April 15, 2021
Role of Real Estate Sector in Pakistan

Role of Real Estate Sector in Pakistan’s Economic Growth

Pakistan’s real estate sector makes a significant contribution to the country’s economic development. According to World Bank reports, real estate assets account for 60 to 70 percent of a country’s overall wealth; if these figures are extended to Pakistan, the real estate market will be worth $300 to $400 billion. After agriculture, it is Pakistan’s second-largest source of employment. Aside from direct employment, it boosts demand in over 400 sectors, ranging from construction (cement, steel, paint, building materials, architects, and urban planners) to financial services (house financing). As the government has increased the amount of different taxes, especially in the areas of selling and purchasing, strict measures have been implemented to show the money trail behind investments made in the last three years. As a result of the extreme economic recession that has hit this industry, many real estate consulting offices have closed, and millions of people associated with this industry are now starving.

Over-Regulation of the Market

The FBR’s stringent regulations (ban on non-filers, mandatory registrations when purchasing property worth more than PKR 5 million, and high property transfer taxes) have deterred investors in this market. Despite the fact that stock markets are volatile, it is not the economic predictor you would expect. However, a common misconception of real estate as an investment opportunity is that it makes a lot of money. This is not the case. The real estate industry fills the void in most countries where capital markets do not play a significant role in economic development. Unfortunately, due to excessive government and FBR over-regulation, this sector is unable to do so. Consider the KSE-100 index and the house price index. For just three years between 2011 and 2019, the annual return on house prices was higher than the KSE-100. The KSE-100 index has risen by 230 percent during the same time span, compared to 147 percent for house prices. There are periodic fluctuations in investments, and one such cycle happened in Pakistan’s real estate market from 2012 to 2015, with annual returns of 16 percent, 25 percent, and 14 percent, respectively. All those years, the return on the housing index has been in the single digits, ranging from 1% to 9%.

The Post 2018 Real Estate Market

The real estate sector has had a tough time since the regime transition in 2018. It has struggled with financial, fiscal, and political difficulties, as well as a host of policy problems and a loss of confidence. It narrowly made it through the previous slump, thanks to huge investments by Pakistanis living abroad. Due to exchange rate benefits for overseas investors, the depreciation of the Pakistani rupee made property investment more affordable. Thousands of foreign investors have moved their money elsewhere due to the instability and tax policies in place. Since these countries (such as the United Arab Emirates and the United Kingdom) are providing greater benefits, the amount of foreign exchange used for real estate investment has decreased. Pakistan earned USD 21.84 billion in remittances in 2019-20, according to the SBP. Since they face limitations in doing other enterprises, the majority of overseas investments are in the real estate market. Overregulation of the real estate sector deters foreign buyers and may result in a decrease in remittances to Pakistan. Furthermore, the government’s strategy of not using construction budgets has caused this sector’s operations to contract.

Inflation and real estate industry

Because of the high prices, people find it impossible to buy a home due to high inflation. According to the Pakistan Bureau of Statistics (PBS), inflation rose to 9.4 percent in March 2019 from 8.2 percent the previous month, marking the highest peak since 2013.

Impact of CPEC on Real Estate Sector

The China-Pakistan Economic Corridor (CPEC) is yet another massive growth initiative that will change Pakistan’s economy and, as a result, the real estate market in the coming years. While the CPEC’s special economic zones have yet to be completed, the project’s positive effects can be seen in the enhanced state of the power sector and the partial completion of the Lahore-Karachi motorway. The interval between Lahore and Multan has been reduced from five hours to three and a half hours. Multan is now being touted as Pakistan’s next economic center by businesses and investors. The development of DHA Multan and DHA Bahawalpur are just two examples of how CPEC will change the real estate industry in 2021.

Economic Boost in Pakistan by CPEC project

The impact of CPEC on Pakistan would be immense, such as:

  • Various industries will be established in Gwadar.
  • There has been significant growth in the number of job openings.
  • Pakistan’s growth rate would rise by 5.07 percent as a result of the CPEC program.
  • It will improve our economy, and the demand for more housing and land in Pakistan will increase.
  • After the completion of the CPEC project, we will see a significant effect on residential and commercial properties.

Without a doubt, the real estate industry will continue to expand in the coming years. However, there are several hurdles to the real estate sector development in Pakistan.

The Real Estate Market Reforms 2021: Housing Industry In Pakistan

Since becoming Pakistan’s prime minister, Imran Khan has implemented a number of changes and enhancements to the country’s real estate market, which are inextricably linked to the country’s economy in a variety of ways, including:

  1. The majority of these reforms were made to increase government tax revenue.
  2. Prevents speculative real estate investments.
  3. As a result of these reforms, investors have decreased their investment in Pakistan’s real estate market, putting the country’s economy in jeopardy.

Challenges For Government: Running Projects Progress

The real estate industry has been taken over by uneducated brokers and sellers who lack the experience to guide people further, resulting in theft in the majority of cases. To further secure the interests of land assigned individuals, the nation needs a federal and regional real estate authority. Furthermore, since the process of land consolidation takes many years, there is an urgent need to oversee the building of societies by developers and builders. People’s confidence in real estate regulators will grow, particularly among overseas Pakistanis, who will be able to invest their hard-earned money in this sector without fear of being scammed.

To increase the tax base, the government must develop long-term strategies. Taxing existing taxpayers would be harmful in two ways: one, it would reduce the tax base as citizens began to use cash transfers instead of financial transactions to hide their income; and two, businessmen would deposit their wealth outside of Pakistan, purchasing properties in the United Kingdom, Dubai, and investing in offshore firms. Fast-track reforms may have negative effects on the economy, especially real estate, so a phased approach to changing the system is expected.

Conclusion

Real estate has the potential to become Pakistan’s biggest contributor to GDP. Real estate encompasses more than 200 different businesses. Growth in this sector will not only address Pakistan’s housing shortage but will also create a large number of job opportunities for the country’s youth. There are many reasons why real estate, such as tourism and CPEC-related growth, has the potential to expand. Pakistan should devise a plan to address the issues that developers and consumers are already encountering in the real estate industry. Real estate transparency and regulation will always be important building blocks for the sector’s potential development.

Leave a Comment

Your email address will not be published.