High demand to drive real estate sector growth

KARACHI: The previous government of PTI kept the real estate sector close to its heart even before they came to power. During his campaign for elections, Imran Khan had said that the construction sector was where his government would look to revive Pakistan’s struggling economy.

During his tenure, the government took several initiatives including amnesty schemes and subsidised housing loans – Mera Pakistan Mera Ghar (MPMG); however, the measures did not yield desired results.

According to former Chairman Federal Board of Revenue (FBR) Dr Ashfaq Ahmed, Rs956 billion were whitened through the last tax amnesty, but all of this money was not invested back in the economy, killing the main purpose of the scheme.

Meanwhile, the subsidised housing loan facility increased the prices of cheaper property for genuine buyers. The government is offering subsidised loans divided into three tiers. In tier 1 category, markup rates are 3 percent for the first five years and 5 percent for the next five for houses up to 5 marlas.

For tier 2, the allowed financing is from Rs3 million to Rs6 million at 5 percent and 7 percent for the first five years and next five respectively. For tier 3, the allowed financing limit is from Rs6 million to Rs10 million at 7 percent for the first five years and 9 percent for next five.

Inflated price of the property in the aftermath of the scheme was expected and economists such as Atif Mian have been critical of it. Mian said Pakistan’s economy has always struggled because it has a fundamentally unsustainable growth model. Investors in the country have been interested in developing real estate, which only increases their personal wealth but not the country’s, he added.

Despite criticism, the steps have jacked up construction activity in the country. Banks received housing loan applications of Rs409 billion by April against Rs57 billion a year ago. Banks have approved applications amounting to Rs180 billion and disbursed Rs66 billion.

According to the Pakistan Credit Rating Agency’s report on real estate sector, property prices have surged. From December 2018 to December 2021 residential property prices have surged by 42.7 percent; housing prices by 43.8 percent; and plot prices by 30.2 percent.

In April 2022, the year on year price increase for residential property was 24.3 percent. For houses, it was18.8 percent; for plots, it was 26.9 percent. There is an estimated shortage of 12 million residential units in the country; most of it in low and middle income groups, and with rising population, this shortfall is growing.

Real estate development activity increased during fiscal years 2020, 2021 and first six months of fiscal year 2022. The FBR completely exempted provincial sales taxes on the sale of low cost housing for the sector in all provinces of the country in addition to tax exemptions on the purchase of building materials (except for cement and steel).

The tax amnesty scheme, which allowed investment in real estate without questioning the source of income, ended on June 30 last year, while the construction relief package ended on December 31, 2021. The Income Tax Ordinance 2001 was also revised on June 30 last year to include new tax rates for immovable property.

The sector’s gross profit in the first nine-month of FY22 stood at 44 percent as compared to 29 percent in FY21. Strong sales growth has been a major factor behind this; cost of sales have been slightly elevated due to higher development costs of properties sold owing to increase in construction costs.

In an effort to boost mortgage financing and boost housing and construction financing for builders and developers, SBP required banks to allocate 5 percent of their advances for lending over a period of eighteen months – by December 31, 2021.

The SBP had also specified targets in the form of number of housing units to be financed and amount to be financed. Monthly targets were assigned to banks based on their asset size with targets effective from July 31, 2021. A penalty was charged in case a target was not met.

As a result, bank financing to the housing and construction sector increased to Rs404 billion by the third quarter of fiscal year 2022 as compared to Rs367 billion in the previous quarter. It was only Rs204 billion in the third quarter of fiscal year 2021.

In 2022, banks have been told to increase their housing and construction portfolio to 7 percent of their domestic sector private advances (up to Rs560 billion).

Budget proposals for the sector The Association of Builders and Developers (ABAD), in its budget proposal, has asked the FBR to completely waive off regulatory duty imposed on import of steel bars and tiles used for construction.

“This (RD) was imposed to safeguard the local steel bars manufacturing industry as the prices of steel bars in the international market fell from $600 per tonne to $225 per tonne in the year 2016-17. As in the preceding year the price of steel bars rose exponentially and are presently around $750 per tonne. Still the regulation has not been withdrawn thereby giving undue protection to local steel manufacturing cartels,” ABAD wrote in its budget proposal to the taxmen.

“Interesting point is that the government of Pakistan has not earned a single rupee as regulatory duty in the last two years,” it added. It further requested to bring down withholding tax monitoring from every year to once in three years to reduce the cost of doing business.

Pakistan Real Estate Investment Forum (PREIF) President Shaban Elahi said that they have asked the government to establish a facilitation desk for property buyers. In its budget recommendation, PRIEF has asked the government to establish a verification centre for buying property and a Real Estate Regulatory Authority (RERA).

“Real estate participation in Pakistan’s GDP is only 2 percent, but in other countries such as India and Bangladesh, it is 7 percent and 9 percent and in China it is 15 percent,” Elahi said, adding that in Lahore, there was a zone system, which should also be introduced in Karachi.

PREIF has asked for certification of booked units to restrict over selling by builders and developers. It has also asked for a facility for foreign investors to be able to remit back, if they sell the property provided the investment has been made via inward remittance received officially via banking channels, or inherited property.

“Currently there is a huge gap between the official (FBR/Deputy Commissioner (DC) values) and fair market values of properties in various parts of the country. Due to this a large portion of any property transaction is carried out in cash, because of this practice a major chunk of our cash is kept outside the banking system,” read a PREIF budget recommendation document.

“We recommend that the government device a mechanism whereby the buyers are encouraged and incentivised to pay a value higher than the FBR/DC value and close to fair market value and bring the undocumented money into the banking channel,” it added.

“In order to ensure better working and to inculcate best practice in the industry, real estate brokers to be registered with SECP and to acquire some kind of certification to operate as real estate broker,” it further said.

The Karachi Tax Bar Association (KTBA) has asked the FBR to establish a separate class of property traders as it would not only help increase the bureau’s revenues but also aid in normalising property rates.

This could also help curtail money laundering and terror financing.

KTBA has proposed that a new head of income in Section 11 of Income Tax Ordinance 2001 should be added as income from disposal and trading of real estate containing progressive taxation, without allowing any exemption as to holding period and quantum of gain.

It suggested that holding periods of two years or less should be taxed at 20 percent (rate of tax on gain). Selling property before five years should be taxed at 17.5 percent, whereas holding periods of below 10 but above five years should be taxed 15 percent and more than 10 years, at 10 percent.

Presently, there was a 10 percent tax on gain if a property was sold in one year. The tax reduces to five percent in the second year and 2.5 percent in the third year. There was no tax on gain if a property was sold after four years. A separate definition of income from disposal and trading of real estate was also suggested by the KTBA.