Pakistan Institute of Development Economics

Discourse Vol 3, Issue 3
Real Estate Myths in Pakistan and the Truth Behind Them
Publication Year : 2022
Author: Ahmad Fraz

Our  Future   and  the  Real  Estate Sector

General  perception  among  people to make their  future  secure  drives  them to  invest  in  the  real  estate  sector  in Pakistan.  However,  due to heavy taxes imposed  on the  real  estate  sector  by the  previous  government,  investment trends   in   real   estate   have  shrunk, resulting   in    a   complete   obliteration of  this   sector.   Pakistan’s   real   estate market   has    a   large   contribution   in economic growth, posting growth even as  foreign  direct  investment  falls  or infrastructure spending  remains stingy. The real estate sector assets contribute from 60 – 70% of the country’s wealth – approximately,  USD 300 to USD 400 billion as estimated  by the World  Bank.

It  is  the second  largest  employment• generation sector in Pakistan after agriculture. Apart from direct employment, it also stimulates the demand  of  more than  400 industries of the economy from construction (cement, steel, paint, building  material, architects, and urban planners) to financial services (house financing). As the government has increased amounts of various taxes, especially in terms of sale and purchase, strict measures were introduced to prove the money-trail behind the investments within the last three years.  Consequently, this  sector has suffered  from  a severe  economic crisis, many offices of real estate consultants are closed, and millions of people affiliated to this sector are now starving.

OverRegulation of the Market

FBR’s strict regulations (ban on non• filers, compulsory registrations when buying   property   of   more  than  PKR 5   million  and  levying   high  taxes  on property   transfer)    has  discouraged investors    in    this   sector.    Although, financial    markets    are   experiencing volatility, it’s not the economic indicator you might think.  But  as an investment option,  a  myth  prevails that real estate sector  makes    a  lot  of  money  is   not true.  In  most countries  where financial markets  are not  playing a  key role in economic growth, the real estate sector steps   in.   Unfortunately,   this   sector is  not able to do so  because of over-regulation  by the  government and the FBR.   Consider the housing price index and  KSE-100  index  (Figure  1      below). Between   2011   and  2019,   cumulative return of housing prices has been high compared to KSE-100 for only 3 years. In  the  same  period,  the KSE-100  index has increased  by 230 percent  versus 147 percent for housing prices.

There are occasionally certain cycles in investments, and it has also occurred in real estate sector of Pakistan from 2012 to 2015, where yearly returns were 16 percent, 25 percent and 14 percent respectively.  In  all other years,  return for  housing  index  are in  single  digit from  1     percent to 9  percent. Whereas, the KSE-100 index is  more volatile and offers high returns and high losses; the highest return  earned by KSE-100  was 42 percent in 2016 and reported 19 percent loss in 2017.

The Post 2018 Real Estate Market

Real   estate  market  has  had  a   very difficult time after the change of regime in 2018. It has faced financial, economic, political    challenges,   a     number    of policy issues and lack of confidence. It barely managed to  survive the earlier recession, mainly due to massive investments by overseas Pakistanis. Depreciation of the Pakistani rupee made property investment cheaper due to exchange rate benefits for overseas investors.

According  to  Zameen.com,  over 30% of traffic on their site is from overseas Pakistanis  looking for  investment.  But investing in the real estate market is already risky, as Pakistan currently ranks 120th  out  of  129  countries  (scoring just 3.9/10). This type of ranking is  an important consideration for overseas investors. In the presence of such uncertainty and tax policies, thousands of the overseas investors have diverted their investments elsewhere. These countries (e.g. UAE and UK) are offering better incentives so the volume of foreign exchange for real estate investment has dropped.

SBP   has  reported  that  Pakistan received USD 21.84 billion  remittance during  2019-20. Most of the overseas investments are in the real estate sector because they face restrictions in doing other     businesses.     Over-regulation of the real estate sector discourages overseas investors  and  may  cause a reduction of remittances in Pakistan. Further  the  policy  of  non-utilization of development  budgets by the government  causes the contraction of the activities of this sector.

The Future of Real Estate

Apart from  all the decisions taken by the authorities, there were high hopes that this sector will have high growth in 2020. But the issue is much bigger this time that can potentially cause a serious crisis in the real estate markets across all big cities specifically Islamabad, Rawalpindi,  Lahore and Karach

Increasing the tax for a  potentially growing sector contributing to the economic growth like real estate sector can be damaging. Government should broaden  the  tax  net  by  incentivizing the sector first. In the current situation, the government should form a  revised policy for the real estate sector.

Points to Ponder

Government must bring a well• structured, transparent and centralized system  for  investors  as compared  to the   current   complicated   procedures of  documentation  and doubtful  legal support. After giving the industry status to that industry, the government should establish an industry regulator, approve rules regarding land acquisition and ownership and all property consultants and projects should  be registered.

Discourse Vol 3, Issue 3
Real Estate Myths in Pakistan and the Truth Behind Them
Publication Year : 2022
Author: Ahmad Fraz

Our  Future   and  the  Real  Estate Sector

General  perception  among  people to make their  future  secure  drives  them to  invest  in  the  real  estate  sector  in Pakistan.  However,  due to heavy taxes imposed  on the  real  estate  sector  by the  previous  government,  investment trends   in   real   estate   have  shrunk, resulting   in    a   complete   obliteration of  this   sector.   Pakistan’s   real   estate market   has    a   large   contribution   in economic growth, posting growth even as  foreign  direct  investment  falls  or infrastructure spending  remains stingy. The real estate sector assets contribute from 60 – 70% of the country’s wealth – approximately,  USD 300 to USD 400 billion as estimated  by the World  Bank.

It  is  the second  largest  employment• generation sector in Pakistan after agriculture. Apart from direct employment, it also stimulates the demand  of  more than  400 industries of the economy from construction (cement, steel, paint, building  material, architects, and urban planners) to financial services (house financing). As the government has increased amounts of various taxes, especially in terms of sale and purchase, strict measures were introduced to prove the money-trail behind the investments within the last three years.  Consequently, this  sector has suffered  from  a severe  economic crisis, many offices of real estate consultants are closed, and millions of people affiliated to this sector are now starving.

OverRegulation of the Market

FBR’s strict regulations (ban on non• filers, compulsory registrations when buying   property   of   more  than  PKR 5   million  and  levying   high  taxes  on property   transfer)    has  discouraged investors    in    this   sector.    Although, financial    markets    are   experiencing volatility, it’s not the economic indicator you might think.  But  as an investment option,  a  myth  prevails that real estate sector  makes    a  lot  of  money  is   not true.  In  most countries  where financial markets  are not  playing a  key role in economic growth, the real estate sector steps   in.   Unfortunately,   this   sector is  not able to do so  because of over-regulation  by the  government and the FBR.   Consider the housing price index and  KSE-100  index  (Figure  1      below). Between   2011   and  2019,   cumulative return of housing prices has been high compared to KSE-100 for only 3 years. In  the  same  period,  the KSE-100  index has increased  by 230 percent  versus 147 percent for housing prices.

There are occasionally certain cycles in investments, and it has also occurred in real estate sector of Pakistan from 2012 to 2015, where yearly returns were 16 percent, 25 percent and 14 percent respectively.  In  all other years,  return for  housing  index  are in  single  digit from  1     percent to 9  percent. Whereas, the KSE-100 index is  more volatile and offers high returns and high losses; the highest return  earned by KSE-100  was 42 percent in 2016 and reported 19 percent loss in 2017.

The Post 2018 Real Estate Market

Real   estate  market  has  had  a   very difficult time after the change of regime in 2018. It has faced financial, economic, political    challenges,   a     number    of policy issues and lack of confidence. It barely managed to  survive the earlier recession, mainly due to massive investments by overseas Pakistanis. Depreciation of the Pakistani rupee made property investment cheaper due to exchange rate benefits for overseas investors.

According  to  Zameen.com,  over 30% of traffic on their site is from overseas Pakistanis  looking for  investment.  But investing in the real estate market is already risky, as Pakistan currently ranks 120th  out  of  129  countries  (scoring just 3.9/10). This type of ranking is  an important consideration for overseas investors. In the presence of such uncertainty and tax policies, thousands of the overseas investors have diverted their investments elsewhere. These countries (e.g. UAE and UK) are offering better incentives so the volume of foreign exchange for real estate investment has dropped.

SBP   has  reported  that  Pakistan received USD 21.84 billion  remittance during  2019-20. Most of the overseas investments are in the real estate sector because they face restrictions in doing other     businesses.     Over-regulation of the real estate sector discourages overseas investors  and  may  cause a reduction of remittances in Pakistan. Further  the  policy  of  non-utilization of development  budgets by the government  causes the contraction of the activities of this sector.

The Future of Real Estate

Apart from  all the decisions taken by the authorities, there were high hopes that this sector will have high growth in 2020. But the issue is much bigger this time that can potentially cause a serious crisis in the real estate markets across all big cities specifically Islamabad, Rawalpindi,  Lahore and Karach

Increasing the tax for a  potentially growing sector contributing to the economic growth like real estate sector can be damaging. Government should broaden  the  tax  net  by  incentivizing the sector first. In the current situation, the government should form a  revised policy for the real estate sector.

Points to Ponder

Government must bring a well• structured, transparent and centralized system  for  investors  as compared  to the   current   complicated   procedures of  documentation  and doubtful  legal support. After giving the industry status to that industry, the government should establish an industry regulator, approve rules regarding land acquisition and ownership and all property consultants and projects should  be registered.