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Mohsin Munir

Shake-up in the property market

Afshan Subohi Updated May 07, 2018

Enveloped in a pall of gloom, the property market is not expected to return to normalcy till the next elected government has settled comfortably in Islamabad after elections later this year.

The market has been down by about 15 per cent since January 2018 and activity level is low. Realtors fear the market will dip vertically by up to 50pc if parliament clears the proposed budget without ensuring the recommended changes in the real estate package.

“The present changes can generate panic and kick-start a reverse spiral, driving genuine clients along with investors out of the market”, said Shaban Illahi, president, Pakistan Real Estate Investment Forum.

The Budget 2018-19 presented in the last week of April included several measures to bring order in Pakistan’s real estate sector which is a destination known for parking ill-gotten money and has been instrumental in increasing the size of the informal economy by pushing legal capital into a grey area.

To this end, the government has proposed abolishing the Federal Board of Revenue’s (FBR) rates on property, requested provinces to end DC rates and barred non-filers from buying property exceeding a value of Rs4 million. At the federal level, the advance tax has been cut to one per cent of the declared value.

However, through a buy-back scheme the government is vested with the power to buy individual properties anywhere within six months of registration for double the registered price in fiscal 2018-19, 75pc higher in 2019-20 and 50pc greater in 2020-21 and thereafter.

Besides the industry which has long been demanding regularisation of the property business, tax experts have also strongly supported the government’s changes. Shabbar Zaidi, Senior partner and chairman, AF Ferguson & Co called property related measures ‘landmark’, ‘long overdue’ and ‘defining’. He was happy that the correction in this key sector had been attempted.

The property market in Pakistan has grown exponentially over the past three decades, pushing housing beyond the reach of middle-class couples starting a family. But the recent Bahria town court ruling along with the government’s moves seem to indicate the market is heading towards a significant shakeup and correction.

“The Supreme Court verdict last week baring Bahria Town Karachi from selling plots after declaring the land acquisition process illegal signals the direction towards which things will be moving. It can prove to be the beginning of the end game for powerful land barons who have operated with impunity in this sector for too long”, commented an observer requesting anonymity.

Movers and shakers in the humongous, chaotic property and construction business claim that the government’s decisions may prove counterproductive to getting property dealings back in the fold of the formal economy.

Suppressing fears many leaders of real estate operators and the construction industry made an effort to give a positive spin to the situation.

“The gap between the market and Continued on declared value of the property is problematic as it is a critical factor for potential foreign investment in the sector. We operate perfectly legally and still end up contributing to the grey economy. In 2016 an understanding with the government was achieved to gradually close the gap between the market and declared price of land.

“Instead of following up on the plan the government is getting new ideas. With a stroke of the pen, it threw the past plan in the dustbin and introduced the buy-back scheme to keep people from understating the value of land transactions. Is this not a breach of trust?” asked Raja Mazhar Hussain, President, Defence and Clifton Association of Real Estate Agents in Karachi.

Builders supported the realtors. “A substantial portion of the country’s remittances are invested in the property sector by non-resident Pakistanis. By banning non-filers, the government has closed a viable investment option for them.

“These people file returns in their country of residence. To become filers they will have to stay in Pakistan for 180 days. How many people settled abroad can do that?” asked Hasan Bakshi, a senior leader of Association of Builders and Developers.

“I don’t’ see why NICOP cannot be used as a National Tax Number, saving overseas Pakistanis the trouble of double filing returns”, he argued.

Responding to a Dawn query in this regard Finance Minister Miftah Ismail said, “Overseas Pakistanis who wish to buy property in Pakistan will have to file tax returns in Pakistan. However, we will make the procedure easy for them. It would benefit them immensely as it will also save them an extra cost on bank transactions”.

Property dealers in some cities of Punjab have already taken their discontent to the streets. According to informed quarters if the government fails to respond swiftly, the protests encouraged by the government’s political opponents can spread across the country.

Commenting on the comparative calm in Karachi, the protest capital of the country, Syed S Haider, CEO of VIP Estate and 21st Century commented:

“We were assured by the finance minister in Karachi that our concerns on the ban on non-filers from entering the housing and plots market, rules of value evaluation, the buy-back scheme that empowers the government to purchase any property within six months and the insufficiently narrow window for the amnesty scheme will be addressed”.

Many operators fear a major market shake-up.

“Prices will tank evaporating value in billions of rupees. Buyers and sellers will exit and wait for the market to stabilise. It will not just hurt people directly associated with the property business but all those working in the 72 construction related industries. The multiplier effect will be immense”, remarked another kingpin of the sector.

Many associations shared documents detailing their budget recommendations and copies of their correspondence with the relevant departments.

“If pushed carelessly this move can become a debacle of similar proportions to the dollar account freeze. The decision on foreign currency accounts in 1998 was a cardinal sin of PML-N that can neither be forgotten nor forgiven. Even PML-N leaders accept that it hurt more than it helped the country”, a leading realtor spew venom.

The property market in Pakistan has proved to be the most lucrative investment destination for the past three decades. The mouthwatering returns combined with low tax and valuation absorb a major chunk of investable capital seeking quick returns.

“No one is asking for a legal cover for unethical practices but if realtors and builders’ fair concerns are summarily dismissed the festering dissatisfaction can find violent expression in an already charged, polarised environment.”, an articulate leader of a realtors association warned pointing out numerous anomalies in the package.

Published in Dawn, The Business and Finance Weekly, May 7th, 2018