BR Research: You operate in Karachi so let's talk about the housing gap in the city and why it has continued to increase?

Arif Yousuf Jeewa: There is a shortage of 12 million houses across Pakistan where Karachi has the biggest share owing to its ever increasing population. Annually, we have a shortage of 300,000 houses. The biggest requirement for houses comes from middle and lower-middle classes. When you want to build houses for this expanding population, you don't build horizontally, you go vertical.

Lower middle class people specially go into vertical housing because horizontal is simply not affordable for them-as a comparison, the price for housing is reduced by nearly 60 percent when you go vertical. The travesty is that right now in Karachi, there is a ban on high-rise buildings. There is a 'ground plus-two' approval which is inadequate-when you are building a high-rise, up to four floors are covered in parking, so this restriction is impeding our construction. Over 300 approvals are stuck in Sindh Building Control Authority (SBCA) and some are stuck in cantonment and Defense Housing Authority (DHA). The demand is intact, even if it hasn't increased, but the supply is substantially depleted.

Fayyaz Ilyas: I would add here that the problem of housing gap in Karachi originates from the absence of a master plan of the city based on the expanding size. There is absolutely no city planning to keep up with the growing population.

AYJ: Yes, they start building bridges, roads and underpasses after the pressure of increasing population reached its peak. That's not how you govern a city.

 BRR: How has the restriction on high-rise affected the existing housing gap in Karachi?

AYJ: The projects that had already attained NOCs and had started construction from last year have seen their prices increase. Moreover, as the security situation of the city has improved, people who had migrated out of Karachi are now moving back; so the pressure on availability for housing has increased. This has not only pushed the housing shortage further up; the rents in the city have also soared up to 25-30 percent.

BRR: When was this restriction imposed and why was it imposed in the first place?

AYJ: It was imposed in March of 2017. The issue of water shortage and sewerage system was raised and the Supreme Court ordered a report on the quality and access to water in the city. Karachi Water and Sewerage Board produced a report saying that there was a shortage of water in the city. Based on this, the restriction was imposed on high-rise.

However, the assertion that there is a water shortage in Karachi is absolutely false. There is no water shortage. There is only water leakage and water stealing. The leakage is because of the old lines that are still being used. Then there is the K-IV project, which was supposed to have finished by 2016, but it is still pending and I don't see it finishing even by 2020.

The stealing of water, as you know, is because of the tanker mafia.  Whether it comes from the tanker or from the pipelines, the source is the same for the water that we utilize. The only difference is that the water we get from the tankers is stolen water.

These two factors have contributed to this perceived shortage of water. Now the Supreme Court is waiting for the Sindh government to take some decision and we are waiting to resume our construction, once this is resolved from the government side.

BRR: Tell us about the housing gaps in other major cities like Lahore. Do they face the same hurdles there?

AYJ: If we are talking about Lahore, the city does not have a concept of high-rise buildings yet. Even there, the housing demand is high while the supply is less. The reason for their gap is that the city still predominantly has horizontal housing and the move to high-rise has only started picking up now. Environmentally speaking, high-rise has to be the future for growing cities. The air quality will improve, for one.

In Lahore, the infrastructure exists and is being developed, which is a positive first step. But even they don't have substantial by-laws to oversee and monitor the construction of high rise buildings. There is a shortage of expertise in that city.

The situation is similar in Islamabad but in the past three years, a lot of buildings in Islamabad have been erected. The high rise culture in that city is picking up faster because even though the population is low, those Pakistani who are living overseas-whether they are from Karachi, Lahore, Quetta or Peshawar-they want to build their second homes in Islamabad, and they prefer living in apartments and high rise buildings.

ABAD is on board with SBCA in this city and we would want to do the same in other cities. We have been building high rises for the past 35 years. We have architects, engineers, builders and developers. We just need cooperation from the government. But that is the issue. There is no housing ministry in this country. The one that exists only looks at public projects related to the federal government. They don't work with the private sector, even though the private sector has been developing the cities for decades

BRR: Isn't it true that the housing demand gap also exists because people simply cannot afford to buy property in Pakistan. Property prices keep on rising. Tell us about the low cost housing programs in the country and the one ABAD has launched.

AYJ: Look, ABAD has been here since 1972-and whatever schemes the government has given to date-whether it is Malir Development Authority (MDA) scheme, Hawksbay scheme, Taiser Town, it hasn't delivered.

So we decided to take it in our hands and make a proposal. What they used to call low-cost, we call it "affordable" housing. When then-PM, Nawaz Sharif came to office, the government promised that it will give 500,000 houses at discounted rates. In 2013, it called ABAD and we spent the next almost two years making proposals and working with the housing ministry to finalize the program. We had arranged the lands. We were talking about planning earlier, so this is an excellent example of that.

All said and done, countless meetings later, we landed in the law ministry to write this into law. The Law Minister told us that the scheme cannot be made, since this issue now comes under the provinces after the 18th amendment, and Federal government does not have the appropriate authority to implement it. We went to Sindh government and their response was since the PML-N government is in Punjab, let them do the project fist.

BRR: So the program is currently on hold?

AYJ: We have done all the work but without appropriate resources and approvals we cannot start construction. We promise today that ABAD can make these 500,000 houses. They want us to develop horizontally-we can do that-but not when there are no utilities available. There is no water connection, no electricity, and no gas. There is no sewerage system either. We just need these basic provisions from governments anywhere whether it is it Sindh or Punjab and we will give them these affordable houses. We have already given the price of Rs2 million per house.

BRR: What about the very lower end of the population that is currently living in kacchi abadi. How can we provide them with housing?

AYJ: We also have a proposal for Kacchi Abadi. Look what has happened in India and Sri Lanka over the past 5 years. They have been taking kacchi abadi vertical. In Sri Lanka, a member of ABAD is currently working to rehabilitate kacchi abadis using the proposal we had for Pakistan. Today in Karachi, nearly 52 percent is just kacchi abadi. Our proposal is for every provincial government. We only seek approvals and connections to utilities and the grid.

But the problem in this country is that, the existence of kacchi abadis is politically important. This is where they get their votes. The political party nominates a Chief who provides people space to create kacchi abadi and then these people give the nominee their votes. And you know, this is where they get people to disrupt the law and order in the city. The protestors come from these areas.

If we are able to implement one model, you will see that people from these places will come to us themselves to implement it for them too.

BRR: With rising real estate prices, do you see any improvement in access to finance available to property purchases or even builders? What about mortgage financing?

AYJ: The House Building Finance Corporation (HBFC) does not have money to give loans. For commercial banks, you simply cannot fulfill their documentation requirements.

FI: Actually, banks do not have the motivation to cater to the real estate sector. HBFC was the only institute that was involved in real estate. We are seeing some interest from private banks now such as Bank Islami or Meezan Bank, but it is not nearly enough. Even Meezan is only interested in the property that is constructed and ready. There is no financing for the construction.

BRR: But don't you think the trust deficit exists because in the past, real estate has earned a bad rep for defaulting. Builders are known to run away with the banks' and customers' money?

FI: That time is gone when the builder could run away. Even so, banks should be working with trusted builders like us who are documented, and who are part of ABAD. The volume of each project of ours today is in billions of rupees. We take the loans for our clients and our allottees who cannot afford to pay upfront.  But when it comes to mortgage financing of projects, there is no product of any bank that is currently functioning.

For individuals, commercial banks are giving out loans but mostly for renovation. That is also for high-end properties. But our requirement is for the 85 percent of the population, who are working class, who are unable to afford a property that costs Rs4-10 million. Commercial banks should be designing products for these people and providing project financing.

BRR: With CPEC and all the infrastructure development happening in the country, do you see foreign investors coming into the real estate market? And where are they coming from?

AYJ: For sure, foreign investors are coming. They are coming and then they are leaving! They are coming from Europe, Gulf, Saudi Arabia but they are all going back.

There was a party from South Korea that expressed interest. We had a meeting with them and they wanted to set up a mall in Islamabad. Preliminary plans were drawn out but they eventually left. Why? Because of our complicated regulatory environment, especially in the real estate sector.

BRR: Are you referring to the valuation issue?

AYJ: Yes. When a foreign investor goes into registry, he has to deal with three different valuations. There is the DC value at the time of registry. Then the investor has to be pay advance tax to FBR on another value determined by the FBR, whereas the actual market value of the property is something completely different.

It is virtually impossible for investors to function with different valuations for one investment. When they go into audit, they cannot explain it away. They say their property is not safe in Pakistan.

As an example, say a foreign investor bought a property for Rs10 million. Now the DC value for that is 3 million-you give tax on that value to DC. The FBR value is Rs5 million-you give tax to FBR based on that value. They have to make separate agreements for one property. The agreement between the buyer and seller is on the market value. Then there is the registry with DC and then registration with FBR. All for different amounts. So when your government bodies are not on the same page and can't operate systematically, how will the foreign investor work in such uncertainty and ambiguity?

We have written to FBR, and the standing committees for Finance in Senate and the National Assembly to keep one tax based on one value and all the chips will fall into place. We have offered to increase the valuation ourselves but it should be consistent across all departments. Levy one percent duty on valuation. When we increase the valuation, the tax would accordingly increase.

BRR: We are talking about taxation but another elephant in the room is informality within real estate. What is the share of the sector that is not tax compliant, and who is to blame for the illegal money being parked into this sector?

AYJ: The informality figures are not even available with the government, but it will be huge. It is the inefficiency of the government that the sector has been unable to document. Many local deals that are happening are still using indirect means of transactions and avoiding tax. But this has been made possible because the government does not take action and is not organized enough to bring them to task.

As regards the money that comes into real estate. The actual money is coming from industries. More industrial development means more money being put into real estate. Pick any allied industry. If there is a surplus in stock, the money in access is put into property. They have to inject that money somewhere-it will be either gold or property, and gold is difficult to manage.

BRR: Do you see substantial changes in construction costs that contribute to the rising prices in real estate?

FI: Construction costs are only going up. At one time, it was Rs800 per sq ft, now we are estimating 2,200-2,500 per sq ft. Steel prices have gone up because of the imposition of regulatory duties so now local players are free to raise prices. As a comparison, six months ago, your steel was around Rs70,000-75,000 when today it is 85,000-90,000. Then because of devaluation, these prices will increase further as imports become expensive. All this burden will land on the customer, the average property buyer.

BRR: But cement prices are starting to fall and we will see a reduction as expansions come through-that should bring construction costs down. 

AYJ: Maybe they have fallen recently. But look where we are coming from. They had been on an incline for years. If you buy a cement bag in PKR anywhere in the world, it is around Rs275-290 per 50-kg bag. But here, the prices are around Rs500-600 for the same. We are still dealing with very high cement prices.

BRR: How optimistic are you about CPEC?

AYJ: With CPEC, no doubt Pakistan has become an important country for the world. With communications and transportation network and linkages in place, CPEC can be a great tool. The Chinese are our brothers. But we have been informed recently the government is treating Chinese investors and local investors differently.  There are different criteria for Chinese companies, and for Pakistani local companies where the Chinese are getting high tax breaks and greater duty concessions in imports while these do not apply to locals.

Their licenses are on faster track and local players are not getting them in time. The government wants us to compete but how will we compete if they are given a clear advantage over us? This discrimination will hurt us greatly in the long run.