Mohsin Sheikhani, Chairman, Association of Builders And Developers of Pakistan (ABAD), speaks to Aurora about the issues plaguing Pakistan’s real estate sector and the role ABAD is playing to improve the industry’s outlook.

AURORA: Why was ABAD established?
Mohsin Sheikhani: Initially there was no concept of an organised real estate sector in Pakistan and building control authorities and by-laws to guide construction and infrastructural development were non-existent. Most of the activity in the property market was largely limited to construction and/or purchase of houses for personal use. It was only during the 70s that commercial interest in building and development started in Karachi. A few builders, who had been in the business for decades, decided that it was important to have an organisation to represent the interests of the sector and help resolve the emerging issues. It was in this scenario that ABAD was established in 1974, by a handful of industry pioneers, and the first office was set up within the premises of the then Bambino Cinema.

A: What role does ABAD play in Pakistan’s real estate sector?
MS: While the organisation itself is decades old, it is only in the last five to six years that ABAD has adopted a formal corporate structure with an elected panel of experts in order to play a more effective role as the premier association of the real estate industry. Currently, we have more than 1,000 members, including some of the most credible names in the business, such as the Dolmen and Arif Habib Groups, to name a few. Our main role is policy development to help this sector grow. To this end, we collaborate with the Federal and Provincial Governments, as well as the utility and planning authorities on an ongoing basis to resolve problems being faced by stakeholders.

A: What is ABAD’s position with regards to the changes in taxation and property valuation system announced in the Federal Budget 2016-17?
MS: ABAD is not against the change in the valuation system or the increase in taxes. Throughout our negotiations with the Government and the Federal Board of Revenue (FBR), our position was that there needs to be a gradual transition from the DC values to the market-based FBR rates. Implementing this change suddenly is not feasible, and instead of increasing tax revenues, it will trigger an industry-wide recession. ABAD’s proposal was that, for the time being, FBR rates be fixed at 30 to 40% of the actual market value of properties for documentation and taxation purposes. There is no denying the fact that there is a huge gap between the DC values and the actual market value of properties, but trying to fix this gap immediately is not feasible. The other issue we raised, and which nobody else highlighted, was that if the recorded property prices for transactions are being increased, then the tax percentages should be reduced considerably. Otherwise, the tax burden will become excessive for buyers and sellers. For instance, stamp duty in Pakistan is 14%, while the global average is about two percent. This was not a problem when this duty was being charged at the DC values. However, if recorded property values are to be brought in line with their actual market worth, then the taxes need to be reduced. If stamp duties are exorbitant, people will simply stop registering property transfers.

A: The general perception is that builders and developers are unwilling to pay taxes or disclose the total worth of their assets. How far is this assessment true?
MS: This is not true at all. In fact, what the media has failed to highlight is that it was on ABAD’s recommendation that an advance tax was introduced in the Federal Budget this year. This tax will be payable by all builders as soon as their project is approved by the concerned building authorities, regardless of whether they make a profit on the project or not; the percentage varies with the size of the covered area. All parties stand to benefit from this; the Government is getting its tax revenues regardless of the fate of a project, while builders know exactly what their tax expense will be and this can be worked into the project’s budget. A few weeks ago, a group of our members have submitted this advance tax to the tune of Rs 27 million.

A: To what extent has the Government benefited from this?
MS: I estimate that within a year, the government’s tax revenues will increase at least by 300%, if not more. Construction projects are being approved and initiated on a weekly basis, both in the metros, as well as in the second-tier cities, so I expect this figure to continue growing.

A: Real estate transactions decreased by nearly 70 to 80% when it was announced that market-based FBR rates will be used for property transactions. Does the industry stand to gain or lose from this?
MS: Once this discrepancy between DC values and market prices of properties is removed, it will solve one of the main problems impeding the real estate sector’s growth, which is the lack of home leasing by financial institutions. The real estate industry everywhere works on mortgages. People pay five to 10% of the total value of a property as down payment and banks finance the remaining 90 to 95%. The issue for Pakistan’s real estate has been that banks are not willing to sanction house loans due to lack of documentation; in cases where the paperwork is there, it does not reflect the real worth of the property in question. Moreover, there is a lack of foreclosure laws specifying what happens if people default on mortgage payments. Once the sector is regulated, financial institutions will start home financing, and the question of affordability for the salaried class will be answered once and for all. Discussions are underway with the State Bank of Pakistan (SBP) so that a legal framework can be developed to encourage commercial banks to provide home loans. The success of car leasing by banks is a classic success story and there are millions in the middle-income segment who would take advantage of this loan facility. Currently, bank involvement is limited to only ready-to-inhabit properties.

"The issue for Pakistan’s real estate has been that banks are not willing to sanction house loans due to lack of documentation; in cases where the paperwork is there, it does not reflect the real worth of the property in question."

A: In 2016, ABAD reported that there was a supply- demand gap of almost 12 million housing units in Pakistan. How can this situation be resolved?
MS: During meetings with the World Bank (WB), the Asian Development Bank (ADB) and the SBP, our members have repeatedly stated that there is an urgent need to develop low-cost housing schemes. On a year-on-year basis, a shortage of 150,000 to 200,000 housing units is accumulating, and the consumer segment most affected by this is the low-income group, which does not have the capital to purchase property. According to our estimates, the size of the low-income housing market is approximately $180 billion, but no builder or developer is catering to it. ABAD has taken upon itself to develop a low-cost housing scheme in which houses will be constructed on 120 square yard plots, priced at approximately Rs 1.5 million. The benefit for people will be that they will be able to move in by making a five percent down payment, and the remainder will be structured as a loan with the help of financial institutions. The objective is to introduce the underprivileged class to ‘community living’; there will be a cottage industry, hospital, park and school, so that they have access to utilities and amenities that are essential for quality living. This will be a pilot project and once it is successfully completed, similar schemes will be planned. However, this is only a drop in the ocean and further government support is needed to develop low-income housing projects across Pakistan. Unfortunately, on rare occasions when the provincial governments announce such schemes, most are never completed either due to lack of capital and financing or, because of a change in government.

A: From a business perspective, are low-income housing projects profitable?
MS: Profit margins are very limited which is why private builders and developers do not invest in such projects. Luxury apartments and shopping malls promise far better returns. However, the low-end of the market cannot be abandoned. Access to affordable housing is one of the basic rights of any individual and it is wrong to rely entirely on public sector investment to solve this problem. The private sector must play its part as well and contribute resources so more projects of this nature are developed and the increasing homelessness in Pakistan is controlled, and hopefully, eventually completely eliminated.

"The size of the low-income housing market is approximately $180 billion, but no builder or developer is catering to it. ABAD has taken upon itself to develop a low-cost housing scheme in which houses will be constructed on 120 square yard plots."

A: What role can the government play in improving the sector’s outlook?
MS: There is a need to develop lasting public-private partnerships for urban planning and infrastructural development. Currently, there is no roadmap for future policies and government decisions come as a surprise. Take the example of the UAE for instance. Income taxes are being implemented from 2018, but the announcement regarding it was made in 2016, giving people time to prepare. Policies that impact an industry worth billions of dollars should not change like the seasons. Consistent government support is crucial for favourable policy development, the implementation of laws and the rooting out of corruption and bureaucratic red tape from the sector. Eliminating the difference between tax ‘filers’ and ‘non-filers’ is important as well, if the government and the FBR really do want to encourage transparency in the property market. This concept does not exist in any other country in the world. The FBR simply asks non-filers to pay a three percent tax on the difference between the DC rates and market value of a property, without asking them to disclose their source of income. The FBR has dubbed this three percent ‘a tax amnesty’; in fact, it is not an amnesty since investors are actually paying more taxes. The only benefit is that people are not asked about the source of their wealth.

A: Why has the government made this concession for non-filers?
MS: Whenever ABAD raises this question with the federal and provincial authorities, the response is that non-filers represent a substantial source of tax revenues for the FBR. So this ‘amnesty’ is for the benefit of the tax authorities and for the people whose source of wealth is undocumented; they do not mind paying a little extra if this allows them to keep their income and assets hidden away. However, on the upside, once they pay this three percent tax, their assets and income will be recorded in FBR files for future taxation and hopefully, the size of the black economy will start reducing.

"On a year-on-year basis, a shortage of 150,000 to 200,000 housing units is accumulating, and the consumer segment most affected by this is the low-income group, which does not have the capital to purchase property. "

A: What are the main issues preventing the growth of the real estate market, and how can they be addressed?
MS: The lack of standardised policies is the main hurdle. A homeowner or builder is not aware of how long it will take for a building plan to be approved or the fee that has to be paid. ABAD has started working with the government and building control authorities, such as the CDA, DHA, KDA and LDA, to devise fixed policy manuals for the real estate sector. We are proposing the formation of a centralised real estate body so that the concept of ‘one-window operations’ can be adopted. This body will then become the contact point between builders and homeowners, and the relevant government authorities will be responsible for approving building plans once the required documentation is submitted. This will reduce the hassle of going to each government office separately, and being forced to pay additional expenses at each stage to have the project approved. Furthermore, if the approvals and record systems are digitised, people will be able to submit plans and documents online, fill out the application and pay the stated fees, without having to visit each office separately and wait for endless hours. Streamlining and regulating the industry will also encourage more foreign investment, since the industry will no longer be plagued by unexpected delays and unaccounted for expenses.

Mohsin Sheikhani was in conversation with Ayesha Shaikh.
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