Pakistan lays down a level playing field
Government measures to discourage inflows of black money and encourage FDI are setting up the property sector for growth
Pakistan’s real estate sector is in the midst of a slowdown, partly because of a stagnant global economy and partly due to market forces within the country. An amendment ordinance, which came into effect on July 1, has also played a role in the market slowdown, at least in the short term. An amendment to Section 68 of the Income Tax Ordinance 2001 through the Finance Act 2016 has changed the property valuation process.
Now, instead of the State Bank of Pakistan-nominated valuers, the Federal Board of Revenue and representatives of the real estate sector will agree upon property valuations. This amendment has increased property prices on paper, leading to an increase in stamp duty and other taxes.
Although this move was introduced to discourage black money from entering the real estate sector by reducing the gap between official rates of land and property and the market, as well as encourage foreign direct investment into the sector, industrysourcesreporteda10-20per cent dip in transactions in upmarket localities, apart from negativity in overall market sentiment.
The rules on the Capital Gains Tax (CGT) have changed too. If a sale happens in a period that is less than three years from when it was acquired, and before July 1, 2016, then 5 per cent CGT will apply.
After three years, there will be no CGT. The CGT for those who sell the properties after two years but within three years is 5 per cent.
Those who sell their properties after more than one year but within two years will pay 7.5 per cent and those who sell the property within one year of purchase will pay 10 per cent.
The minimum threshold of Rs3 million (about Dh105,143) for application of withholding tax on purchase of immovable property has been increased to Rs4 million. The new valuations have been agreed upon for major cities but for those areas where no valuation tables have been notified, the existing rates approved by district officers apply.
While these reforms have established that investors will have to wait a minimum of 3-5 years to see any visible returns, Pakistan’s real estate will continue to receive the attention of investors. Opportunities in the property sector are inevitable in a country that has a shortfall of 800,000 homes. The country also saw an increase of 20 per cent in the home loan segment in 2015-16, its highest since 2008.
The Lamudi Real Estate Market Report — Pakistan 2015 states that the sector is worth $700 billion (about Dh2.57 trillion) and the second-largest employer, after agriculture. It contributes about 2 per cent to Pakistan’s GDP. The average per capita income has gone up to 9.3 per cent, while the exchange rate has remained stable, at about Rs102 a dollar in the inter-bank market. The GDP is expected to be above 4 per cent until 2020. The World Bank, in its biannual South Asia Economic Focus Report, has stated that Pakistan’s GDP growth rate is likely to improve during the next fiscal year.
Data from real estate portal Zameen.com shows Pakistan’s property market has had growth of 118 per cent in the past five years.
Major markets
Though Lahore, Islamabad and Karachi dominate the real estate market, these are now getting saturated, leading developers to focus on cities such as Gujranwala, Peshawar, Multan, Gwadar and Faisalabad. The port city of Gwadar is a strategic investment location thanks to the China-Pakistan Economic Corridor (CPEC) and the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. In 2015, China decided to invest $46 billion for the development of Gwadar Port and the CPEC. Pakistan is also the first country in the Asia-Pacific to launch a real estate investment trust (REIT). For investors, the capital gains from a property sold to a REIT scheme will be exempt from income tax until June 30, 2018. A REIT scheme for the development of a housing project set up by this date will enjoy a 50 per cent reduction in income tax chargeable on the dividend income for the first three years. The promoters of the REIT expect a net income of $21.9 million in the first year, with dividends of nearly $20.7 million. Property portal Lamudi Pakistan’s surveys show that 78 per cent of the agents are positive about the prospects of the sector in the second half of this year while 75 per
cent expressed confidence about the expected increase in FDI flows.
According to a report by Zameen.com, Karachi and Lahore markets have performed well in the first two quarters, while Islamabad has failed to attract investors.
Islamabad
As per Zameen.com data, several projects such as Bahria Town Islamabad/Rawalpindi, Sector B-17, Sector E-11 and Sector F-11 were either stagnant or even had a drop in their prices.
Bahria Town had a 10.20 per cent and 6.45 per cent decrease in prices of 500-sq-m and 250-sq-m properties respectively. Gulberg Residencia had a marginal growth of 1.94 per cent in prices of 500sq-m plots and 1.15 per cent in prices of plots of 250 sq m.
Only DHA Islamabad’s 250-500-sq-m plots performed well thanks to the ongoing construction of the signal-free Islamabad Expressway and the infrastructure work being carried out in several parts of the area.
Karachi
Prices of 380-sq-m plots in Defence Housing Authority (DHA) City Karachi increased by 23.91 per cent, though the rates of DHA Karachi are higher. In Bahria Town Karachi, prices of 150sq-m plots increased by 11.82 per cent. A five-year comparison shows that compared to January 2011 when a residential plot was priced at Rs2,276 per square foot, by January 2016 it was Rs8,089.
Lahore
Residential plots in Lahore have shown a 149 per cent growth in the past five years. Prices in January 2016 were Rs3,339 per square foot, from Rs1,336 in January 2011.
In the first six months of 2016, the prices of 250-sq-m plots in DHA Lahore’s Phases 7-9 increased by 13.48 per cent, while Bahria Orchard saw a price rise of 23.08 per cent, Zameen.com data shows.