The real estate sector in Pakistan is an important sector of the economy. Pakistan spends about $5.2 billion on construction annually and construction output accounts for 2 percent of GDP. have been observed in Pakistan’s real estate market in the past few years. A bullish trend has been observed in the last four years followed by a price hike in the last one year. In 2015, investment in residential property increased by five to seven percent.
Pakistan has emerged as the third largest real estate investor in Dubai. India is placed second in the list of top 10 investors in the Dubai real estate sector, according to figures released recently by the Dubai Land Department (DLD).
Indian citizens have invested about AED20.4 billion through 10,628 transactions. Pakistani nationals have made 5,398 real estate transactions investing about AED7 billion. The DLD has released the list of top 10 nations that invested in the city’s real estate sector from January 2016 to June 2017.
The latest report based on the number of registered transactions confirms that UAE nationals are in the lead, outperforming all other nations by making the largest investment of about AED37.4 billion. UAE nationals made 12,000 transactions in the given period investing about AED37.4 billion. Saudis led the Gulf nations with 5,366 transactions worth AED12.5 billion and UK citizens took pole position among the European nationalities with 4,188 transactions worth AED9 billion.
According to the recent DLD report, 217 nationalities have invested a total of AED151 billion in Dubai’s real estate market. Egypt, China, Jordan, Lebanon and the US are the other countries who made it to the list of top 10 investors in Dubai.
A recent research survey has indicated that following the amendments in the Income Tax Ordinance-2001, about 16,000 out of 18,000 real estate developers have finished their operations in the local real estate market.
Pakistan’s real estate market is constantly declining, and a fall in property prices is evident in almost all major cities and areas. The property transactions are reported to be record low at present. The effects of amendments in Income Tax Ordinance-2001 connected with property valuation are becoming visible. The demand in the real estate market is constantly diminishing, and people are merely speculating with no intention to invest thereby sparking a slump in the real estate market. The amendments to Income Tax Ordinance-2001 through the Finance Act 2016 were made from July 1, 2016, which stated that the provincial governments would no longer be evaluating the properties.
The State Bank of Pakistan would be responsible for valuation of property and land, and refer it to FBR’s in-land revenue department. The real estate sector investment flows from overseas Pakistanis are seen to be declining due to depressing inflows of remittances in the country.
A recent research survey has indicated that the local real estate market have moved abroad to seek alternative investment opportunities. The devolution of power by the government to Federal Board of Revenue for assessment of the land prices and to stop under-valuation of land is a serious blow to the realtors and common buyers in the real estate market.
Taxes have a minor effect on the real estate sector. In contrast property prices are appreciating in countries like Europe, Canada, USA and Australia despite an increase in the taxes. The fall in the property prices, is that the Federal Board of Revenue (FBR) has banned the inflow of black money at present.
The people with black money were flourishing in the real estate sector while the lower and the middle income strata were barely able to purchase any living. The investors holding black money are reluctant to invest in the real estate sector leading to a fall in the property prices. The time frame of capital gains tax (CGT) levied on property has been introduced. In the past, CGT at a rate of 10 percent and 5 percent was levied on property within one and two years’ time. At present, the CGT has been increased to 10 percent with an increased time frame of five years. A considerable price fall is evident in the top housing schemes of the country.
A price fall of 15 percent has been reported in DHA phase 9, and approximately 20 percent and 17 percent price fall in DHA Karachi and in DHA Islamabad has been reported respectively.
The on-going slump in the property market is worse than the property crash, which arose in 2005-09 when people withdrew money to invest in Dubai and USA but in those years, the inflow of black money has not been banned. It is expected to reap profits but in the long run majorly for 3-5 years investments.
According to price-income ratio, the housing prices are expected to become affordable as the house prices will keep on falling, and the income of the people will increase. In this uncertain situation one must chalk out a sound mechanism to regulate the prevalent crisis in the real estate sector, which is considered to be an integral component of Pakistan’s economy.
The trend of buying luxury apartments has increased by nearly seven to nine percent in Pakistan in the last ten years primarily due to an increasing demand for secure and well-maintained housing units. Between 2010 and 2016, apartment prices increased by 120 percent, while houses registered a much slower increase at 80 percent. Apartment projects were mostly limited to Karachi, as cultural preferences in Lahore and Islamabad were for horizontal residential projects.
In the last five years alone, the demand for apartments has gone up by nearly 30 percent, which has given rise to an increasing number of newly constructed high-rise luxury apartments in Lahore and Islamabad. Most luxury apartments have a covered area ranging between 2,400 and 3,000 square feet.
State Bank of Pakistan (SBP) has established a dedicated Infrastructure and Housing Finance Department to strengthen the market-based housing finance mechanism. As long as affordable home financing options are developed and provided to the general public, the housing supply-demand gulf will continue increasing. It is also a sector that until recently has been severely undocumented.
Due to its undocumented nature, real estate is traded as a commodity, with speculators buying in bulk during the lows and selling at exorbitantly high prices later.
The government has done well in initiating the process of documentation and transparency. There is long way to go before Pakistan’s real estate sector can work for the benefit of all and not just a few Pakistanis.