Pakistan’s 2020 real estate prospects and challenges

Real estate is one of the pillars of any economy. Land, who owns it, where it is located all end up being critical factors in where wealth is concentrated and where human society will organize itself. According to the World Bank, nearly 60-70pc of a country’s total wealth is stored in its real estate assets.

Apply these estimates to Pakistan, and you’re looking at a real estate sector worth anywhere between $300 to $400 billion. With any number in the billions, let alone the hundreds of billions, it is wont to gain attention and importance. But for a bevy of financial, economic and political challenges, real estate has been a disaster all through the last year and isn’t looking any brighter in 2020. The positive, however, is that things are stagnant for now, and that means possibility of growth.

“A near complete absence of incentives for the investors was imposed as the government tried to somehow wrangle a tax net together. Bans were imposed on non-filers from buying property worth more than Rs 5 million unless they registered with the Federal Board of Revenue (FBR).”

The current rut that the real estate sector in Pakistan finds itself in can be traced back to 2017, where a strange mix of political instability, tax policy confusion and uncertainty in economic and financial policies first caused the once vibrant sector to develop anxious breaks and finally come to a resounding halt.

A near complete absence of incentives for the investors was imposed as the government tried to somehow wrangle a tax net together. Bans were imposed on non-filers from buying property worth more than Rs 5 million unless they registered with the Federal Board of Revenue (FBR). This was followed by the board placing strict checks on the banking transactions of non-filers, levying higher taxes on transfers of property, and actively discouraging investors to put their money in the sector in 2018-19. What any of this achieved, no one can still quite tell. What is clear is that it managed to make things messier.

“Despite the gloomy outlook and the bruising in the last few years, there is compelling evidence that 2020 will be an exciting time for investors, especially Prime Minister Imran Khan’s blue-eyed demographic: overseas Pakistanis.”

Another factor that contributed to the slowdown of the real estate sector was the non-utilisation of developmental budget that led to contraction of the construction sector and consequently, the real estate sector.

Just thinking (and writing) about the last few years in Pakistani real estate is a hope robbing activity. Where could it possibly go from here? Don’t be surprised if it’s up, even though this isn’t even bottom yet. Despite the gloomy outlook and the bruising in the last few years, there is compelling evidence that 2020 will be an exciting time for investors, especially Prime Minister Imran Khan’s blue-eyed demographic: overseas Pakistanis.

To start with, and this is no lightweight factor, there has been a serious boom in the tourism industry. Inbound tourism in Pakistan has witnessed a marked increase of over 70 percent during the year 2019, mainly due to multiple government initiatives, and the improved security situation in particular. The number of foreigners who visited Pakistan in 2018 on tourist visas stands at 17,823, which was 10,476 in 2017, according to one report.

This significant growth in the tourism industry will definitely compel foreigners to purchase properties in Pakistan, especially in Lahore, which is a historic, central and tropical location. Similarly, Pakistan is treading on the right path by creating favourable environment for businesses, with the World Bank ranking Pakistan 108th in the global ranking of its “Doing Business 2020” report. This is a jump nearly 30 places, with Pakistan placed at 138th just a year before this.

The improved business environment will attract foreign direct investment into the country and create employment opportunities for the youth. According to a world bank report, an increase in foreign investment and an expansion of the market has a direct impact on the worth of real estate. Improved indicators of economy point towards 2020 being a year that will increase the demand of commercial and luxury housing societies in metropolitan cities like Lahore, Faisalabad, Multan and Karachi.

Digital vision Pakistan is also a much-needed project to modernize the governance system and bodes well for the investors, especially for the overseas Pakistanis who were eagerly waiting for the digital revolution in governance and taxation. E-governance offers platforms to report corruption, comfort for citizens, and minimal interaction with government functionaries. Moreover, The federal government has also authorized relevant authorities to carry out a digital survey of the sale and purchase of the real estate in Pakistan which will provide citizens easy access to the information of all real estate.

There is also the CPEC factor. It has been a buzzword and now it is treated as just that, but that does not do much to end its on the ground reality and the impact it has on possible investors. Special economic zones of CPEC are yet to be completed, but the positive impacts of CPEC can be seen in the form of improved situation of the power sector and partial completion of Lahore-Karachi motorway. The distance between Lahore and Multan has been cut short to 3 and a half hours from an earlier 5 hour distance. Business and investors are now looking towards Multan as the new economic hub of Pakistan. Development of DHA Multan, DHA Bahawalpur are some of the examples that are proof of CPEC’s boons, and its eventual positive impact on real estate in the country.

However, there remain certain challenges. Withholding tax on non-filers on banking transactions, FBR notices to banking customers to authenticate their money sources are all still haunting customer confidence. Up to 37 per cent of the banking transactions are in cash which reduce the financial industry’s lending ability, says Asad Umar, former Finance Minister. This needs to be brought down to at least 25pc if we are to have a prayer.

Likewise, diaspora Pakistanis still need to be properly wooed. According to the State Bank, Pakistan received a record $21.84 billion remittances in 2019-20. The only way that expats can invest in Pakistan is in real estate, since they can’t possibly run businesses in the country. For this purpose, they must be facilitated in every possible way. Cumbersome procedures, imposition of high taxes on non-filer overseas Pakistanis, and requirement of visiting Pakistan for the completion of property acquiring process are some of the many reasons that have discouraged overseas Pakistanis to invest their money in the real estate sector. Asking for remittances is never going to be enough, the government will have to win them over now.

The state of affairs is that the real estate market has been overtaken by uneducated agents and dealers who don’t have the necessary skills to guide people, and in most cases leads to frauds and ruination – which further gives the sector a bad name and keeps local and foreign investors away. There is a serious need for a Federal and Provincial Real Estate Authority in the country that could help regulate the profession and protect the rights of land allottees.

Moreover, there is a dire need to oversee the development of societies by the developers and builders as it takes many years to complete the land consolidation process. Oversight by a real estate regulatory authority will lend the business some legitimacy and more importantly some accountability. Those overseas will also not have to worry about being scammed.

All over the world, real estate and stock markets play key roles in the economic growth of a country. But real estate in Pakistan is unable to reach its maximum potential because of the over-regulation by the FBR. At present, there is no tax on property that is held for more than four years. But a five per cent tax will be imposed if the property of worth Rs 5 million is sold within four years and a 15 per cent tax will be imposed on property sold within ten years of ownership.

Increasing the tax rate and banning the non-filer is no solution and serves no real purpose other than the government feeling more in control of the sector. Only well-articulated research is required to broaden the tax net by incentivizing the non-filers to become filers. The government seems to be doing the opposite by punishing people that want to invest and circulate wealth.

Somebody needs to tell the government that its two projects of 5 million housing schemes and 10 million jobs scheme will only get success when the real estate sector grows, because there are more than 100 industries directly and indirectly related to it. The boom in real estate will fuel growth in other industries such as the construction industry, which accounts for 2 % of GDP of Pakistan. It will not only help overcome shortages of houses, but also will provide employment opportunities for our burgeoning youth, which accounts for 60 % of the total population of 220 million. The government also needs to build new cities along with big metropolitan cities to overcome the urbanisation crisis.

At present, the market is contracted and confidence of investors is shattered because of restrictions on non-filers and impositions of huge taxes on already tax paying citizens. Government needs to devise long-term strategies to broaden the tax base. Taxing existing taxpayers more will only inflict more harm, first by squeezing the tax base, as people will start using cash transactions instead of banking transactions and will hide their wealth, and secondly by forcing investors to park their wealth outside Pakistan by purchasing properties in Britain, Dubai, and investing money in offshore companies. There is a need to follow an incremental approach in reforming the system as fast track reforms can have negative implications for the economy, especially real estate.

Syed Khurram Atiq is the CEO of the Premium Group.