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New valuation rates a snag in Karachi real estate boom

Pakistan takes third spot in real estate investment in Dubai

Pakistan has emerged as the third largest real estate investor in Dubai depicts Dubai Land Department (DLD). Pakistani nationals have made 5,398 real estate transactions pumping about AED 7 billion in Dubai’s real estate sector. The DLD released the list of top 10 nations that invested in the city’s real estate sector. Pakistanis bought property worth AED 3 billion (around Rs85 billion) in Dubai during the first half of this year, just behind Indians and Britons who plunked down 7 billion and 4 billion Arab Emirati Dirham, respectively.

According to the report, UAE is the first which made Dh 12 billion worth of transactions valued at 37.4 billion. India made 10.6 billion transactions worth Dh 20.4 billion. Pakistan, on the other hand, made, 5.39 billion transactions worth 7 billion.

Pakistani businessmen have pulled out their money from banks after introduction of 0.3 to 0.6 percent withholding tax on filers and non-filers on tax returns. They have basically parked their money abroad.

The latest report of registered transactions confirms that UAE nationals are in the lead, outperforming all other nations by making the largest investment of about AED 37.4 billion. UAE nationals made 12,000 transactions in the given period. Indian citizens followed with about AED 20.4 billion through 10,628 transactions. Saudi Arabia led the Gulf nations with 5,366 transactions worth AED 12.5 billion and UK citizens took pole position among the European nationalities with 4,188 transactions worth AED 9 billion. Egypt, China, Jordan, Lebanon and the US are among the countries that made it to the list of top 10 investors in Dubai’s real estate. According to the DLD report, 217 nationalities have invested a total of AED 151 billion in Dubai’s real estate market. These figures show the confidence of the investors around the globe and the significant efforts made by the government of Dubai to establish a healthy investment climate.

This list has been unveiled at a time when real estate market is preparing for a new phase of growth in the run-up to Expo 2020. Such high levels of interest from global citizens in Dubai have invested over AED 151 billion through across 71,000 real estate transactions in just 18 months.

NEW VALUATION RATES

Property dealers in the local market paint an uncertain future after the introduction of new valuation rates, saying the real estate market has become inactive. It is believed that after new valuation rates for property, the local businessmen were unlikely to take the plunge and started buying property in Dubai as the prices on that market have been in decline for more than one year.

The new valuation rates look feasible for the Defense Housing Authority (DHA) and Clifton, but for other areas of Karachi the valuation rates seem overvalued. It is surprising that the federal government has decided the valuation rates instead of provincial governments under the 18th Amendment. The property market has been very quite in terms of sale and purchase deals since July 1 as only 15 percent deals were struck which were mutually agreed before July, but the sellers get 10-15 percent less price.

Many buyers and sellers postponed their transactions mutually. About 80 percent of black money found way into the real estate sector of Pakistan. The volume of property transactions has lessened and only 10-15 percent deals have taken place in DHA and Karachi Development Authority compared to the volume before the introduction of latest finance bill.

Explaining reasons for huge price difference in official and open market prices, a leading dealer said the deputy commissioner valuation table was formed in 1986. Since then, the market price has risen drastically. The markets saw three bullish trend periods namely first in 1993 to 1996, second in 2001 to 2005, and third in 2011 till 2016. The sale/purchase had become insignificant from July 2016 onwards as buyers and sellers had adopted wait-and-see approach, especially after new valuation rates.

The new valuation rates are overvalued which may keep property buyers and sellers in an uncertain situation for future deals.

LUCRATIVE REAL ESTATE SECTOR

Everyone in Karachi believes that the safest and most lucrative investment is in the real estate sector these days since it provides the best returns with much less risk and effort.

People who bought land two decades ago have multiplied their investment. Karachi believed what the whole of Wall Street believed till 2007.It believes that property prices cannot go down. People in Karachi say that prices in metropolitan cities are much higher than prices in Karachi. These people compare the prices of Karachi with Shanghai, Mumbai, Singapore and Dubai and observe that prices in Karachi are still much lower. So, let us compare some statistics of Karachi with these cities.

Rent-to-price ratio in Karachi (0.54) is lower than the ratio of Dubai (0.83) only. Shanghai, Mumbai and Singapore have much lower rent-to-price ratios than Karachi.

People in Karachi are already paying much more rent in comparison to their salaries. Rent-to-salary ratio of Karachi (1.30) is only lower than the ratio of Mumbai (2.07) and Shanghai (1.88). Dubai and Singapore have lower rent-to-salary ratios.

On average, people in Karachi are paying too much rent in comparison to their income when compared with other big cities. The only credible reason for such high prices in Karachi is the burial of illegal money in the property market. Tax avoidance also makes property investment a profitable strategy. The rental prices can’t go up forever. The fear of losing a big investment opportunity compels us to believe otherwise.

The Kingdom of Saudi Arabia (KSA) made transaction 5.36 billion transactions valued at 12.5 billion. Though KSA has invested more than Pakistan in terms of value Pakistan is leading due to the number of transactions made in the real estate business. This indicates Pakistan has relatively smaller investors who make less valued transactions. But Pakistan is the third country who is actively involved in purchasing and selling Dubai’s property enabling the country to be ranked at number 3 in Dubai’s real estate.

Everyone in Karachi believes that the safest and most lucrative investment is in the real estate sector these days since it provides the best returns with much less risk and effort. These confident sentiments about real estate are not completely baseless. They are based on their past track record. People who bought land 20 years ago have augmented their investment. It is a human leaning to believe that things would turn out as they have happened in the past.

People with conventional sagacity always say that prices in metropolitan cities are much higher than prices in Karachi. Therefore there is further room for appreciation. These people compare the prices of Karachi with Shanghai, Mumbai, Singapore and Dubai and observe that prices in Karachi are still much lower. So, let us compare some statistics of Karachi with these cities.

On average, rents in Karachi have already peaked as a return on investment relative to other big cities. Furthermore, people in Karachi are already paying much more rent in comparison to their salaries. Rent-to-salary ratio of Karachi (1.30) is only lower than the ratio of Mumbai (2.07) and Shanghai (1.88). Dubai and Singapore have lower rent-to-salary ratios. This means that, on average, people in Karachi are paying too much rent in comparison to their income when compared with other big cities.

The only credible reason for such high prices in Karachi is the burial of laundered money in the property market. Furthermore, tax avoidance also makes property investment a profitable strategy. We all know that the prices cannot go up forever. The fear of losing a big investment opportunity compels us to believe otherwise.

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