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The real estate sector in Pakistan is growing and is an important sector of the economy. Pakistan spends about $5.2 billion on construction annually, and construction output accounts for 2pc of GDP. The accelerating rate of urbanization in the country requires urban planning and hence an effective management of the real estate market.
Varying trends have been observed in Pakistan’s real estate market in the past few years. A bullish trend has been observed in the last four years followed by a price hike in the last one year. This sets a question mark as to whether or not the housing and accommodation needs in the country at present be fulfilled considering growing rate of urbanisation. The following details elucidate the recent scenario of the real estate market of Pakistan.
Pakistan’s real estate market is constantly declining, and a fall in property prices is evident in almost all major cities and areas. The property transactions are reported to be record low at present. The effects of amendments in Income Tax Ordinance-2001 connected with property valuation are becoming visible, and especially as the third quarter has ended; they are getting widespread. The demand in the real estate market is constantly diminishing, and people are merely speculating with no intention to invest thereby sparking a slump in the real estate market.
The amendments to Income Tax Ordinance-2001 through the Finance Act 2016 were made from 1 July 2016, which stated that the provincial governments would no longer be evaluating the properties; rather the State Bank of Pakistan would be responsible for valuation of property and land, and refer it to FBR’s in-land revenue department. This amendment is decreasing the investment in the real estate sector because investment flows from overseas Pakistanis are seen to be declining. An uncertain environment in the real estate sector prevails, which is impeding the overseas inflows and hence is depressing the inflows of remittances in the country. This is expected to aggravate the dismal economic outlook of Pakistan.
A recent research survey has indicated that following the amendments in the Income Tax Ordinance-2001, about 16,000 out of 18,000 real estate developers have finished their operations in the local real estate market, and have moved abroad to seek alternative investment opportunities. The remaining investors are seen to be adopting a wait and see policy, the interests of the short term investors are facing a severe threat and the realtors and common buyers are vigilant in buying and selling the properties. The devolution of power by the government to Federal Board of Revenue for assessment of the land prices and to halt under-valuation of land is a serious blow to the realtors and common buyers in the real estate market. This signifies that the real estate market, which once used to be booming, is gradually becoming a real estate disaster.
The people in the market are of the false view that the decrease in the property prices is attributed to an increase in the income tax. Taxes have a minor effect on the real estate sector as such taxes are subjected to conditions, and even entail an exemption. In fact, property prices are appreciating in countries like Europe, Canada, USA and Australia despite an increase in the taxes.
The salient cause, which supports the fall in the property prices, is that the Federal Board of Revenue (FBR) has banned the inflow of black money at present. The real estate market, which once used to be the hub of attracting black money for investment, resulted in an abnormal increase in the property prices in the past. The people with black money were flourishing in the real estate sector while the lower and the middle income strata were barely able to purchase any living. The scenario at present is to the contrary whereby the investors holding black money are reluctant to invest in the real estate sector leading to a fall in the property prices. They are reluctant to enlist themselves in any activity, which will give FBR any opportunity to check their bank accounts; hence increasing the trust deficit between the government and citizens. Consequently, this is contributing to the rapid slump in the real estate market.
The changes in the tax percentage, and time frame of capital gains tax (CGT) levied on property has been introduced as well. In the past, CGT at a rate of 10pc and 5pc was levied on property within one and two years’ time. At present, the CGT has been increased to 10pc with an increased time frame of five years. This increase is expected to adversely influence the property transactions; thereby contributing to the crash of the real estate market.
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