The real estate sector has remained a goldmine for investors in Pakistan over the last two decades, barring some brief periods of slow activity, and offered exorbitant profits to them. It got a major boost immediately after the 9/11 attack when Pakistani expatriates, especially those in the US, decided to send their money back home. They feared their money deposited in foreign banks might come under the scanner and their financial transactions might be scrutinized under the US policy of tracking suspicious transactions.

The expatriates sent huge money back home most of which was invested in the real estate sector that promised high returns as well as security of investment. The preferred option was to invest in plots in Defence Housing Authorities (DHAs) and other housing societies of good repute. Within no time, the prices of plots skyrocketed due to higher demand against limited supply. The sudden surge in prices motivated locals who also decided to make investments in the sector and even pulled away from the businesses they were doing. The low interest rates offered by banks over deposits provided another reason to people to go for this option.

This trend did help many make fortunes within no time but it had its downside as well. Investments that should have gone to the manufacturing and agricultural sectors were also diverted to the real estate sector. What followed was that the same properties were sold many times for profits by different people on prices decided merely on the basis of speculations and manoeuvering by vested interests. Being a non-performing sector of economy, the real estate investment did not create enough jobs or trigger boom in other sectors as real buyers who needed housing units to dwell were driven out of the market. The investments were made purely for short-term profits by those who had enough money at their disposal to play safe bets.

Around two decades down the road, the situation is changing though gradually and the sector is no more a favourite parking space for investments. Following some regulatory measures taken by the government and steps to eliminate unexplained money from this sector, investors are moving out in the absence of venues to make quick profits. Now it is not easy for them to sell properties because these are mostly the genuine buyers who might be ready to spare big amounts for this purpose.

Against this backdrop, one wonders what will be the future outlook of the real estate sector and whether it will be able to contribute to the country’s economic growth the way it is doing in other parts of the world.

Gohar Majeed, a chartered accountant and director Trust Deals -- a real estate advisory and development company -- is of the view that the sector is being structured with the aim to free it from speculation and few individuals’ control. If things go as planned, he says, the real estate sector will receive investments but the rate of return would not be unreal as it had been in the past.

He shares it with TNS that "the policy to trace sources of money coming into this sector, putting a limit on non-filers to buy properties not more than Rs5 million in value, bridging the gap between official value and market rates of properties etc will push the unexplained money out." Earlier, there was hardly any such check. Taking similar measures has always been a tough choice for political governments but it seems this time these were unavoidable mainly due to the Financial Action Task Force (FATF) pressure.

Majeed predicts under the new scenario, investments in real estate will be fully recorded and offer realistic annual profit rates a bit higher than those offered by banks on deposits. "The times are gone when money invested here could be doubled in two to three years or so." He points out that many industrialists had secured industrial loans on concessional rates and invested them in real estate rather than modernising their industrial units and expanding their production capacities. These loans, he says, will now be used for the purpose they were obtained because windfall profits are no more there and it has become compulsory to explain the source of money used in transactions.

So, one can say that correction in the real estate market of the country is long overdue. This is important also for the reason that the wealth generated here has concentrated in few hands whereas small and genuine buyers have mostly suffered. The Competition Commission of Pakistan (CCP) affirms this and points out that the real estate sector in the country suffers from the issues of transparency, lack of mutual confidence and the protection of consumers’ confidence.

It has also suggested setting up of a Real Estate Regulatory Authority to monitor the real estate sector and help it contribute to the growth of the national economy. The authority should be empowered to monitor pre-registration/licensing, renewal of licenses of developers, promoters, project managers, real estate agents/brokers/dealers etc.

The Federal Board of Revenue (FBR) has a major role in this context. It has established the Directorate General of Immoveable Property (DG IMP) to strengthen taxation on real estate and curb the undervaluation of property. In case a discrepancy is found between FBR-assigned values and market prices, the directorate will have the powers to enquire about the source of income of the buyers for the purchase of property. The directorate will be vigilant as the term of the amnesty scheme launched three years ago has ended and investment can no more be legalised after the payment of 3 per cent additional tax.

Afzal Ahmed, who manages housing business in Lahore, is of the opinion that the growth of housing sector can create jobs as well as help meet the housing needs of the country. "This does not happen when money is invested in plots for short-term profits. But for this sector to grow, there shall be sufficient finance for investors who complain lack of cooperation on part of commercial banks and leasing companies." The Central Bank must instruct the financial institutions to lend money generously to this sector, he adds. "With the growth of housing sector, scores of allied industries will get a boost."

Economist Kaiser Bengali laments the fact that the lack of government attention towards the manufacturing and agriculture sectors is one of the reasons why investors chose real estate sector. He says it is a pity that huge factories in Karachi’s SITE area are shutting down their industrial units and selling their factory land as housing societies. "The government must bring down the cost of doing business and farming in order to bring investment from a non-performing sector like real estate to the performing ones," he concludes.