The real estate industry is on fire. Earlier this month, the Federal Revenue Board (FBR) announced that they are reviewing the appraisal prices of real estate, including commercial, residential, apartments, flats and other areas of 40 selected major cities of the country.
Since the announcement, there has been outrage coming from realtors, realtors and investors. The results of the revised valuations were not immediately apparent, but in the following days, it became clear that the market would inevitably slow down. There are already reports of major deals failing with buyers withdrawing at the last second, and sellers are suddenly finding an obvious shortage of buyers for their residential and commercial plots.
Basically, the FBR increased its valuation of property prices for two reasons. The first is the very obvious one, which is that they will use this increased valuation to generate more real estate tax revenue. The second reason is that the real estate business in Pakistan has long been a well of black money, hyper-inflated values, tax fraud, and all other manners of shady practices.
While the market value of the real estate in Pakistan is high, its official value in documentation is usually cited as low enough in an attempt to keep taxes payable low. The new tariffs have tried to fix this very old problem – the official value of land is much lower than the real market value of the same land.
This problem has been around for some time. Its roots are in a complex system of DC tariffs and FBR tariffs that anyone who has had to go through the discontent of buying and selling city property will know. It is a system based on lies, deception, and attempts to avoid taxation. Through its property valuation, the FBR is essentially trying to put together the official index of property and the market value together.
In its current test, the board may have outperformed slightly, as there are many cases in which their rating was actually higher than the market rating. However, the FBR has already said that it will negotiate with stakeholders in the industry, which means that the extra valuation is simply there as a hesitation for when the government inevitably negotiates with the real estate industry to lower the valuation.
Real estate in Pakistan
Please skip this short section. Mostly because it is not exactly related to the current problem, but is instead a brief comment on the nature of the real estate industry in Pakistan. In July 2020, Farooq Tirmizi made a story for Profit titled ‘Why (and how many) Pakistanis are investing too much in real estate.’ The story showed that although the obsession with real estate has understandable foundations and originates in an essentially good idea: the need to buy assets that generate inflationary returns has gone too far and is now beginning to create a drag on economics. growth, investment opportunities, and housing affordability.
Real estate in Pakistan is a strange obsession. It has been co-opted by some of the most shady characters this country has seen and because there are so few regulations, things very easily manage to get out of hand. Pakistani real estate agents and realtors do not really have licenses or exams that qualify them to do the job they are doing. It is easy to find hidden passages in documents and development is confusing and incessant. These are many of the traits that have made this sector the degenerate disorder it is today. It is also why it is accused of being used to park black money, and why organizations like the IMF and FATF are unhappy with Pakistan, which we will discuss further in the story.
In addition, the commentary also raises more questions about the fate of real estate in Pakistan. You don’t need to pass an exam to be a real estate agent, you just need a phone to make calls, make connections and be a good salesperson. This act itself pushed real estate to be traded like a commodity rather than a real estate asset. The revaluation, whether overestimated or undervalued, not only makes it difficult to park money but can eventually lead to the inconvenience of real estate. Maybe then homes may one day become accessible.
Watch this space for more information on that. Stay tuned to Feeta Blog for the latest updates about Pakistan Real Estate.
