04/11/2016
Real Estate Crisis
FREQUENTLY ASKED QUESTIONS
(An Analysis by Pakistan Real Estate Industry Forum - PREIF)
Question 1: FBR valuation rates are still lower than actual market rates. So why is there objection to the rates notified by FBR?
Answer:
This question is raised by people who have little understanding of the real estate market dynamics and the historical practices.
The objection is not on revising the official rates - the objection is on not doing the requisite planning that is necessary. Prior to 30th June 2016, property transactions were being registered on Deputy Collector (DC) rates for many decades. It was government’s mistake not to revise the rates gradually every year keeping in view the rising real estate pricing. As a result of this mistake, most of the investors who had white/documented money and invested in real estate, their investment got converted into undocumented money. Whose fault was that?
Due to the overnight change by the Finance Act 2016, investors who work regularly in the real estate sector are suddenly required to have much higher amounts of documented investment to conduct a property transaction. The situation is bad across all Pakistan but this particular issue is most glaring in the city of Karachi where the increase in official rates is the most significant. In some areas, the increase is as much as 1200%!
So, in a nutshell, investors who were working precisely according to the law of the land prior to 30th June, 2016 are suddenly feeling discouraged to invest because they are left with insufficient documented money to continue to invest in Pakistan real estate. This unplanned and sudden move has put the entire sector and its associated 50 industries in a crisis that will deepen further if not addressed soon.
Question 2: The new FBR rates were devised after consultation with the real estate stakeholders, so why is there an objection now?
Answer:
There was complete panic in the real estate sector after the government introduced the new tax laws on 1st July, 2016. Government took the action without consultation with the stakeholders and invited the stakeholders only after creating the panic. Even those consultations were done hastily without spending time to evaluate the impact properly. Those consultations were primarily focused on property valuation tables without little discussion about the tax rates and issues related to source of investment. In short, those discussions between government and industry stakeholders failed to resolve the real estate crisis so there is a need to sit together again to come up with a proper solution for the real estate sector.
Question 3: Why is the real estate sector resisting taxation?
Answer:
Real estate sector pays a long list of federal and provincial taxes, including Capital Gain Tax (CGT), Withholding Tax, Capital Value Tax (CVT), and Stamp Duty. The sector does not resist paying taxes. The problem is with an attempt to significantly change property valuations overnight and increase in tax amounts by as much as 2400% in some localities. Such significant changes have shattered investor confidence and requires intervention from government again.
Question 4: After the new tax laws, property transactions are reduced but tax percentages are increased, government will still collect more tax revenues even on fewer transactions. Isn’t that better for government and the country?
Answer:
Since tax rates and property valuations have been raised significantly, the number of property transactions have been reduced significantly. In the short term, government’s collection of taxes might have increased, but the new tax rules have the following negative impacts:
1. Investors will be discouraged due to higher transaction costs and the hostile environment created along with the new tax rules
2. New housing schemes will not remain viable because of lack of investor interest.
3. Construction business will not remain viable because of lack of investor interest. Builders cannot finance all their construction projects themselves they usually rely upon investors. We are already seeing bookings being cancelled on numerous housing schemes.
4. Due to a sluggish real estate market, overseas Pakistanis are not sending their usual amounts of remittances thus depriving Pakistan of valuable dollar reserves. Local and overseas Pakistanis are focusing on other avenues like UAE for their investment.
Question 5: So what is the solution to the current crisis?
Answer:
1. The sector needs some reassurance from the government to bring back investor confidence
2. A package similar to that given to stock exchange back in 2012 to regularize undocumented investment. The details of the package must be finalized by including industry stakeholders in the discussions.
3. Lowering of tax percentages considering that property valuations have been increased significantly.
4. Lowering of property valuations and adopting a more gradual approach.
