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Pakistan real estate business is active and maturing towards diversification

Pakistan real estate business is active and maturing towards diversification

Introduction of single window operation may simplifies its tax system
Interview with Syed Muhammad Talha – Director, Safe Mix Concrete Limited

PROFILE:

Syed Muhammad Talha is CFO (Chief Financial Officer) of Javedan Corporation Limited, Safe Mix Concrete Limited and International Builders and Developers (Pvt) Limited. He is also serving as a Director of Safe Mix Concrete Limited. He is associated with the group for more than 8 years. He has a working experience of 15 years in various diversified capacities. Javedan Corporation Limited launched its project named as Naya Nazimabad (NN) which is a well-planned gated community wherein every member enjoys value for money life style at City Center. After the successful launch and handing over possession to the allottees, the brand name of Naya Nazimabad has already been established. The overall master plan spread over 1,366 acres land having clean and clear title of land, multiple entry and exit point, fool proof documentation including biometric verification make it a first choice to the buyers and investors. Javedan Corporation Limited is the only public listed company in Real Estate Sector enrolled in Pakistan Stock Exchange. Residential units in the project comprise of plots and built-up bungalows of 120, 160, 240 and 400 square yards. It has some value-added projects like state-of-the-art club, grand Jama Masjid, school, college, hospital, extensive greenery, cricket stadium, football and hockey stadium etc. Pricing and payment terms are structured as per the economic requirements of the target market. First phase of around 5,500 units has already sold out. Further, sub lease has also been issued to the allottees. Banks are on board to provide construction loan to the allotees, if needed. The secondary market is also established and now the allottees may enjoy huge premium of around 4 to 5 times on their booked units. Naya Nazimabad is currently working with International Architects to develop a mix use development schemes which will include 9000 apartments, Malls, Cinemas, Theme parks and other related projects. All these initiatives shall surely change the demography of the area and it will be a valuable addition in Karachi.

PAGE: YOUR VIEWS ON THE REAL ESTATE MARKET IN PAKISTAN?

SYED MUHAMMAD TALHA: The real estate sector in Pakistan has gained momentum after the improved security and law and order situation in all parts of the country with the major operation cleanup under the supervision of Pak Army named as Operation Zarb-e-Azb and Operation Radd-ul-Fasaad. It has created a friendly environment for all the stakeholders including residential and real investors to be part of real estate sector. The introduction of gated communities has also created the demand for the safe living of families across Pakistan. Investors in the real estate industry have also gained quadruple times of their investment in Pakistan for a period of past 5 years.

REITs (Real Estate Investment Trusts) is also an important component of this sector. As of now, REITs are at a severe disadvantage in comparison to all other organizational forms such as proprietorship, partnership or a private or public limited company in Pakistan. It is important to note that in a real estate project, public money inevitably gets involved in the form of customer advances. Therefore, it is imperative that such business is undertaken by regulated corporate entities such as REITs. REIT Regulations (first introduced by SECP in 2008) were revamped in 2010 and subsequently repealed and renewed in 2015, resulting in the launch of South Asia’s only REIT fund ‘Dolmen City REIT’. Only 2 REIT Management Companies initially registered in 2009, which struggled in bringing business due to very stringent and vague regulatory framework. No leverage allowed (REITs can’t obtain secured borrowing), excessive regulatory approvals requirements and transfer of real estate prior to the launch of REIT fund hindered progress. There are now 5 REIT Management Companies (AHDRML, AKD REIT, Orange REIT, SB Global, Islamabad Stock Exchange) working on various proposals awaiting favorable changes in both the Tax and Regulatory regimes governing REITs in order to list new REIT schemes.

PAGE: YOUR COMMENTS ON THE DEVELOPMENT IN THE CONSTRUCTION SECTOR OF PAKISTAN:

SYED MUHAMMAD TALHA: Pakistan property market has witnessed an upward trend for last 10 years especially in five major cities: Karachi, Lahore, Islamabad, Multan and Gwadar. We are expecting an upward trend in other areas as well after the availability/improvement in transport infrastructure. Huge infrastructure work is being carried out all over Pakistan. Almost in all major cities, road network is being established. Further, the introduction of Green, Blue and Orange lines shall improve the connectivity which will surely improve the pricing. After CPEC, the construction industry has entered into a new era as the demand for cement, steel, sand, hardware material, labor and other related stuff has also increased due to which the economy of Pakistan has seen the trickledown effect. It is pertinent to note that more than 50 industries directly or indirectly are linked with the real estate industry.

There is a need from the government side to take part in the multi-billion sector and to facilitate the real estate developers by computerizing all the land record to resolve title issues and to put in place laws and regulations, which would be beneficial for all the stakeholders including builders and developers. By facilitating the real estate sector, it will certainly help out to address the issue of unemployment in the country.

PAGE: HOW IS THE PROGRESS OF REAL ESTATE BUSINESS IN PAKISTAN AND WHAT ARE THE DIFFICULTIES BEING FACED CURRENTLY?

SYED MUHAMMAD TALHA: The real estate industry in Pakistan is shining day by day as the development of new schemes in the urban areas which are giving suitable friendly and safety environment for the inhabitants to make this sector more attractive. The average rate of return yield is far much superior as compared to other sectors, which makes it more convenient for the real estate agents and the investors.

Pakistan is now offering a high potential return on investment for foreign investors looking to diversify. You just imagine that anybody who had invested 10 years before in USA, UK, Canada or Germany shall not be able to match the return on investment in real estate sector of Pakistan. The current population of Pakistan is around 220 million and there are simply not enough houses being built. Currently, the housing shortage is estimated to be over nine million units with demand growing at a rate of 0.8 million new units per year. By 2025, the shortfall is predicted to almost double and it would be around 18 million. Pakistan needs to construct one million new units each year, however, the current building rate is just around 125,000 to 150,000 units per annum. As a result, you would see huge development in shape of encroachments and houses on nalas and related areas. This situation is very alarming in major cities of Pakistan. For instance, in Karachi more than 50% population lives in Katchi Abadis. My opinion about Katchi Abadi would be to build small houses with utilities and infrastructure at some places away from the city in some appropriate areas and shift these areas one by one to that place because one cannot make proper planning while people reside at those places. Since these areas have now fallen within the region of developed areas, the cost will reciprocate the construction and land cost; rather it may generate a size amount as profit. This type of action will discourage the land grabbers and others who migrate from far flung areas and start residing in well-developed areas grabbing land without paying any taxes and enjoying the same facilities as the tax payers and legally purchased house owners enjoy.

In Pakistan, housing-to-finance ratio was one of the world’s lowest at just less than one percent as compared to 50 percent in the developed countries. There is a need to give special incentives to this sector with a more accessible home loan market specially for those who are purchasing first unit anywhere in Pakistan as this is the basic need for everyone. Further, State Bank of Pakistan (SBP) should encourage banks to provide housing loan on easy terms and conditions. Since the orders passed by the honorable high court of Sindh regarding the execution of sale deed is dependent upon the completion certificate. We are of the view that this condition shall be applied prospectively instead of retrospectively. Due to this decision, Sale Deed/sub lease process is being stopped by the Registrar which in turn may create a panic amongst the owners/investor/real estate agents. Though the decision is yet to be announced in the mid of September 2017 and we are hopeful shall consider the builders point of view before taking final decision.

 

Recently, a complete ban has been imposed by the Honorable Supreme Court of Pakistan on construction of multistoried/ high rise building beyond ground plus two stories in the Karachi Region. Due to the notification, there is a disharmony found amongst the developers that it would hurt their upcoming plans to construct high rise buildings. There is a need to eradicate the illegal water hydrants from all over Karachi as they are creating a shortage of water in Karachi. There is a need to properly manage the water distribution system rather blaming upon the construction of high rise building in Karachi. Since the case is subjudice, however, we expect that the ban on high rise building shall be uphold by the Honorable Supreme Court of Pakistan in the upcoming hearing to be held in the month of September. Pakistan is now one of the major global opportunities for foreign investment in real estate.

PAGE: YOUR VIEWS ON THE LOW COST HOUSING IN PAKISTAN:

SYED MUHAMMAD TALHA: Real estate market in Pakistan especially in Karachi is at its highest peak. The housing demand is also increasing day by day due to the rapid increase in population. Further, there are number of families which have been settling in the urban areas from the rural areas alternatively increasing the demand of houses in urban areas. Since the poverty ratio in Pakistan is on a very higher side therefore there is a big need to introduce low cost housing scheme for this neglected segment of the society. Government should take some initiative to give some relief to the low or middle income class people by introducing low budgeted housing schemes in the urban areas as well especially in Karachi, Lahore, Islamabad, Faisalabad etc.

A consortium of private builders and developers has recently launched the low-cost housing schemes under the supervision of Association of Builders and Developers of Pakistan (ABAD) for the low and middle-income groups in Pakistan that are partially being financed by the World Bank and HBFC. Under the schemes, they are offering a total of 20,000 units of 120 square yards each at a price of Rs1.5 million each. Plots will be partially developed with finished bedrooms, a lounge and attached bathrooms. House owners may later expand the construction horizontally and vertically.

We are of the view that government should reduce tax and mark-up rate for such housing schemes. The country needs 09 million more houses to provide people with their own accommodation, but the government is unable to accomplish this task on its own. There is a big need to introduce such housing societies on a public private partnership platform so that the low cost housing initiative may be started. The government should provide land to builders and developers on a subsidized rates so that low cost housing schemes may be offered to the much neglected lower income group.

PAGE: HOW WOULD YOU COMMENT ON TAXES ON REAL ESTATE IN PAKISTAN?

SYED MUHAMMAD TALHA: In the current scenario for taxation of real estate, provincial taxes (Stamp Duty @1%, Capital Value Tax @2%-2.5% and Registration Fee @1%) would be collected as per DC values, while federal taxes (CGT and WHT varies on the value of Transactions) would be collected as per FBR determined property values. There is still a need to improve the taxation structure of real estate such as a single window operation to be introduced which simplifies the system to a wider extent. Currently DC values and FBR values are introduced which creates disharmony among the tax payer. Government must introduce a single channel for collecting taxation this will regularize the system in a better way.

ABAD had proposed that the government should implement a single property valuation system based on market value all over the country instead of present 3-tier system and tax should be only one percent instead of three percent of tax, which will not just increase the government revenue manifold but financial institutes will also be able to easily finance housing. Government should also provide opportunities to REIT schemes, prior to 01.07.2015 profits and gains (unrealized) accruing to a person on sale of immovable property to both the REIT Schemes (Development and Rental) were exempt from tax. However, the Finance Act 2015 inserted a proviso; whereby, this exemption restricted only to the profit and gains on sale of immovable property to a Development REIT Scheme up to thirtieth day of June, 2020. No REIT Scheme has been launched after this amendment, resultantly documentation has stopped and no tax has been generated from this avenue.

Sale of real estate to a REIT scheme is an extra step which is only required so that property is transferred in the name of Trustee. No other form of organization such as a company, partnership or sole-proprietorship has to undertake this transaction. We still believe that the exemption available prior to the Finance Act, 2015 under Section 99A Second Schedule of Income Tax Ordinance, be restored and made available up to June 2020.Tax on dividend received by companies on Stock Funds (including by implication listed REIT funds) was applicable at 10%. However, The Finance Act, 2015, inadvertently inserted listed REIT Fund in the category of Money Market Funds thereby imposing a higher rate (25%) of tax to dividends on listed REITs. We believe that Investment in listed REIT units be treated as investment in Stock Fund (as REIT Funds are listed fund) wrongfully classified with Money Market or Fixed Income Fund and their rate of tax should be reduced in-line. Provincial governments should rationalize the taxation and duties implicated on the transfer of immovable property to and from REITs (including the Capital Value Tax, Registration fee and Stamp Duty) as implicated in the province of Sindh.

Real estate transactions are generally reported at book value based on “valuation table” or FBR rates. Actual transaction value could be manifold higher as it is based on the market value. Imposition of any taxation on the transaction/actual valuations renders the transaction non-competitive and prohibits launch of REITs. Shelter is the basic need of one’s family.

I am of the view that the Government of Pakistan should exempt wealth reconciliation for a Pakistani resident who is purchasing his first property for his resident. It would not only motivate them but will also urge to pay tax on the subsequent purchase of the property.

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