Pakistan Real Estate Sector Property Tax
Myths and Facts
In the aftermath of ambitious but impractical taxes imposed on the Pakistan real estate sector in the budget 2016-17. The Pakistan real estate sector is on a stand still, waiting for a possible reversal of the brutal taxes imposed. There is no clear policy given by the Government and it seems Mr Ishaq Dar is pretty happy with what he has achieved so far. The banks now have enough money for the Government to borrow hence Mission accomplished and well done. The panic situation was intentionally created by the Government to make sure that Billions of rupees coming as foreign remittances for real estate sector in Pakistan stays in the bank after Eid.
There are some myths circulating in the market regarding the effects of taxes , lets address them one by one:
Myth No 1: Property Prices Will Fall Heavily
I have been really amused by some comments from people who think that the Pakistan real estate prices will actually fall after heavy taxes. In UK the CGT ( Capital Gain Tax) varies between 18 to 28% on a property bought for the sake of investment. The taxes only push prices higher in the real estate sector.
An average transaction today in Pakistan real estate sector adds 1% to the price of the land because of taxes in a upwards market. The same transaction will add at-least 2% to the price of land after the taxes. So even if we assume that the transaction in real estate sector will slow down . The prices will continue to go up at a much higher rate because of the higher tax which will add to the real estate value after every transaction.
Myth No 2: Pakistan Real Estate Rides On Black Money
It is a common belief that the reason for Pakistan real estate sector up-trend is because of black money. While i do not disagree that black money plays some part in the rise of prices but it is more of a myth.
Fact is that demand for real estate is driven by population growth, personal income, employment rates, interest rates, and access to capital. Between 2006 and 2011 real estate sector in Pakistan was very slow in growth . If black money is the cause of price hike we can thus safely say Pakistan was black money free during that time. Which we know we were not , actually the corruption, tax evasion were at there peak during this very period.
The biggest factor when it comes to the growth of Pakistan real estate is foreign remittance. Only in the year 2015-16 approximately 6 Billion USD was injected in the economy of Pakistan for real estate sector through foreign direct investments.
Myth No 3: Taxing Real Estate Will Produce Jobs & Grow Industry
Taxing Real estate sector of Pakistan will produce more jobs as people will likely move there money to other sectors such as industry which will give more job opportunities and raising employment rate.
Lets be very specific about it which industry? Real estate in Pakistan is the highest employer second only to agriculture. There is no industrial growth in Pakistan nor is it feasible in these circumstances. Pakistan has become over the years more of a services and retail economy. In reality the government will be adding a lot of people to unemployment list because of lack of development of real estate.
Myth No 4: It Will Be Good For A Common Man
The taxes imposed will bring down the prices in real estate sector. This will eventually make it easier for the common man to buy a property at lower rates.
This is a common misunderstanding that a common person will benefit from the taxes. Actually the common person will end up being the biggest sufferer. The real estate sector will recover and as it recovers the prices will soar high , thus making it harder for a common man to posses a piece of land. In reality the common man does not get any benefits or tax cuts.
In Uk there is no tax if you purchase a house for your personal living below 125000 GBP . There is no CGT if you sell the house you live in , no matter what the price slab is. Has the Government of Pakistan given any tax relief to the common man who wants to purchase a house to live in? Thats a BIG NO .
Myth No 5: Property Prices Are Too High
Property prices in Pakistan are too high and a common man can not afford to buy a piece of land.
There is a common misunderstanding that the property prices are too high in Pakistan . I have carried out an analysis of the prices in Lahore and surprisingly there are some very good societies offering plots in very low price. Rest assure there is a society in Lahore for every class of our society. A 5 Marla plot varies from 10 Lacs to 100 Lacs . It only depends on where you want to buy . The central and more developed locations are expensive and will always be more in demand. Societies such as Central Park , Grand Avenues , Park View Villas , Raheem Gardens , Bharia Nashaiman etc cater for middle and lower middle class.
These are the dynamics of real estate sector every where in the world. Suburbs will always be cheap till they develop and become more central and so on and thus the urban areas keep on expanding.
What Is Going To Happen in the wake of Taxes?
Actually not much, no matter what the decision of the Government is we can safely assume following.
- There will be a minor market correction in some sectors, however long term indicators , such as population growth , economic growth on the shoulders of CPEC indicates a higher personal income and access to capital and thus more demand and growth in the real estate sector will follow.
- The Government will collect higher taxes on every transaction , thus will not impact there revenues even if there are lesser number of transactions.
- Pakistan real estate sector still offers much less taxes than other developed countries such as UK. Every Pakistani want to own a piece of land in his own country. FDI in real estate will not be effected at all by the taxes imposed. It is however important for every foreign investor now to register himself as a tax payer.
- Once the dust settles , the real estate price will start to rise again. The sellers will start adding the taxes in there final price. This will eventually lead to much higher prices and the buyers will suffer.
- Market trend will shift a bit from short term trading towards mid term and long term trading . An average real estate transaction will take a bit longer than it does now.
I believe that if you are an investor than the minor correction in the market will be an opportunity to buy . Actually the market is already correcting itself and it is time to find a good deal for yourself. My suggestion for buyers is to purchase real estate on market correction in developed or near completion areas. Sellers its a hard decision , you will be subject to CGT , you should hold what you have and wait for a higher price.
Captain (Retd) Shahnawaz Yaqub Bhatti
Investment Consultant and CEO at Imlaak
Mob : +92 333 1717170 ( Whatsapp)
Skype : Shahnawaz.yaqub