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Pakistan’s real estate market presents a strong picture; lower taxes can push it to expand further

Pakistan’s real estate market presents a strong picture; lower taxes can push it to expand further

Interview with Mr Ahmed Owais Thanvi — Managing Director, King’s Group Builders and Developers

PAGE: WHAT CAN YOU TELL US ABOUT THE REAL ESTATE MARKET IN PAKISTAN?

AHMED OWAIS THANVI: The real estate market of any country acts as the backbone of its economy and covers the major portion of assets within any geographical boundary. The overall real estate market in Pakistan presents a strong picture and Karachi’s market is a clear stand out in terms of volume and asset quality. Karachi as the biggest city of the country contributes 70 percent in Pakistan’s economy and acts as the major investment arena for investors interested in the property market. In terms of investment appreciation, Karachi again stands out and properties here have shown strong growth surpassing even that of the country’s capital, Islamabad. Special interest has been observed in the housing sector of Karachi and investors, both within and outside Karachi, have invested increasing amounts regularly. Major source of investment comes about through remittances of Pakistanis residing abroad. All of such investment activities have brought about decent price hikes and people are benefitting out of it so much so that since 2012-13, there have not been decline in prices in any area of the city. We believe that this increasing trend will continue if investments keep flowing in from abroad. Overall, we feel that unlike a lot of other countries, Pakistan faces fewer problems in this sector, however, a lot needs to be done for sustainable growth.

PAGE: HOW MUCH DEVELOPMENT HAS TAKEN PLACE IN PAKISTAN IN CONSTRUCTION SECTOR OVER THE PERIOD OF LAST 10 YEARS?

AHMED OWAIS THANVI: The overall development and investments in the construction sector of Pakistan have grown multiple folds in the past decade. A ball park growth figure of 200 percent has been observed in construction and development of the housing sector since the year 2007-08. This increment is a reflection of better law and order situation in the country especially since the year 2013. As a general rule of thumb betterment in law and order of a country brings about a boom in the housing sector, following this growth, the overall economy experiences growth and stability. The relationship is not difficult to decrypt as this sector involves several industries in the economy and in Pakistan’s case 130 allied industries, directly or indirectly. Industries like cement manufacturers, construction machinery etc. are common examples. If the housing sector goes down, it will impact all these industries and the economy will go down as a result. In order to compete with the peer countries, a strong construction sector and a stable economy is a basic need.

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

AHMED OWAIS THANVI: Future growth is very much there if the law and order keeps improving. We have to keep in mind that there are problems attached to each and every sector and perfection is a long hop. Similarly in the housing sector of Pakistan, problems arise through the system of taxation and operation of other relevant departments pose challenges in the growth process. As an example the current issue pertaining to restriction on development of high rise buildings is affecting a lot of ongoing and future projects. As per the government officials, this restriction has been placed in light of the scarcity/limitation in water and gas supplies.

We believe that there is exaggeration in this statement as Pakistan is an active producer of natural gas and there is ample water in the country. The problem lies with unequal distribution brought about by improper allocation of quotas and the substandard supply mechanism of these resources. Proper provisioning of utilities like gas and water is one of the prime responsibilities of any government. Builders, at max, can develop quality projects and ensure timely provisioning of such projects to the people, but by no means can they provide water and gas supplies. The government must facilitate general public and act for their welfare in this regard. As builders, we build these buildings to facilitate the public as a huge majority does not have enough funds to buy a piece of land of their liking and build houses on their own, as it requires a lot of funds. Apartments as a result act as a lower cost option and cater to their affordability.

Prices of apartment range from as low as PKR 2 million and go upward to 40 million. In coming times if the government co-operates with the builders through favorable policies the prices can be kept affordable. We, thereby, recommend that this ban on high rise buildings is raised and proper provisioning of utilities like water, gas and electricity is ensured. This is the only way we can enlighten the future prospects of Pakistan’s economy.

 

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

AHMED OWAIS THANVI: Low cost housing is a must for a country like Pakistan in order to cater to the housing shortfall prevalent in the country. This can only be put into action if the government stands besides and co-operates with the private builders. The government will have to ensure provision of utilities, infrastructure of roads, proper drainage system etc. On top of that government will have to provide lands at low prices, on which builders will assure low cost construction. Association of Builders and Developers of Pakistan (ABAD) current policy on low cost housing entails that builders must provide apartments within a price range of PKR 1.1 to 1.2 million. The possibility of fulfillment of this policy can only arise if builders get access to land at nominal charges and not at market driven prices. For e.g. a builder can buy a 80 to 120 sq. yards plot at a nominal cost of PKR 0.3 and undertakes construction worth PKR 0.7-0.8 million, providing a standard living facility in around PKR 1.2 million. Half of this amount can be financed by House Building Finance Corporation (HBFC), and the other half will have to be provided by allotees over a scheduled period of 2-4 years. Low cost housing is not the sole responsibility of private builders, in fact it is one of the prime duties of government as reflected in the constitution of Pakistan that the Government of Pakistan has to provide shelter to each citizen. We have been proposing the government since 2014-15 regarding provision of low cost land and as a result governments in the past have provided low cost lands for construction of housing schemes. ABAD builders have accordingly provided low cost housing to the benefit of the general public. In early 80’s up till late 90’s King’s Builders and Developers has provided around 500 low cost housing units in Steel Town, followed by other builders working in Karachi. If the government starts providing us with low cost lands, we can construct homes for small families having between 3 to 5 people having 2 bed rooms, a kitchen, washroom and a wiranda (backyard) within a total cost of PKR 1.2 million, half of which can be financed through HBFC and the other half can be paid by the allottees over a scheduled payment of 3-4 years.

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

AHMED OWAIS THANVI: Numerous taxes have been implemented on housing industry as of today, due to which the prices are facing an incumbent hike. As an example, outer development charges (ODC) amounting to millions is charged without being followed by relevant development in regards to drainage, road systems etc. For example in KDA Scheme 33 there are plots spread around on huge acreages, against which significantly large amounts of ODC is charged at the time of acquiring Non Obligation Certificates (NOCs) despite of which, proper development is not undertaken. Various areas in KDA Scheme 33 do not still have roads and proper sewerage. This is the responsibility of Sindh government and if they will not be able to provide infrastructure, the builders will not be able to undertake construction and more importantly, these areas will not be made inhabitable.

Not just the ODC, there are other taxes like those on sales deed, forwarding, transfer etc. which have a significant impact on the cost and thus the prices.

Another example is the Sindh Sales Tax (SST) imposed by the Sindh Board of Revenue (SRB), which has been imposed only in Karachi at significant rate of 17%. These taxes are by default chargeable to service providers which in the construction industry includes vendors who sell construction material. Builders and developers cannot be tagged as service providers and thus these taxes have no relevance with them. Implementation of SST, thereby has been challenged by ABAD in the High Court for re-consideration. It is highly recommended that the construction and housing sector should be exempted of such additional taxes as has been done in the past for other industries to encourage growth in those industries. The real estate industry being the back bone of the economy will in turn gain strength causing a ripple effect for other allied industries and an overall boom will take the economy to desirable levels.

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