Real estate in Pakistan: Prospects & Challenges in 2020 and CPEC

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Syed Khurram Atiq

PAKISTAN’S real estate has a large contribution in its economic growth. According to a World Bank estimate, the size of a country’s real estate assets constitutes between 60 and 70% of the country’s total wealth; if these estimates are applied to Pakistan, the estimated size of the real estate sector would be $300 to $400 billion. Because of many financial, economic and political challenges, real estate has not performed well in 2019. But, there are bright prospects that there will be a high growth in the real sector in 2020.

There has been a slowdown in real estate since 2017 because of political instability and uncertainty of economic and financial policies. Absence of incentives for the investors, imposition of ban on non-filers to buy a property worth more than 5 million unless they register themselves with the Federal Board of Revenue (FBR), FBR’s strict regulation on banking transactions of non-filers, levying of high taxes on transfers of property discouraged the investors to put their money in the sector in 2018-19. Another factor that contributed to slowdown of the real estate is non-utilisation of developmental budget that led to contraction of construction sector and consequently, realty sector.

Despite the gloomy outlook of the real estate sector, there are compelling facts that indicate that the 2020 year will be encouraging for the investors, especially for the overseas Pakistanis. Among the promising factors which paint encouraging pictures for the real estate sector are the boom of the tourism industry. Inbound tourism in Pakistan has witnessed a marked increase of over 70 per cent during the year 2019 as compared to corresponding year, mainly due to multiple initiatives, especially improved security situation.

Similarly, Pakistan is treading the right path by creating favourable environment for businesses as the World Bank has ranked Pakistan 108th in global ranking in its “Doing Business 2020” report. The previous ranking of Pakistan was 136 in ease of business report which indicates the improvement of 28 places from previous year. 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 market has direct link with the worth of real estate.

CPEC is another mammoth development project that will transform the economy of Pakistan and resultantly, the real estate sector will boom in the coming years. Special economic zones of CPEC are yet to be completed, but the positive impact of CPEC can be seen in the form of improved situation of the power sector and partial completion of Lahore-Karachi motorway. Distance between Lahore and Multan has been cut short to 3 and a half hours from an earlier 5 hour distance. Businesses and investors are now touting Multan as the new economic hub of Pakistan. Development of DHA Multan and DHA Bahawalpur are some of the few examples that give credence to this fact that CPEC will transform the real estate business in 2020.

There is no denying the fact that the coming years will be an expansion of the real estate sector.

However, there are certain challenges to progress in the real estate sector in Pakistan. Withholding tax on non-filers on banking transactions, FBR notices to banking customers to authenticate their money sources are shattering the confidences of investors and compelling them to do banking transactions in cash. 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 25pc, and in Bangladesh the cash-to-deposit ratio is at 16pc, he observed.

Likewise, Pakistani Diaspora are an asset of Pakistan as they send huge amounts of money to Pakistan. According to the State Bank, Pakistan received a record $21.84 billion remittances in 2019-20. Government needs to understand the fact that Overseas Pakistanis only invest their money in the real estate sector as they are not able to do business in Pakistan. Cumbersome procedure, imposition of high taxes on non-filer Overseas Pakistanis and requirement of visiting Pakistan for the completion of property acquiring process are some of many reasons that have discouraged Overseas Pakistanis to invest their money in the real estate sector.

All over the world, real estate and stock markets play key role in the economic growth of a country. But, real estate in Pakistan is not able to reach its maximum potential because of the over-regulation by the FBR. At present, there is no tax on the 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. Only well-articulated research is required to broaden the tax net by incentivizing the non-filers to become filers.

Government needs to understand that its two projects of 5 million housing schemes and 10 million job schemes will only get success when the real estate sector grows because there are more than 100 industries directly and indirectly related to it. Boom in real estate will fuel growth in other industries such as the construction industry which accounts for 2% of GDP of Pakistan. Taxing the already taxpayer will inflict harm in two ways; one it will squeeze the tax base as people will start using cash transactions instead of banking transaction and will hide their wealth, secondly, investors will park their wealth outside Pakistan and will purchase 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 the real estate.