcome the urbanization crisis.
At the moment, the market has shrunk, and investor confidence has been shaken by restrictions on non-filers and the introduction of huge taxes on already tax-paying citizens. The government must develop long-term strategies to broaden the tax base. Taxing existing taxpayers will only do more damage, firstly by crowding out the tax base, as people will start using cash transactions instead of bank transactions and hiding their assets, and secondly by forcing investors to park their assets outside Pakistan by buying a property in the UK, Dubai and investing money in offshore companies. Reforming the system requires a step-by-step approach, as rapid reforms can harm the economy, especially real estate.