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Decoding Pakistan’s Real Estate Market

Real Estate Sector in Pakistan

Real Estate is one of the crucial and prominent factors the economy of Pakistan has always been based on. The need for extensive development projects has unmasked itself once socioeconomic urban migration has been started since the country’s foundation and independence. Following independence, there was an influx of people from villages to cities, real estate investors saw a need for housing and infrastructure to facilitate and accommodate the additional citizens. At the core was Karachi – the birthplace of Pakistan’s real estate market as a business. Real estate in Karachi existed even before Pakistan’s independence. It all started with nobles erecting buildings, and plot sales were quite rare.

Pakistan’s large population and rural-urban migration provide enormous real estate investment opportunities. As more people migrate to cities in search of work, real estate prices continue to rise. The real estate industry employs a large number of people directly and also generates demand for more than 50 other industries, including steel, brick, cement, paint, and other building materials. The combined direct contribution of construction and housing sectors to the country’s GDP has been consistently higher than 9 percent over the past decade,” State Bank of Pakistan reports.

Market Contribution

The real estate market contributes significantly to the country’s economy. According to latest World Bank estimates, Pakistan’s real estate economy accounts for 60-70 percent of the country’s wealth, or over $700 billion. Other reports put the figure at greater than $ 1200 billion. Because 80 percent of wealth is undocumented, estimating the real worth of real estate is extremely difficult. Foreign investors, as well as Pakistani investors, are intrigued by the market’s potential and wish to invest here. A market that is very transparent is not only free of corruption, but also has easily available information and functions fairly and consistently. But, the real estate market in Pakistan lacks these characteristics. There are many housing societies and market participants who trade open files worth Rs1 million to Rs10 million in the open market using open certificates and affidavits while remaining completely unregulated. This shows that there are still some areas which remained outside of the regulated network and functioned as a money dumping site while remaining outside of the legal system.

Regulatory Framework

Due to the lack of an adequate regulatory framework that might protect the interests of all parties – buyers, sellers, developers, builders, tenants, and so on — Pakistan’s real estate sector operates mostly in the informal economy and is beset by several challenges. The lack of rules frequently entangles players in protracted legal fights over property fraud and ownership/tenancy disputes, repels potential investors due to ambiguous land titles, and weakens public trust in real estate. More importantly, tax revenue collected from this sector is substantially below its true potential, as real estate/property has become a sanctuary for tax evaders to park large sums of unlawful money during the last few decades.

Land premiums in metropolitan areas have only increased as a result of bad policies and a lack of planning. Previously, political unrest and a lack of government regulation would frequently cause the stock market to plummet. Prices are more stable as a result of increased government regulation, and they have been consistent for a long time.Another problem with Pakistan’s real estate business is that no government has taken action in years, and much of the white-collar investment has gone into the grey economy. Rather than investing in the manufacturing business, investors diverted their funds to unproductive plots trading, causing their money to stagnate.

The real estate business in general grows at a consistent rate of 5 to 8% every year all across the world. However, while researching the history of Pakistani real estate, we discovered that during bullish periods, the figures might soar to 40 to 60% annual growth rates. After analyzing the historical data some of the reasons becomes obvious like; Overpricing has caused recessions in the past. Over the last 43 years of Pakistan’s 74-year real estate history, market trends have stayed consistent. Between the top of the recession and the high of the boom, there is often a 4-5-year interval. In inhabited locations, the typical annual price increase is between 4% and 5%. In unpopulated areas, however, this figure is closer to 9% to 10%. When a recession starts, prices in populous areas often drop by 0.5 to 1%, whereas prices in unpopulated areas drop by nearly 5% or even up to 50% of the previously raised price.

Unpopulated / underdeveloped areas, such as plots or files, functioned more or less like stocks, with a high level of volatility. They have given enormous gains three times in the last two decades, but over a long period of time, they have shown either zero or negative growth. Overall, residents in developed areas stayed steady, and when combined with rental revenue, they likely provided greater earnings in all conditions.

The government maintains a policy of “no questions asked” when it comes to the source of funds, and the financial industry has remained the ideal spot to stash black money for decades. As a result, a real estate bubble has formed, with artificial price hikes and a widening supply-demand disparity in the housing market. Moreover, Unapproved housing societies are springing up outside of the country’s major cities, consuming fertile agricultural land. More crucially, enormous sums of money have been diverted into real estate, pushing land prices beyond the reach of middle-class families.

Improvements made in Ex-Prime Minister Imran Khan Government

Since becoming Pakistan’s prime minister, Imran Khan has implemented a number of changes and improvements to the country’s real estate sector, which are inextricably linked to the country’s economy in a variety of ways. The majority of these modifications were made to increase government tax income. Furthermore, the government has taken a number of steps in recent years to regulate the real estate market in order to document it and enhance tax collections. However, due to the lack of a concerted effort and a legislative and policy framework to streamline the market, these initiatives have had limited to no success. So far, the proposed authority’s scope and coverage are currently unknown. Nonetheless, it is intended to promote international best practices to the country’s real estate industry, allowing it to realize its unrealized potential. It will be necessary to enroll builders, developers, and real estate agents in order to properly document them so that it can quickly find a solution to their problems and protect the rights of consumers and tenants, in addition to streamlining, harmonizing, and modernizing tedious processes and laws related to land and property development.

If the authorities truly want to control the sector in order to dissuade illegal money from being invested in real estate and generate tax revenues from this market then they must drastically reform the federal and provincial rules that govern the whole land supply chain. To broaden the tax base, the government must develop long-term policy. Taxing existing taxpayers would be harmful in two ways: one, it would reduce the tax base as people begin to use cash transactions instead of banking transactions to hide their wealth; and two, investors would park their wealth outside of Pakistan, purchasing assets in the United Kingdom, Dubai, and investing in offshore companies. Fast-track changes can have negative effects for the economy, particularly real estate, hence a methodical approach to changing the system is essential.

The real estate market has been taken over by unskilled brokers and dealers who lack the expertise to guide individuals, resulting in fraud in majority of cases. To help in preserving the rights of land assigned persons, the government needs a federal and provincial real estate authority. Furthermore, as the process of land consolidation takes several years, therefore there is an urgent need to oversee the development of societies by developers and builders. People’s trust in real estate regulators will grow, especially among Pakistanis living abroad, who will be able to spend their hard-earned money in this industry without fear of being scammed.

About the author

Maria Ali

The author Maria Ali is a young economist associated with Pakistan Institute of Development Economics (PIDE), Islamabad.