Pakistan’s real estate sector hits the brakes

By Uzma Nawaz

The real estate sector in Pakistan is unfolding some interesting scenarios.

Over the past two years, starting from June 2014, the market saw a bullish trend with tremendous growth across all segments including residential, commercial and agricultural land.

There has been an almost 80 to 120 per cent growth in development of commercial projects including shopping malls, purpose-built office spaces and specific industrial zones across the country. The commercial setups based on shopping malls provide investment opportunities to non-business community as well as to purchase the shops and yield maximum profits in the shape of guaranteed rental income.

All this has attracted huge investment from both local and foreign investors.

Likewise, investment in property in specialised industrial zones (also known as industrial parks) has increased by nearly 45 per cent in the past two years. Factories are usually established in these zones, which provide state-of-the-art premises and infrastructure. Benefits for investors include tax-free operational costs for up to 10 years after they have purchased land, as well as exemption from customs and import duties as far as capital goods and machinery are concerned.

Most of these zones provide utilities such as water, gas, telephone and wireless internet connectivity in addition to other specialised facilities.

The residential portfolio of Pakistan’s real estate sector has grown by leaps and bounds in the shape of gated communities that keep mushrooming in first and second tier cities. Karachi alone has witnessed a phenomenal growth of 150 to 250 per cent in new housing projects, followed by Lahore (72 per cent) and Islamabad (48 per cent).

In smaller cities such as Faisalabad, Gujranwala, Multan, Peshawar, Hyderabad and Quetta the influx of working communities from smaller towns increased the demand of housing space, thus ensuring a higher resale value of residential property.

Mostly located on the outskirts of the cities, the setup of these gated communities offers state-of-the-art infrastructure, round the clock security, first-class amenities such as playgrounds, gymnasiums, mosques and commercial centres that make living there synonymous with comfort and luxury. Small duplex houses ranging from 120 to 500 square yards abound here matching the needs of various socio-economic groups.

In view of these recent developments, the demand of property in these gated communities had attracted massive investment (up to 80 per cent) from overseas Pakistanis as well.

Much has changed after the federal budget announcement in July 2016. With new amendments in place, there have been many implications for property buyers and sellers. As per a new amendment provincial governments will no longer evaluate property prices which were in place since 1986. Instead, the State Bank of Pakistan will determine the collector rate value of immovable property, expected to be significantly higher than before as it will be in line with the actual market value. This will, in turn lead to higher taxes including Capital Value Tax, registration fee and stamping fees.

Due to higher CRs and higher taxes, experts predict that this will consequently lead to a substantial reduction in the number of property transactions and a drop in property prices. The demand for property across residential and commercial segments has become stagnant with a wait-and-see approach by the investors. There has been approximately 60 to 70 per cent dip in the sales transactions from July onwards.

The resale value of the high-end property of 1,000 square yard houses has dwindled by 25 per cent. The major decline has been in the vacant plot purchase value that largely dropped by nearly 45 per cent in most areas.

Karachi, which has been one of the best cities to attract investment in commercial property with an expected ROI of 12 to 19 per cent, has suffered tremendously and is expected to take nearly 20 to 22 months to regain previous demand.

One of the positive changes that may stir the real estate sector in the right direction is the introduction of Real Estate Investment Trust (REIT), Pakistan’s first such trust that will offer an initial nine per cent dividend and stakes in one of Karachi’s most prominent malls and office towers when it sells shares. REIT is likely to enable small investors become shareholders in property.

The other promising happening is the development of the China-Pakistan Economic Corridor (CPEC), which is currently under construction. The corridor will eventually link Gwadar Port to China’s Xinjiang region via a network of highways and railways. As a result, access to Gwadar will be easier and is likely to attract more investment in property there.

In fact, after a gap of almost a decade, property prices in Gwadar doubled last year; this is partially due to the fact that Chinese companies took over the development and maintenance of Gwadar Port last year.

Real estate experts are confident that property prices in Gwadar will increase by a further 50 to 100 per cent in 2017.

Courtesy: Khaleej Times,  http://www.khaleejtimes.com

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