The real estate sector in Pakistan has faced significant challenges over the past three years, including economic recession, stagflation, currency devaluation, political instability, heavy taxation, and a loss of investor confidence. While it is true that a ‘correction period’ was inevitable after the tremendous activity in the real estate sector post-Covid (2020) until early 2022, the prolonged crisis that followed mid-2022 reflects a farrago of misdirected economic decisions that stifled the property business across Pakistan.
Challenges Faced by the Real Estate Sector
The imposition of high withholding tax rates, along with additional new taxes, significantly increased the cost of property purchases during the ongoing political and economic crises. This discouraged regular investors from considering real estate as an option, especially as bank deposits offered higher returns without the risk. The stock market also gained traction during this period as investments shifted from real estate to stocks.
While the capital and money markets were thriving, with major players calling the shots, the real estate sector sank to its lowest point, resulting in billions lost by investors—especially Overseas Pakistanis—who were hit hard by both declining prices and currency depreciation. Enough lamenting the past—and to some extent the present; the struggling real estate sector now needs a revival plan that is long overdue.
A Positive Start to 2025
The year 2025 has begun with a positive vibe for the real estate sector. After a long pause, things are finally showing signs of improvement, with increased sale purchase activity, particularly in DHA projects across Pakistan. As the stock market has reached its peak and faces the risk of a correction, combined with interest rates dropping to 12% with further reductions expected, money is gradually flowing back into the real estate market.
However, significant revival challenges still need to be addressed. On a brighter note, the government is finally stepping up to tackle key issues, including tax reductions and incentive plans for the construction industry.
Incentive Package for the Real Estate and Housing Sector
As part of its revival plan, the government has prepared a comprehensive incentive package for the real estate and housing sector. The Ministry of Housing’s 11-member task force has compiled over 40 key recommendations and proposals aimed at stimulating growth in this crucial sector.
A key development involves revisiting the hefty taxes imposed on property transactions in the previous budget, i.e. withholding and FED taxes. The detailed plan, now submitted to Prime Minister Shehbaz Sharif, proposes strategic measures to revitalize the sector.
Key Measures in the Proposed Plan
- Tax Relief: Reduction in property sales tax from 4% to 2%, and buyer’s tax reduced from 4% to just 0.5%.
- Federal Excise Duty: Removal of the federal excise duty on property transactions.
- Housing Subsidies: Provision of housing subsidies for low-income individuals.
- Tax Reduction: Decreasing housing and real estate taxes from 14% to 4%–4.5%.
- Construction Approvals: Permission for constructing three-story residential houses to promote urban development.
- First-Time Homebuyers: Complete tax exemptions for first-time home purchases.
- Public-Private Partnerships: Facilitation for housing projects through public-private partnerships.
- Loan Schemes: Reinstating easy loan schemes with repayment terms ranging from 5 to 20 years.
- Tax Exemptions: Exemption for housing investments up to 50 million rupees.
- Regulatory Reforms: Moving the Real Estate Regulatory Authority (RERA) from the Ministry of Interior to the Ministry of Housing.
Government’s First Step: Property Purchase for Non-Filers
In a major development, the government has allowed non-filers to purchase properties worth up to 1 crore without being questioned about their source of income. This decision is aimed at encouraging investment in the real estate sector and expanding property ownership.
Initially, there was a proposal to set this threshold at 5 crores, allowing property buyers to evade source-of-funds inquiries from the Federal Board of Revenue (FBR). However, the FBR did not agree to this proposal, leading to the revised limit of 1 crore. This decision is seen as a pragmatic approach to jump-start investment while maintaining fiscal oversight.
Challenges in Implementing the Incentive Package
While these proposed reforms are crucial for reviving the real estate sector, significant limitations exist due to the constraints of Pakistan’s current IMF bailout program. Under this arrangement, major economic decisions, particularly those concerning taxation, require the IMF’s consent. As the IMF essentially dictates the fiscal direction of the economy, implementing these incentives without their approval may be challenging. Balancing the country’s immediate economic needs with IMF conditions remains a daunting task for the government.
Another challenge stems from illegal developments that drain a significant amount of public money through flashy advertisements, yet fail to deliver, leaving investors with substantial losses. The government must consider implementing a centralized and proactive system to address these issues, offering guidance and oversight to rebuild investor trust in the real estate market.
Conclusion
The government’s proactive approach signals a renewed commitment to reviving the real estate sector. If implemented strategically, the proposed reforms have the potential to restore investor confidence, stimulate economic growth, and provide affordable housing solutions for the people of Pakistan. However, success depends on navigating the complexities of IMF restrictions and ensuring swift execution of the revival measures.