EDITORIAL: In a recent speech, former Prime Minister (PM) Imran Khan (IK) hit out at the ‘mafias’ in the country, specially ‘the real estate mafia’. It may be heartening to see that someone in the top leadership of the country is openly talking about it. But, not too long ago, during his own tenure, it was IK himself who came up with the country’s longest-ever real estate amnesty scheme.
When he became the prime minister, one of his core agenda items was to provide affordable housing to the teeming millions of the country. He elevated construction sector’s status to an industry’s and simplified the taxation system, lowering tax rates enormously. This is in addition to the real estate amnesty scheme which led to real estate prices shooting up and housing becoming even more unaffordable for the social segments that needed housing the most.
It is true though that real estate ‘mafias’ started mushrooming over the last 25 years or so. Prior to that, real estate prices in Pakistan were either reasonable or reasonably low. The core issue was that the elite including the establishment, bureaucracy, business community and others, have become the beneficiary of this real estate boom. Tax rates applied on this sector, whether generated in the form of income or capital gain, are abysmally low while tax evasion is rampant. Hidden wealth can easily be disguised in real estate assets as the declared value is only a fraction of the actual value of the acquisition.
On top of all this land grabbing, particularly that of government-owned land, is prevalent. Zoning laws are conspicuous by their absence in most places and where they exist, they are flouted with impunity through resort to change of land use or payment of penalty for violation with the result that the rich and influential people can easily transform the residential areas into commercial/industrial estates and agriculture lands into urban centres. There are numerous cases of government (or state) land being grabbed. And there are cases where land is not supposed to be used for setting up or erecting temporary or permanent structures but has been used for construction — such as land for riverbeds or for forests.
There is another layer of problem where lack of regulations has resulted in overselling and selling in advance of products.
In many instances, for development of housing societies or apartment complexes, builders after buying (full or part) of land, get all the requisite approvals, and start selling projects (or plots). They then use the proceeds from the sale as working capital to finance a project or projects. The modus operandi is to recover the cost in the first leg of selling and then use people’s money to build it further. The risk is usually passed on to the third party. If there is any dispute on the land, delay in approvals or general delay in the execution of the project, the poor owners must take losses. There is no regulator to protect consumer interest.
All these factors have made real estate a choice of investment in Pakistan. The biggest issue is skewed taxation. Till the 1990s, the rich used to invest in manufacturing. And all the big manufacturing groups operating in Pakistan have been in the business for 30 years or so. It’s hard to find any example, in the past 20 years, where some group started growing in the manufacturing business. Almost all the new billionaires are in the real estate business.
There could be some examples in services; but, predominately, real estate is the kingmaker in Pakistan. If the government strives to put the economy back on the rails, the undue advantages available to real estate investments have to end. This must be seen in general with tax evasion and the prevalence of illegal money.
The growth in real estate prices and the increase of black money are strongly correlated. In the past 10 years or so, the currency in circulation (M2) has increased abnormally and that coincides with the real estate boom. Earlier than that, it was relatively easy to move money outside Pakistan and the parking of ill-earned money in real estate was less significant. Now with global tightening of tax havens and better enforcement of FATF (Financial Action Task Force) laws, sending money abroad is not that easy. And perhaps most of that money is now channeled to real estate.
The government needs to address these anomalies. For that, the buy-in from all the stakeholders, who are benefiting from it, is required. The land mass belonging to the government needs to be opened in a transparent manner to enhance the supply to reduce price rallies while zoning laws need to be strictly implemented. There should be an absolute restriction on the conversion of agriculture land to real estate as food security is going to be a problem. Housing needs to move vertically. The tax rates of multiple holdings of plots should be increased. The bottom line is that this nexus of power and money in almost all spheres, including political parties, must be broken. The question is: who will bell the cat?
Copyright Business Recorder, 2022
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