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It’s a reality that the real estate sector is one of the most important driving factors of the economic growth of Pakistan. On a global scale, when different economies address the housing deficit problems that are driven by populations undergrowth, they tend into public expenditure and start new projects. The same is applicable in Pakistan. Both governments – federal and provincial – spend a considerable amount from their retrospective development budget spent on brick and mortar.
However, the issues the government has to go through during the process include the specification of the macroeconomic challenges faced by Pakistan on a perennial level. The ability of the Pakistani government for launching a public development project constrained through a limited budget.
As a ratio of GDP, the expenditure of the government on the developmental projects has pretty much gotten limited over the last few years.
The other issue is however more generalized and global: the expenditure from the government seems to be less than required and the economic returns on the investment are much lesser than the expenditure of the private sector.
The ultimate solution lies in moving from the recent model to a public-private partnership – PPP model that involves more part of the private sector in the development. This will be able to solve both issues simultaneously. With the private sectors supervising the projects, the incapacity of the system that was under the government would be cut off, and the private sector will be able to finance its project which will bring more return.
Although it is a fact that PPP will also face issues when it comes to implementing and designing of the projects, strong mechanisms will be useful for tackling them. In a short capacity, the solution for the development of brick and mortar apparently provides space for the private sector.
Should the Private Sector Get Involved?
It is quite evident that the recent government is bringing a solution like this. A sound sum has already been put forth for the real estate sector and the approval from the Ministry of Finance is on its way. This will be easing up any hang-ups for the builders and start new developmental projects.
The government needs to inculcate expertise from the private sector in building construction into housing construction and commercial use at a bigger scale. This will vary from the previous regimens as the previous enforcement was for mainly road building and highway constructions. The primary focus of the current government is on solving housing issues. According to the Naya Pakistan Housing Plan, the government has a goal to bridge the gap of the housing industry which is currently 10 to 12 million units. The project is expected to assist in the build-up of 5 million homes and thus creating around 10 million jobs.
Because of the unstable economy and incomplete policies in the country, the project has seen a downfall. However, the government is hoping to resume it soon. The central obstacle of this project is the pending approval by the IMF.
However, the good thing is that according to the review of the Fund program, quantitative goals are made possible. This is a sign of success as it offers some leverage to the government on getting an allowance when it comes to declaration a package for real estate development.
More Investment in the Real Estate
With this good initiative taken by the government, it is also essential that the government ensures the ongoing issues linked with the real estate investment are taken into consideration so that there is an enhancement in the real estate investment sector and also a boost in the economy.
Firstly, the government will have to stop the fear of the taxpayers for encouraging new investments. In the previous times, the real estate sector has faced defamation because of its unstable structure, a wide circulating factor of grey income, wealth accumulation by the developmental parties, and complications regarding transparency and traceability.
According to the end consumers, property buyers, and builders, they do not have sufficient financial resources to buy houses in elite localities of urban centers. Due to this, many developers and builders show hesitation in undertaking new real estate projects. The market agents also do not prefer any interrogation regarding their sources of income.
However, the builder community wants lowered tax rates. They are finding a rate of flats for Rs70/ sq ft ad Rs 210/ sq ft for residential and commercial constructing respectively. These rates are practically impossible. The cost of the relatively more affordable apartment is about Rs 7000 per sq ft in Karachi, while with the assumption of 40 percent return, the tax income rate is measured to be 1.4 percent. Instead, there is a need to calculate these taxes at the actual income. The builders must also have encouragement for being honest about it.
One concern arising is the launch of the real estate sector for black money that involves no investigation from the FBR regarding the income source, and it attracts mafia. The prices for real estate might rise and make properties highly expensive for the end-users. It needs controls to trough the taxation of empty plots that stay underdeveloped for a considerable time. For instance, the taxation for single unit empty plots can be after every 2 years, whereas, the period can be exceeded to 5 years for plots with multiple units. The trick will be to look for the plot transaction potential practices among the speculators at a certain time.
As of the current time, the market expects the announcements and approval of the concession which might become an important part of the finance bill or be broadcast via a presidential ordinance. It is also important to acknowledge that the concessions might revive the market. However, there must be more to offer when it comes to lowered tax rates and input tax concessions. For this, the authorities will have to address issues regarding economic stabilization that can take up to 6 months.