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Significance of real estate market amid taxation, waning interest rates

Real estate market is crucial for promoting commerce and industry, growth and employment, and poverty reduction. The liberalization of the Pakistani economy has increased business opportunities and migration of the labor force to urban localities has led to an increase in the demand for both commercial and housing space. However, the role of formal real estate investment markets in the process of economic development remains poorly understood. The lack of understanding is, in part, a direct result of the absence of reliable information on real estate values, yields and total returns.

The real estate market is the market that encompasses all transactions which involve dealings in rights or access to land and buildings. It forms the backbone of the urban economy being a fixed factor market; hence an efficient real estate market is most important for a well-functioning urban environment.

An efficient real estate market is one that encourages quick development and transaction of land, provides reasonable access to all income groups, environmentally sound and the system governing the land markets should be integrated with other laws and regulations governing land, such as planning, taxation and provision of public infrastructure and services.

According to the World Bank, in most countries, real estate (including land) accounts between half and three-quarters of national wealth. In Pakistan about 250 ancillary industries, such as cement, steel, brick, timber and building materials, are dependent on the real estate industry. These combined make it the second largest employer, next only to agriculture.

There is a need for an efficiently organized finance system in the real estate market to ensure that the capital value held in the real estate market is not grossly underutilized. Real estate finance is a vital element in the development of a dynamic housing and construction sector. Theoretically, bank lending is one of main sources of real estate funding, and there exist close connections between real estate prices and bank credit. To avoid over-exposing of the banking system to the real estate market, the relationship between the real estate and the financial sector needs to be understood and regulated.

The housing finance market is among the most important in the economy. It accounts for a sizeable portion of the production activity of a country, through its backward linkages to land markets, building materials, tools, durable goods and labor markets. During the last few years, favorable developments in the economy have facilitated the offering of housing finance by financial institutions. The increasing scope of finance for housing in Pakistan has led many local and foreign banks to be engaged in house financing activities.

Low interest rates stimulate the real estate sector by encouraging home-buying activity and by making it less expensive for individuals and businesses to borrow money to invest in all types of real estate. However, the impact of low interest rates has to be looked into in conjunction with the myths and facts in the aftermath of property taxes imposed on the Pakistan’s real estate sector in the budget 2016-17.

MYTH NO 1: PAKISTAN REAL ESTATE RIDES ON BLACK MONEY

Fact: The demand for real estate is driven by population growth, personal income, employment rates, interest rates, and access to capital. Between 2006 and 2011 real estate sector in Pakistan was very slow in growth. If black money is the cause of price hike we can thus safely say Pakistan was black money free during that time, which we know we were not. In fact corruption and tax evasion was at its peak during this very period. The biggest factor when it comes to the growth of Pakistan real estate is foreign remittance. Only in the year 2015-16 approximately $6 billion was injected in the economy of Pakistan for real estate sector through foreign direct investments.

MYTH NO 2: TAXING REAL ESTATE WILL PRODUCE JOBS AND GROW INDUSTRY

Fact: Pakistan has become over the years more of a services and retail economy. In reality the government will be adding a lot of people to unemployment list because of lack of development of real estate.

MYTH NO 3: IT WILL BE GOOD FOR COMMON MAN

Fact: This is a common misunderstanding that a common person will benefit from the taxes. Actually the common person will end up being the biggest sufferer. The real estate sector will recover and as it recovers the prices will soar high thus making it harder for a common man to possess a piece of land. In reality, the common man does not get any benefits or tax cuts.

MYTH NO 4: PROPERTY PRICES ARE TOO HIGH

Fact: There is a common misunderstanding that the property prices are too high in Pakistan. The central and more developed locations are expensive and will always be more in demand. Societies such as Central Park, Grand Avenues, Park View Villas, Raheem Gardens, Bahria & Nashaiman etc. cater for middle and lower middle class.These are the dynamics of real estate sector everywhere in the world. Suburbs will always be cheap till they develop and become more central and so on and thus the urban areas keep on expanding.

As 2016 draws to a close, the big question on all real estate professionals’ lips is: what will 2017 hold? Migration away from major cities, infrastructure improvements and increased international interest from investors are just some of the expected developments for Pakistan’s real estate market. Industry professionals have already noted the increased attraction of second- and third-tier cities in emerging urban cities such as Gujranwala, Faisalabad, Multan and Hyderabad. As the bigger cities such as Lahore, Islamabad and Karachi are becoming slowly saturated, real estate developers and investors alike are turning their attention to smaller cities.

In June 2016, Pakistan’s first-ever Real Estate Investment Trust (REIT) was launched, paving the way for unprecedented growth in the country’s commercial property sector. More REITs are expected to follow this lead over the next 12 months.With deals such as the China Pakistan Economic Corridor (CPEC), foreign investment is at an all-time high. Moreover, with the improved security situation, especially after the Karachi operation, foreign investment has increased drastically and is expected to grow further over the course of 2017.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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