{"id":73033,"date":"2019-11-08T12:18:37","date_gmt":"2019-11-08T12:18:37","guid":{"rendered":"https:\/\/www.zameen.com\/blog\/?p=73033"},"modified":"2019-12-05T05:23:27","modified_gmt":"2019-12-05T05:23:27","slug":"real-estate-potential-economic-growth","status":"publish","type":"post","link":"https:\/\/www.zameen.com\/blog\/real-estate-potential-economic-growth.html","title":{"rendered":"Opening Up the Real Estate Sector: Unlocking Construction Sector\u2019s Potential to Boost Growth"},"content":{"rendered":"\n

Scope of Construction in\nNaya Pakistan<\/strong><\/h2>\n\n\n\n

The fact that construction industry is an engine of economic growth and employment has been realized by subsequent governments in Pakistan. Globally, when economies try to address housing deficit issues driven by growing populations, they venture into public spending and launch new public projects. The model in Pakistan has been similar. Both the federal and provincial governments spend a substantial amount from their respective development budgets on brick and mortar.<\/p>\n\n\n\n

\"Contribution
Contribution of Construction to GDP In Pakistan
Source: Ministry of Finance <\/figcaption><\/figure>\n\n\n\n

But the problems faced by government during the process are two-fold: the first is specific to Pakistan\u2019s perennial macroeconomic challenges. The capacity of government to launch large public development projects is constrained by tight fiscal budget. As a proportion of GDP, the governments\u2019 spending on development has shrunk over the last few years. <\/p>\n\n\n\n

\"Public
Public Sector Development Program (PSDP) in Pakistan
Source: Ministry of Finance <\/figcaption><\/figure>\n\n\n\n

The second challenge is\nendogenous and often universal\u2014that government-led spending tends to be\ninefficient and economic returns tend to be far less than that of the same spending\ndone by the private sector. <\/p>\n\n\n\n

The solution is to move from\nthe current model to a public-private partnership (PPP) structure with a greater\ninvolvement of the private sector. This would solve both the problems at the\nsame time. With the private sector entities running the projects,\ninefficiencies from the system earlier run by government will be eliminated, and\nprivate sector will be encouraged to finance the projects, bringing in more\ninvestment. <\/p>\n\n\n\n

While it is true that PPP can also face challenges in designing and implementation of projects, strong mechanisms can be built to tackle them. In the short-run, solution to develop brick and mortar seems to be in providing space to private sector investment. <\/p>\n\n\n\n

Motivation for Involving the Private Sector<\/strong><\/h2>\n\n\n\n

It is very likely that the\ncurrent government will bring such a solution. A handsome package has already been\nproposed for the real estate sector and its approval by the Ministry of Finance\nis underway. This will ease regulatory hang-ups for developers and builders and\nkick-start new development. <\/p>\n\n\n\n

The government wants to\nbring private sector expertise in building construction into commercial and\nhousing construction at a much grander scale. This will be different from\nearlier regimes, as earlier the emphasis of development was on building roads,\nhighways and bridges. The PTI government\u2019s primary focus is on housing issues.\nUnder the Naya Pakistan Housing Plan, a project PM Imran Khan announced right\nafter joining office, the government aims to bridge the rising housing gap\nestimated to be somewhere between 10-12 million units. The project hopes to support\nbuilding 5 million houses and generating 10 million jobs. <\/p>\n\n\n\n

Due to hindering economic\nstabilization policies and slowdown in the economy, the project has come to a\nstandstill state. But the government has to shift gears soon. The main\nstumbling block for the aforementioned package, considering the fiscal\nconcessions, is the pending approval of the IMF. <\/p>\n\n\n\n

The good news, however, is that in the ongoing first review of the Fund programme, most of the quantitative targets are met. This is a propitious sign of success since it gives government leverage to get allowance on announcing a real estate development package.<\/p>\n\n\n\n

Boosting Investments in Real Estate<\/strong><\/h2>\n\n\n\n

While such a great\ninitiative has been taken, it is important that the government make sure the existing\nchallenges associated with the real estate investment are addressed so that not\nonly does the project enhance investment in the real estate sector, but also\nboost the economy in general. <\/p>\n\n\n\n

First and foremost, the\ngovernment must eliminate the fear of tax man to encourage fresh investments.\nHistorically, the sector has largely remained notorious due to its informal\nnature, wide circulation of grey income, wealth accumulated by the developers\nand builders, as well as transparency and traceability issues. <\/p>\n\n\n\n

According to builders,\nproperty buyers and end-consumer do not have enough white money to buy\napartments or houses in posh localities of the urban centers. Because of this,\nthe builders are hesitant to undertake new projects. The agents in market also prefer\nnot to be interrogated regarding their sources of income. <\/p>\n\n\n\n

That in no way means that\nother agencies cannot intervene in the cases where money is generated through\nillegal means. In such cases criminal proceedings could be applicable. In fact,\nthere is a subtle difference between tax authorities asking questions or other\nagencies probing on the money trail. The latter is of great importance given that\nPakistan is on the FATF grey list and the government cannot afford to not\ndocument the money trail. <\/p>\n\n\n\n

Once investment is made\nin a real estate project, the government should be able to fully document it.\nThe transactions ought to be recorded on real value or close to real values and\nthe tax to be deducted on the income generated upon selling after development.  <\/p>\n\n\n\n

The builder community\nhowever, desire much lower tax rates. They are seeking a flat rate of Rs70\/square\nfeet and Rs210\/square feet for residential and commercial construction\nrespectively. These rates are very low and seem unreasonable. The cost of\nrelatively less pricey apartment is around Rs7,000\/square feet in Karachi, and\nassuming 40 percent return, the income tax rate is calculated at 1.4 percent. Instead,\nthese taxes should be calculated at actual income. The builders should also be\nencouraged to keep their books clean.  <\/p>\n\n\n\n

One fear is that the opening\nup real estate sector for black money\u2014with no FBR investigation on the source\nof income\u2014will attract speculators. Real estate prices may go up and make\nproperties unaffordable for end buyers. That has to be controlled by heavily\ntaxing empty plots that remain undeveloped for a stipulated period of time. For\nexample, empty plots for single units can be taxed after 2 years, and those for\nhigh rise units can be taxed within 3-5 years, depending on the height of the\nbuilding. The tricky part would be to be watchful of potential practice of plot\ntransaction among speculators within the stipulated time.<\/p>\n\n\n\n

For now, the market is anticipating\nthe approvals and announcements of concessions which may become part of the\nfinance bill, or be promulgated through presidential ordinance. It is pertinent\nto note that these concessions would revive the existing market, but for cost-effectiveness\nmore has to be in offering in terms of tax concessions on inputs and lower\nincome tax rates. For that, economic authorities have to address economic\nstabilization issues first which may take another 6-9 months.  <\/p>\n","protected":false},"excerpt":{"rendered":"

Scope of Construction in Naya Pakistan The fact that construction industry is an engine of economic growth and employment has been realized by subsequent governments in Pakistan. Globally, when economies try to address housing deficit issues driven by growing populations, they venture into public spending and launch new public projects. The model in Pakistan has been similar. Both the federal and provincial governments spend a substantial amount from their respective development budgets on brick and mortar. But the problems faced by government during the process are two-fold: the first is specific to Pakistan\u2019s perennial macroeconomic challenges. The capacity of government to launch large public development projects is constrained by tight fiscal budget. As a proportion of GDP, the governments\u2019 spending on development has shrunk over the last few years. The second challenge is endogenous and often universal\u2014that government-led spending tends to be inefficient and economic returns tend to be far less than that of the same spending done by the private sector. The solution is to move from the current model to a public-private partnership (PPP) structure with a greater involvement of the private sector. This would solve both the problems at the same time. With the private sector entities…<\/p>\n","protected":false},"author":97,"featured_media":73041,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[11051],"tags":[42706,42711,43961,8501,42712,236,42709],"persona":[32409,32415,35639],"class_list":{"0":"post-73033","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-property","8":"tag-construction-sector-and-economic-growth-in-pakistan","9":"tag-construction-sector-pakistan","10":"tag-lob","11":"tag-naya-pakistan-housing-programme","12":"tag-potential-of-construction-sector","13":"tag-property","14":"tag-real-estate-and-economic-growth","15":"persona-constructiondevelopments","16":"persona-market-trends","17":"persona-property-management","18":"cat-11051-id"},"acf":[],"yoast_head":"\nUnlocking Construction Sector\u2019s Potential to Boost Economic Growth in Pakistan | Zameen 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