The market prospects in the current economic climate of slowing growth and tight liquidity.

Dec 15 - 22, 1997

Pakistan having 40% of its population now residing in the urban areas, it is assumed that real estate would soon become a major industry and therefore attract foreign investment.

And on the other hand it is feared that should the country's property market be opened for foreign investment the same fate that economies like that of Malaysia and Thailand is facing at present may befall the country as well.

The prospects of better and easier jobs in the urban areas and the lack of basic utilities such as potable drinking water and electricity in the rural areas are motivating ever larger numbers to migrate to the urban areas, creating major problems of housing shortage in the major cities like Karachi, Lahore and Islamabad. This keeps increasing the demand for low-cost housing which results in continuous rise in the prices of real estate.

This rural-urban migration, which is a global phenomenon in the developing world, is expected to continue for long and the housing problem it brings with it will remain for years to come.

The urban share in total population which was 17% at the time of partition is said to have gone up to 40% (unofficial figure). This concentration of more and more people into fewer cities is regarded as one of the major environment threats today and is expected to escalate.

According to analysts, by the end of the year 2003, which is the end of the (Tenth Five Year Plan) the overall large cities in the country would account for 78% of the projected urban population.

Karachi which is considered to be very young as compared to other cities in the country has over the last 40 years has grown tremendously simply because of its coastal location as the main outlet for international trade not for the country only for but to the region northern of the country as well.

The present population is estimated to be more than 12 million is still growing at an unprecedented pace while the growth of Katch abadis too continued uncontrollable.


A promised land for millions of job seekers Karachi has attracted population from all over the country over the years.

Katchi Abadis (squatter settlements) — which are part of the informal housing sector which provides not the best alternative solution to the urban housing problem by default, especially for the lower income group — keep coming up all over the city owing, in large measure, to the activities of professional land grabbers who thus acquire otherwise unavailable and expensive pieces of land.

The problem has a human dimension which has been exploited by various political and other groups to the extent that the government not only failed to control the establishment of Katchi Abadis in the cities, but even encouraged it by establishing departments at both provincial and federal level for Katchi Abadis, to regularise.

This sector offers affordable land to the lower income groups in certain areas and these are the people who are most in need of accommodation in the cities.

Rapid urbanisation is said to be one of the main reasons for hindering the expansion of management capabilities of local administration in the cities to take appropriate steps in improving the quality of life.


Until the early '90s, when the State Bank of Pakistan issued a notification which called for more participation by the private sector in financing housing projects, there was only the House Building Finance Corporation (HBFC) to meet the needs of the whole country to take care of the housing finance. But, following the notification, seven private companies expressed their interest and got registered with the sole objective of extending loans to either individuals or companies to finance the construction, purchasing of new buildings or addition to and alteration of old buildings. Out of these seven companies only three remained active for sometime out of which only one is left today.

Despite the participation of three private companies, the market still remains under-developed in terms of reach. The lower and the middle-income groups who are supposed to be the main clients of these companies are unable to secure anything from them due to various reasons.

The first of these reasons is the existing framework in which the companies operate. According to analysts, the long absence of a foreclosure law — whereunder if repayments are not regular or there is default, the mortgage can be closed and the property sold — made the lending institutions which can sponsor housing schemes wary. According to a realtor, though such a law has been enacted, it is still not easy to evacuate a defaulter from a house in case the foreclosure law is applied.

Another reason why the institutions were always reluctant to enter the sector was that investment made in housing is seen as long-term while the lending institutions prefer short-term portfolios.

It is reported that International Housing Finance Limited has already increased its mark-up rate by one per cent from 20% to 21% after the 'main' budget. Meanwhile, others are still contemplating increases in their mark-up rates. Sources from the IHFL said that the increase will not affect those agreements that have already been signed but new ones only.

The number of agreements signed last year has gone down as compared to the same period last year while this year the number has gone down to almost nil.

One of the reasons, according to sources from the finance market was the fact that these companies are reluctant to finance new schemes after some of the old ones ran into snags while others are not moving forward as planned.

According to some of the clients spoken to, the house building finance companies too are presently reluctant to come forward and finance new schemes for reasons best known to them, an allegation confirmed by a source from the International Housing Finance Limited. According to them, some projects being financed by the corporation have now come to a stand still. And as far as the government-owned House Building Finance Corporation (HBFC) is concerned, the corporation has been 'sick' for quite some time now due to what analysts called bad loans and have suspended financing any other project.

Sources in the market indicated that the government had planned to wind up the organisation sometime ago due to the fact that the pace of recovery is such that the organisation has become economically unviable.


With the new investment policy in place and foreigners are now allowed to involve in the property market and more funds coming in the market is bound to change from its current situation.

General opinion is that real estate is just another one of the sectors and therefore cannot keep itself aloof from others in terms of investments, while the government is doing all it could to attract foreign investments, it cannot keep property market out of it.

Some are of the opinion that the government should take care while granting permission to the foreigners to participate in the local property market, it is said that if the foreign participation is limited to only the build up property or development of old ones this will lead to creation of more jobs in the industry while the related industries such as the marble, the steel, the cement industries will flourish.

On the other hand, it is said that if they (foreign investment) are allowed to participate in the open plots, then "it is bad for the country" Suleman Tahir, a realtor said.

It is said that such step will have negative effect on the economy because they will ultimately push up the prices beyond the reach of the locals "though it will help the government to recover the unpaid taxes from the sector," said another realtor. "Increase value of land does not add anything to the economy", Suleman Tahir said.


'Under-invoicing' which is a general practice here in the country regarding purchase of property whereby less than one quarter of the value is shown on the agreement paper while the remaining is paid without showing it on the paper, a practice which most believe safe them from paying a huge amount of taxes.

The present system of registration and the tax structure involved is seen by many as cumbersome and expensive and that is why prefer to stay away from it altogether than paying it. The property registration fee of 10.5% as well as other taxes involved which totaled 15% of the value declared is on the high side.

Singapore, where property is considered to be one of the most expensive in the region, the registration fee, known there as 'stamp duty' is between one to five percent of the total value declared as against 10.5% in Pakistan.

Likewise the income tax on property is charged on the gains made from the sale of property within a certain period, which is normally calculated on the difference of the value of the property between the date of purchase and the date of disposal of the property.

Furthermore such tax is not final, it is treated as withholding tax because the seller may still file a tax return to claim for deduction of expenses.

On the one hand it is believed that the coming of the foreign investment in this sector might change that because the multinationals may not be able to do that because of the strict law that requires the principals to show every single penny spent on their annual report.

On the other hand, it is said that some of the foreigners indulge in property deals in the country, both individual buyers or corporate are already used to the local system.

Khalid, a trainee in an accountancy firm confided in PAGE that his company has already helped few foreigners went through the process without any trouble.

Another realtor on Sharah-e-Faisal, who requests for anonymity also told PAGE that he was able to save a foreign company from paying Rs 2.3 million tax last year by paying only Rs 0.5 million (bribe) to the officer concerned, "and things took care of itself" he said with confidence.

"It (under-invoicing system) is permanently part of the system and the foreigners will find a way to do it as well," another estate agent operating in DHA Phase IV Commercial Area said.

Rupee and Dollar parity is another problem which may discourage the foreign investment from putting their funds in the property market, while the sector itself is termed as a non-productive one, the devaluation of rupee against dollar would rather have a negative impact on a property purchased with foreign exchange than with local currency.

While the exchange rate was twenty rupees to one dollar about ten years ago, the value of property bought at that time have certainly gone up by more than 500% and on the other hand with the current exchange rate of forty five rupees to a dollar the value of the property bought with dollar ten years ago is worth half its price today in the current exchange rate .

"This argument holds valid for property value and not open plots which changes at every change of government" a realtor said.

A security analyst said that had the amount initially been invested in an export base industry rather than in property, the same amount would have brought in profit margins rather than devalue because " it would have covered for exchange risk" he said.

But according to Syed Salahuddin Haider, a realtor in the city, "there are still more than just attracting the investment that the government has to do, there is lacking in the repatriation and the company law that the foreigners may not find attractive at the end of the day" he said.

Though one view is that there will be no effect whatsoever on the retail side due to the fact that foreign investment is exempted from tax and therefore there is little influence.

The other view is that the same situation which was created by foreign investment in the real estate at such places like Bangkok, Malaysia, Bombay and South Korea might repeat itself here.

It is said that one of the causes of problems to the economy of Thailand and Malaysia at moment was because of foreign involvement in the countries' real estate which, because of its unproductive nature, has added to the countries' economic woes.


Since last year, the prices of property has remained in the slump while prices of constructed buildings on the other hand keep rising.

Though most of the building raw material is available locally, the central excise duty and sales tax imposed on the products have increased the prices of finished products tremendously.

In addition to these, the cost of transportation, power and labour have also increased beside the margins of the manufacturers who are said to be exploiting the situation to their advantage in the absence of any consumer protection society that can properly monitor such activities and take action on its own.

Analysts in the property market, on the other hand, are of the opinion that though economic recession has brought the prices of property down in Thailand but it is temporarily and is bound to go up again because of the scarcity of land in that country.

Places like Mexico City, Bangkok, Singapore and Bombay have the same problem, which is scarcity of land while on the other hand there is enough land to capitalise on in Karachi.

Unlike Bombay which is surrounded by hills and water, Karachi has a vast land to make use of and could easily stretch itself upto Hyderabad, a city about 120 Km to the north of the city.

"The coming of foreign investments into the property market may not necessarily create the demand that in turn will keep property out of reach of the locals".


The participation of the foreign investment in the real estate will increase the role of the speculators which at present is limited in the market.

speculators entered the market about four years ago during the crash of the stock market and focused on Defence Housing Authority Phase-VIII has been in the grip of speculators for the simple reason that the area was un-developed. For these speculators, buying and selling open plots had therefore become what one estate agent termed as "gambling".

For the period between the third quarter of 1993 and the beginning of 1995 when lawlessness prevailed in some areas of the city like Nazimabad, Liaquatabad, Federal B. Area and other middle and upper middle income residential areas and therefore most of the residents started selling off their property in those areas buying another in other areas or just investing in property at prime localities of the city.

It was around the same time too that things started turning bearish at Stock Exchange bringing more and more speculative funds from the exchange to property market and did not take long before the whole area got into the hand of speculators.

The prices of plots in the prime area was controlled during the period by the speculators and it was said that it went up as high as seventy five per cent which practically forced the genuine buyers out of the market.

Plots in the area were left to the mercy of the buyers who in the hope of a bigger margin of profits had bought them at inflated prices.

By the middle of last year, the stock market was stable enough for the speculators to once again retrieve their money from the property market and returned to the stock market. This action was said to have sent the market crashing down causing losses to those who had bought them at inflated prices as investment and in return were expecting bigger margin of profits.

Though these speculators have since gone back to the stock market their role in the market in those two to three years have left a permanent impression on the market.

Today the rule of speculation governs the prices of the property in the prime areas than other reality.


On the other hand Syed Salahuddin Haider, a realtor in the city said that the immediate problem to think of at present is how to assure the foreigners the security on their investment which is not there at present.

The same view was shared by Waseem Butt, one of the city's tycoons who view the real estate sector as one of the most disorganised sector in the country today, "there should be a guarantee that one day another person won't just take over the property while there is little one can do".

Security of the property owned is one and the security of the capital as well as the profits is another, according to Syed Salahuddin Haider, there is need for repatriation policy which will guarantee that the investor can repatriate his money back home in foreign exchange whenever he wants "without hurdle".

Companies like Pizza Hut, KFC and MacDonald's, though all said to be local franchisees, they can afford to pay more than the market price due to the fact that there is boom in their sector so they can easily recover their investment in less time. And therefore have indulged in the same practice while purchasing real estate in the city. Other sectors may not be able to do the same and would therefore regret of having done that.

Though there have been instances where the presence of multinational or foreign franchise has helped to increase the property value in certain areas of the city. "Prices of spots around franchise outlet is bound to jump up due to their influence" an estate agent along Shahrah-e-Faisal said.

Sources claimed that recently, MacDonald's, an international fast food franchise which entered the country in the first quarter of this year and is said to be on property buying spree is reported to have bought plots in three separate areas of the city among which is a corner plot at the intersection of Sharah-e-Quaideen and Tariq Road which was purchased at a price three times the going rate at the area, and due to that prices of the adjoining plots is said to have shot up while prices in other areas are experiencing slump at present.

Even, Wimpy, which belongs of the same sector, is now regretting having paid an enormous amount for its outlet. It has failed to attract consumers beyond the three to six months craze for new outlet, one of its failure is said to be mismanagement while the other reason is "because Wimpy is not internationally recognised" said Waseem Butt.

People's psychy here in the country is following internationally recognised names., therefore well known names are the ones that will likely click in the market.

The surrounding of the location could be pushed up by their influence but that does not necessarily meant a push of the whole market.

Capital Value Tax was introduced last year at 5% of the value of the property, that is above 500 square yards and is charged from the persons who are not tax-payers or, in other words who didn't have an allocated National Tax Number (NTN).

Wealth Tax is charged on residential plots above 500 square yards and below 1,000 square yards at Rs.2,000, while Rs 5,000 is charged on plots measuring 1,000 square yards but less than 2,000 square yards Rs.5,000 whereas it is charged on for plots measuring 2,000 square yards and above.

Flats and apartments upto 2,000 square yards in size are, however, exempted from the tax while an annual wealth tax fee of Rs 2,000 is charged on those of 2,000 square yards and above.

The stamp duty on house transferring , was increased to 10.5% last year for those who are regular tax payers and 15.5% for those who do not possess 'NTN'. 20% tax was levied on landlords with their houses, flats or apartments on lease.

It was expected then that the step would play a positive role in the real estate market, for the fact that there would be more of white money in the market than the black varity. Measures such as declaration of the source of money being used was also expected to become mandatory and in turn scare away the speculators as well as their money.

It was also said that the introduction of the taxes would bring the control of prices into the market. When the speculators would no more be in the market, genuine buyers would stick to the reality of prices.

The Sindh Rent Control Act which governs the leasing of property in Sindh was expected to be taken out of the vault after almost a century of neglect.

But unfortunately, none of these expectations was realised and not only had the government failed to implement the current various laws that govern land lease in the country their tax scheme has also fallen flat on its face.

The first loophole in the law was that it gave the tax officers free hand to decide as to how much is the value of the property and therefore how much is to be paid, the system, therefore, is that of 'you scratch my back I scratch yours' between the taxpayers and the tax collector and those who fail to fall in line are rudelessly penalised or forced to become tax evader.


While there are different views regarding the pros and cons of the participation of foreign investment in the local property market, the main concern of both locals and the foreigners that are involved in real estate is the law and order and the lack of consistency in the government's policy.

As a result, not until the end of next year before real foreign investments will start flowing into the market as they would like to 'study the depth of the river' before plunging in.

As is witnessed from the stock market, the foreign participation in the market means the coming of a huge amount in the market and while this investment is exempted from paying tax, 10% registration fee is surely not feasible and therefore the government would have to reduce it in order to attract more investment as mentioned earlier.

Devaluation is another major deterrent to investment in the property market as it is in every sector here in the country. As long as there is no security that the investors will get the worth of their money back as well as margins the chances of foreign investments coming into the property market is slim.

Consistency of policy is connected with guarantee of return on the investment in foreign exchange, unless the investors are sure that the government will stick to their policy and that another government will not come in and scrap the previous policy the investors will definitely not jump in blindly.

The little change that has occurred in the sector, according to a realtor, has more to do with the hand over of Hong Kong to the Chinese may in other hand influence the sector.

After the handing over of the Island to the Chinese by the British, the multinationals and banks located in Hong Kong would be seeking an alternate office in the region notwithstanding the Chinese government's promise that there will be no change in the policy for sometime to come.

And since Karachi is a preferred port over Bombay, hence the growing demand for offices along Shahrah-e-Faisal, which is the only route to the international airport from the city, it may be an ideal choice.

Meanwhile, the slump in the local market will continue for the next two years more before any stability could creep in.