Real estate and state of economy | By Engr Akber Sheikh

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Real estate and state of economy

GDP growth has come to be known as a symbol of prosperity and success of economic policy. This is a fallacy as higher GDP figure can be achieved by borrowing from abroad and promoting consumption.

Healthy GDP growth can only be based on relying on domestic resources.Component of construction/real estate in Pakistan national GDP is about 25%.

Construction taken alone is about 17%. It thus becomes second largest sector in our economy after agriculture.

Unfortunately present government, especially the Finance Minister has demonstrated a heavy bias against real estate and resultantly construction sector.

The Finance Minister in a TV interview has stated that when it comes to real estate he is a leftist.

This comment betrays lack of understanding of importance of real estate sector and how it contributes to the economic activity.

Globally, 70% of net household wealth resides in real estate. This percentage is higher for poorer segments of society and lower for richer segment.

In Pakistan an average household would have 50% of its net wealth in real estate. A positive sentiment in this sector creates a general sense of wellbeing in the society.

Present government has, because of its search of taxation revenue, brutally dampened the sentiment and damaged its political support.

A populist rhetoric is to refer to present real estate as a “bubble” and calls for its deflation. A bubble in true sense is formed if it is based on leveraged financing.

For example, 2008 housing bubble in the US was formed by subprime mortgages. In Pakistan real estate mortgage financing is negligee.

In fact bank financing for “plot” purchase is practically prohibited by State Bank. Financing for construction activity is available but not for land purchase.

So, while negative sentiment created by government does not have great effect on prices of plots, it greatly damages the liquidity of real estate assets and reduces the number of transactions.

This reduction in number of transactions will defeat the revenue increase targets of government and affects livelihood of hundreds of thousands of persons involved in the transaction business.

There is also a misconception that investment in real estate is non-productive and distracts investment from industrial activity.

Fact is that an average person investing in real estate will not invest in industrial activity as that is a totally different ball game where he has no expertise.

Also, as with 70% of lending to government of Pakistan, banks have no appetite for lending to newcomers and small businesses.

Pakistan stock market is also an insiders’ game and not everyone can play there. It is a small market, only about 10% of GDP, (compared to 150% us, 70% India).

Out of 10% GDP Capex, only about 20% is traded annually, while corresponding figure for us is 300%.

Thus stock market investment is not an alternative for real estate investment. The alternatives for ordinary real estate investor in Pakistan are gold, dollar or Dubai/UK/Turkey.

All these alternatives have negative impact on Pak economy. Healthy real estate sector over last 5 years has coincided with healthy growth in remittances by Overseas Pakistanis.

A sick real estate sector will surely have negative impact on these remittances. Estimated 25% new developments in real estate are financed by overseas Pakistanis.

Especially, Pakistanis working in Gulf countries who know that they have to return to Pakistan eventually, have a house in Pakistan as their first priority.

The negative sentiment in Pakistan will have these Pakistanis looking for other alternatives also.

There is no denying that grey/black money is parked in real estate. This trend needs to be reversed.

However mechanism of this phenomenon should be understood and this addiction should be cured gradually.

While we understand compulsions of IMF/FATF requirement, effort should be made to make changes in a gradual manner.

Sudden steep changes defeat the very purpose of change. Revaluation of properties, by FBR is a needed and necessary exercise.

But 500% increase in one go as recently done by FBR reflects ineptitude. It is also malafide as lower values and different system was adopted in Karachi when compared to Lahore.

Already there are instances where FBR/DC values are much higher than market value.

There are also vagueness in some areas which leads to discretionary space and misuse by lower cadre.

The “file” system is created and encouraged by various “authorities” created by the government.

With this system in vogue, private sector is also tempted to follow. This not only creates money parking space, unrecorded transactions but also allows developers to oversell and defraud general public.

This file system should be systemically outlawed. Also the “authorities” created by government do not feel obliged to comply with tax laws and development laws that the private developers are forced to follow through different coercive measure.

A level playing field should be created for all prayers. The money parking system takes place in expensive chips.

Investment in 5 Marla, 10 Marla plots is not done by high stake players. This affordable class of plots/houses should not be treated harshly by the taxman.

A relief given to affordable class of plots/houses, would be popularly welcome and will encourage creation of affordable class of products.

In Pakistan, due to imported input, all manufacturing activity, unless it creates matching exports, creates current account deficit.

In a recent TV interview of an auto company, CEO of Lucky motors, M Ali Tabba, stated that car making in Pakistan should be discouraged as it does not add desirable level of value addition.

With high component of domestic input, construction and real estate create lowest level of deficit in terms of percentage of value addition.

The foreign remittance generated by construction activity, however, amply compensates the deficit.

Lahore’s population increases by 5 lac persons per year. It is, therefore, needs 50,000 housing units per year.

Housing is a basic human need and to consider investment in this sector unproductive is nothing but foolishness.

While the industry is willing to cooperate with the government in its efforts towards economic revival, it is advisable that policy makers avoid rhetoric that creates negative sentiment about this important sector of our economy.

—The writer is Chairman Association of Builders and Developers of Pakistan (ABAD-NR).

 

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