Real estate sector in urgent need of regulatory body
It appears that with the absence of a regulatory body, the real estate sector is becoming the easiest way to turn “black money” into “white”, which has resulted in uncontrollable high prices, making property unaffordable for the low-income group.
In an interview to Daily Times, Zameen.com’s CEO Zeeshan Ali Khan said a regulatory authority is an absolutely essential, as the UAE’s Real Estate Regulatory Agency (RERA), which practically dragged the sector out of a shambolic state and turned it into one of the biggest realty markets in the world. In the real estate sector in general, the biggest issue we face is the lack of trust. Real estate is everybody’s concern and yet you would be surprised to learn how little people know about the buying process or the paperwork involved. This lack of information is another major issue that causes many problems, said Zeeshan.
Rising property prices have made property unaffordable for the middle and lower-income groups, who cannot even afford to take out home loans because of the high interest rates – as high as 8% to 12%. Pakistan currently has a housing shortfall of around 9 million units, and our mortgage policy is not helping the situation. Pakistan doesn’t have a mortgage market, which is why housing finance’s contribution to the GDP is 0.5%, whereas in India this figure is at 9%, he added. Land records should be computerised, although the government is working to resolve this, the process has been slow, he stated.
Talking about the market trend, he said the market has been stable in terms of prices but overall growth has been slow. Lahore has been stable overall with a few areas seeing minor corrections, and this trend may continue for the rest of the year. Islamabad has been somewhat similar, but certain locations in Karachi have seen impressive growth, such as DHA Karachi. Overall, Ramazan was a particularly slow period for the entire real estate sector but activity could pick up after Eid and last until the end of the year, but it won’t be anywhere close to the growth we saw in 2013.
In the last three years, property prices in Pakistan have seen increments of about 50% as per Zameen.com’s property index, so naturally the market had to slow down a bit. So far in 2015, the increment has only been 2%, which goes to show just how slow the market has been. This slow period could last for the rest of the year, but we do see decent growth for new developments, especially the ones focusing on middle or low-income groups, Zeeshan opined.
A real estate investment trust, REITs are great for the market since they allow smaller investors to collectively participate in lucrative real estate investment. The recently announced Arif Habib Dolmen REIT Management’s REIT is the first of its kind in the region and has the potential to be a great investment product. The trust is likely to pay a dividend of 9 percent in the first year, which is significantly higher than the national rental yield, which barely goes above 5% in most areas in Pakistan, added Zeeshan. REITs are very good in themselves, but the public needs a lot of education before they understand how they work, he concerned.
The government has taken a couple of really positive steps in this year’s budget, like the tax breaks on construction material for builders, which is great news for the real estate sector. The spike in transfer fees and other taxes on real estate transactions in 2014 negatively affected transaction volumes, and this will likely remain the case unless the government offers some relief here as well. A lot of overseas Pakistanis invest in the local property sector. Our foreign remittances are increasing year on year and some estimates suggest that around 15% to 20% of it goes directly into real estate.
This number is increasing because the expat population is increasing, particularly in Middle East. In fact, more than 60% of the $18.4 billion remitted last year came from Pakistani workers in Middle East. This workforce, together with other overseas Pakistanis around the world, pours in a lot of money into the sector to build houses and views property as a very attractive investment product because of the simple fact that the sector is largely cash-based and the market doesn’t crash. It’s also one of the most lucrative sectors where returns on new projects and developments can be as high as 20% to 30% annually.
A lot of Pakistanis do invest in properties abroad, but that goes hand-in-hand with Pakistanis investing in properties back home as well. Dubai is a very attractive market in terms of investment because of its high rental yields, which are around 8% to 10%. In a lot of cases, investment in Dubai or any other foreign market actually creates avenues for remittances into Pakistan through rental income of properties owned by Pakistanis, which ultimately contributes to Pakistan’s economy.
In the last fiscal year alone, remittances sent by Pakistanis residing in the UAE were over $3.7 billion, the second-largest after Pakistanis living in Saudi Arabia who sent home over $5 billion in the same time period. So we should encourage such investment going abroad because it creates an extra stream of income for investors and most of this income keeps coming back to Pakistan, he concluded.