Pakistan's real estate divide

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The year 2016 was forecasted to be an extremely promising one for Pakistans real estate industry, and with good
reason.

In 2015, investment in residential property (apartments, houses and vacant plots) increased by five to seven
percent, while in commercial property (including standalone shops, showrooms, retail and office space), there was
an increase of 15 to 20% across Pakistan, despite the levy of Capital Gains Tax, Capital Value Tax and Stamp Duties
in the Federal Budget 2014-2015. Industry experts were confident that investment would continue to increase in
2016 because of increased investor interest and consumer confidence in the property market, an improved security
situation, as well as the Governments enabling policies for the sector.

The Federal Budget 2015-16 brought much needed tax relief to the sector. The minimum tax builders were required
to pay for the construction and sale of residential buildings was suspended; bricks and crushed stone (crucial
building materials) were given a sales tax exemption until June 30, 2018, and Customs Duty on the import of
construction machinery was reduced to 10% (source: Federal Board of Revenue (FBR), 2016).

By all projections, Pakistans real estate market on the back of increased Foreign Direct Investment (FDI), CPEC
infrastructure projects (Read our story CPECs real estate opportunity on page 16) and a robust demand for housing
was expected to reach new heights in 2016.

However, this positive outlook took a turn for the worse with the announcement of the Federal Budget 2016-17 in
June, 2016. Property taxes were increased and the outdated District Commissioner (DC) rates for property valuation
were replaced by the FBR determined market values for documentation and taxation purposes (Read our story
Taxing real estate in Pakistan on page 12).

The increased taxes, changes in the property valuation mechanism and consumer demographics have many
implications for the industry. However, to understand them fully, it is essential to step back and understand the
complex dynamics of this industry.

Market dynamics
Since residential and commercial properties are not documented at their current market values in Pakistan, it is an
impossible undertaking to determine the worth of the real estate sector. However, FBR released data and industry
surveys estimate that the industry is worth around $700 billion (source: Lamudi Real Estate Market Report Pakistan
2015). Real estate and construction, together, account for approximately two percent of Pakistans total GDP. Not
only does it generate a high level of direct employment, the sector also stimulates demand in more than 250
ancillary sectors, including cement, steel, paint, brick, building materials and consumer durables, to name a few.

A unique aspect of Pakistans real estate market is that the industry hits record highs and lows within a span of a
few years. Elsewhere in the world (barring the 2005 sub-prime mortgage crisis), the real estate industry more or less
follows a steady growth rate (five to eight percent per annum is the average). In Pakistan, however, when bullish
trends are witnessed in the market, monthly growth rates of more than 10% are recorded, which are unprecedented.
This was the case post 9/11, when FDI by expatriates increased, and again, between 2011 until the announcement
of the Federal Budget 2016-17.

Mohammad Shafi Jakvani, Vice Chairman, The Federation of Pakistan Chambers of Commerce and Industry
(FPCCI) Standing Committee on Real Estate Research and Image Building, explains this market dynamic by saying

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that real estate is traded as a commodity in Pakistan; speculative investors buy property in bulk, and then sell it
later at an exorbitant profit.

The reason why investment was taking place for short-term gains was because the sector was not regulated or
taxed until 2014. The Government maintained a no questions asked policy about the source of the capital coming
in, and for decades the sector remained the ideal spot to park black money. This led to the creation of a property
bubble with artificial price hikes and a widening supply-demand gap in the housing sector. The situation has been
further aggravated by the fact that Pakistan is the most urbanised nation in South Asia. If rural to urban migration
continues at the existing rate, urban population is expected to reach 95.62 million by 2025, taking the urbanisation
level to an unprecedented 53.3%.

Akhlaq Ahmed, MD, Manhill Advertising (the in-house advertising agency of Star Marketing, a real estate marketing
company), points out that since the metropolitan trio comprising Karachi, Lahore and Islamabad is reaching
saturation levels in terms of land availability for new projects, an increasing number of builders and developers have
shifted their focus on creating vertical urban clusters in the city centres, and sprawling gated communities at the
outskirts.

He also highlights increasing investor interest in the smaller cities such as Bhurban, Gujranwala, Multan, Sargodha,
Sheikhupura and Taxila, where organised residential communities have cropped up in the last three to four years,
completely redefining their landscape.

When asked if there was any truth in the prevalent perception that real estate projects in second-tier cities are not
profitable and are almost always plagued by limited customer demand, Jakvani and Ahmed emphatically declare
that this assumption was not grounded in facts at all.

The concept of gated housing societies has really taken off in these cities and there is great demand for them,
Jakvani points out. Ahmed adds that there is great affluence and buying power in the smaller cities thanks to a
flourishing agrarian economy, and whenever such projects are announced, they are booked almost
instantaneously.

Mohsin Sheikhani, Chairman, Association of Builders and Developers of Pakistan (Read Sheikhanis interview on
page 32), believes that increasing smartphone and internet penetration in Pakistan has made homeowners far more
aware of international real estate trends and have influenced their expectations. It is these changing consumer
lifestyle preferences that have paved the way for high-rise luxury apartments and villas within gated communities
and mixed-use developments across Pakistan.

Luxury living
The trend of buying luxury apartments has increased by nearly seven to nine percent in Pakistan in the last decade,
primarily due to an increasing demand for secure, well-maintained housing units; it is therefore not surprising that
between 2010 and 2016, apartment prices increased by 120%, while houses registered a much slower increase, at
80% (source: Pakistan Economic Survey, 2016).

Traditionally, apartment projects were mostly limited to Karachi, as cultural preferences in Lahore and Islamabad
were for horizontal residential projects. However, with the rapid urban sprawl, cities have become congested, land
prices are going up, and the apartment living trend is swiftly gaining traction in these cities as well. In fact, in the last
five years alone, the demand for apartments has gone up by nearly 30%, which has given rise to an increasing
number of newly constructed high-rise luxury apartments in Lahore and Islamabad.

Ahmed mentions that initially, these projects were limited to the city outskirts such as the Raiwind and Multan Roads
(in Lahore) and the new Islamabad Airport (near Fateh Jang in the Attock District). However, recently, development

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work has started on fully serviced apartment projects in residential hotspots such as Gulberg and the Canal Road
(in Lahore), as well as Jinnah Avenue and Bahria Enclave (in Islamabad). Karachis skyline has also been
undergoing noticeable changes. In neighbourhoods that were traditionally home to the citys well-heeled, such as
Nazimabad, Federal B. Area, P.E.C.H.S., Clifton, and several phases of DHA, sprawling mansions have given way
to condo-style apartments.

Jabir Hussain Dada, SEVP & Head of Business Unit, Dolmen Real Estate Management, attributes this shift to the
fact that people want convenient access to quality amenities, their favourite restaurants and recreational avenues,
without compromising on location.

This is perhaps why multi-purpose buildings, offering a mix of residential (serviced apartments) and commercial
(standalone shops, office suites and shopping malls) units are being developed. Dada classifies Harbour Front as
possibly the first mixed-use project in Pakistan, comprising Dolmen Mall Clifton as well as a dedicated office wing
which was leased out to the leading MNCs in Pakistan. Since then, mixed-use projects have come up in Islamabad
(Centaurus Residencia Towers, Margalla Vista, Diamond Mall & Residencia and Royal Mall & Residency),
Faisalabad (Lyallpur Galleria) and Lahore (Pace Circle operated by Hyatt Lahore).

Ahmed concurs with Dada on this changing demand by Pakistani home buyers. The first question, before going
ahead with the booking, is always about the down payment and monthly instalments. However, what it comes down
to is how central and secure the location is, the average daily commute to the city centre (where most offices are
located), the amenities on offer, and particularly, if there is a union responsible for the maintenance and upkeep of
the project.

There is considerable evidence to support these observations. Creek Vista Apartments (Phase VIII, DHA,
Karachi), Saima Presidency (Malir Cantonment, Karachi), Al-Khaleej Towers (the first-of-its-kind luxury
apartment project in Federal B. Area, Karachi), Springs Apartment Homes (Canal Bank, Lahore), and Veranda
Residence (Sector E-11, Islamabad) are some of the projects that generated considerable buzz in the market for
introducing the concept of high-rise luxury living in Pakistan. Most luxury apartments have a covered area ranging
between 2,400 and 3,000 square feet, with price tags of Rs 38 to 65 million or more.

To take advantage of this rising demand for luxury living, the Dolmen Group will soon be launching fully serviced
hotel apartments as well as a green apartment project in Karachi in the forthcoming years. Dada is of the
opinion that the success of these projects is contingent on convincing buyers that downsizing their lifestyle, by
choosing an apartment over a traditional house, doesnt have to mean compromised living.

Surely enough, the glossy promotional brochures of such projects, not to mention, the TVCs, print advertisements,
billboards, and scaled project models showcased in on-site offices, leave no stone unturned to convey a sense of
luxury and exclusivity. The design elements typically highlighted are round-the-clock security, backup generators,
cinemas, food courts, reserved parking, swimming pools, indoor gymnasiums, day care centres, community halls,
play areas, and even garden patios and kitchen backyards.

Clearly, gated housing communities are an important trend that cannot be ignored. Industry experts estimate that
between 2015 and 2016 alone, investment in these schemes increased by 15 to 20%, and almost 15 such projects
were completed within the last two years. Offering privacy, prestige and protection, gated communities have taken
off in a big way in Lahore, Faisalabad, Islamabad and Rawalpindi, where the presence of a sizeable and affluent
business community has triggered the development of villas within gated communities. Prices for these luxury
homes range from Rs 2.8 million (for schemes located in the outskirts) to Rs 33 million (for those developed along
major thoroughfares at the heart of the city). The target audience in this case, Ahmed believes, are the more
conservative industrialist families for whom living in apartments, no matter how luxurious, is still an alien concept.
This trend is expected to grow in the central (Punjab) and northern (FATA districts) regions of the country,
particularly with development work being resumed by Emaar Pakistan on Canyon Views in Islamabad, in what is
expected to be the most luxurious, well-planned and expansive villas.
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This is not to say that gated communities have not taken root in Karachi. Bahria Town, DHA City, Fazaia Housing
Scheme and Naya Nazimabad and the are some of the most sought-after residential communities in the city.
However, Jakvani points out that these schemes are mostly being developed along Karachis periphery, since there
is insufficient land available in the already over-crowded city centre.

A question of affordability
The picture, however, is not all rosy as the discussion so far would lead you to believe. Despite such a booming real
estate sector (ignoring the temporary slump that rocked the market post the Budget announcement last year),
Pakistan has a housing backlog of almost 12 million units (source: ABADs Real Estate Research, 2016). Even more
startling is that for an industry that had been registering double-digit growth since 2010, with new residential projects
announced almost weekly, more than 50% of the urban population lives in slums and squatter settlements (katchi
abadis), that lack the most basic utilities such as clean drinking water, sanitation and electricity.

A research conducted by Ansaar Management Company (AMC) a social enterprise that has been working since
2008 to provide affordable housing to low-income families helps put things in perspective. Only one percent of the
housing units developed annually cater to 68% of Pakistans total population, comprising people who earn a
maximum monthly income of Rs 30,000. On the other hand, almost 56% of housing units target 12% of the
population, comprising individuals with a monthly income of Rs 100,000 and above.

Given these statistics, the State Bank of Pakistans (SBP) assessment that the affordable house price to income
ratio is 20:1 in Pakistan (compared to a global average of 5:1), should not raise any eyebrows. The first question
that pops into ones mind almost immediately is what steps has the Government taken to address this issue? Over
the years, many announcements of Government-sponsored low-cost housing projects have made headlines. These
include the Apna Ghar Scheme in Punjab, the Behan Benazir Basti (Benazir Housing Program) and Shaheed
Benazir Bhutto Housing Scheme in Sindh, and similar programmes in other parts of the country.

Unfortunately, as has been the case for most public sector housing initiatives, none have been completed.

Sheikhani is optimistic that ABAD will be able to complete a low-cost housing project in Karachi soon; Paragon City
has expressed an intention of developing Ashiana Apartments (budget apartments) on Burki Road, Lahore; and,
there are other social welfare organisations, such as AMC, doing their bit to bring stymie the almost viral growth of
katchi abadis. However, until the underlying problem is addressed effectively, blue and white collar workers have no
realistic chance of owning a home.

Ahmed succinctly, yet comprehensively, summarises the root cause: Home mortgages, the principle on which the
global real estate industry operates, is a non-existent concept in Pakistan; home financing offered by commercial
banks is largely limited to high-net income earners, and the House Building Finance Corporation hardly gives out
loans anymore.

Financial analysts and economic experts might argue that the situation is gradually improving. Mortgage rates are
currently between 15 to 18%, the lowest that they have been in the last decade and the SBP has established a
dedicated Infrastructure and Housing Finance Department to strengthen the market-based housing finance
mechanism. However, an internet search reveals that mortgage rates are still significantly higher compared to other
countries in the region: Hong Kong (2.15%), Japan (2.7%), China (7-8%) and India (8-12%).

There is a unanimous agreement among builders, developers and real estate agents that until affordable home
financing options are developed and provided to the general public, the housing supply-demand gulf will
continue increasing. Sheikhani sums up the debate by stating that even after the market recovers from the
current slump, investment inflows resume and real estate deals are hatched by the dozen every day, the divide
between the affluent and the underprivileged class will remain very real, and continue to widen in the forthcoming
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years.

Editorial
In this issue we explore the dynamics of Pakistans real estate sector and the housing segment in particular. Real
estate reportedly accounts for two percent of Pakistans GDP and more importantly, is a major source of
employment both directly and through the associated industries upon which it depends. Yet, it is also a sector that
until recently has been severely undocumented, and one upon whose fortunes Pakistans population is dependent
for its well-being. In terms of housing, three significant trends are apparent.

Firstly, until 2014 the real estate sector was, for all intents and purposes, unregulated, therefore undocumented and
consequently out of the tax net. Quite a feat for a sector estimated to be worth in the region of $700 billion! A feat that
largely explains the dynamics behind the highs and lows that have characterised this sector. Due to its
undocumented nature, real estate is traded as a commodity, with speculators buying in bulk during the lows and
selling at exorbitantly high prices later. In fact, Pakistan is probably among the few countries in the world where real
estate offers a ROI of over 100%.

However, changes are afoot and since 2014 the Government has embarked on an attempt to regularise the sector.
In 2014, the Federal Budget introduced various taxes on property and in 2016 a Finance Act came into being aimed
at aligning property valuations with market prices. Until then property transactions were carried out on a dual
calculation method, whereby the price of a property was officially declared at what is known as the DC (District
Commissioner) rate, but actually sold at the current market rate, the monetary differential being transacted off the
books. Under the Finance Act, all property was to be valued and documented as per the prevailing market rate.
However, subsequent to the passing of this Act, opposition arose among all real estate stakeholders, who were
faced with added taxes on top of the increase in the value of documented property. As a result, the volume of
property transactions slumped by almost 85%. The Government was forced to backtrack and introduce a tax
amnesty and promise a more gradual transition in aligning DC rates to open market rates. As matters now stand,
the Federal Bureau of Revenue has declared that the tax amnesty will come under review in 2017 and that it intends
to eventually impose a single price for property. How matters will pan out is anyones guess, but the point is that
attempts to streamline and bring transparency to a sector, which has been allowed to transact under the radar for far
too long, are underway.

Secondly, real estate is an important growth sector in Pakistan and despite the recent glitches that have arisen as
a result of government intervention, a period of further sustained growth is on the cards. The problem is that this
growth is restricted to the upper end of the market, with the emphasis on gated communities and high-rise luxury
living (or what passes for it). Given Pakistans security issues, it is understandable that the number one concern of
most citizens is safety, which gated communities are perhaps better equipped to offer. Added to this are
maintenance concerns and the prospect of living spaces that allow for easy access and convenience. However,
gated communities are a dangerous trend, as they accentuate even more starkly the divide between the affluent, the
average and the severely underprivileged. The medium and long-term societal implications should be a source of
concern. Yet, between 2015 and 2016, investment in such schemes has gone up by 15 to 20%.

Thirdly, despite the construction activity taking place across Pakistan, with second tier cities jumping on the high-rise
luxury living bandwagon, the fact is that only one percent of the housing developed every year caters to 68% of the
population; put another way, 56% of the housing targets 12% of the population. This is a truly terrible situation. At
current estimates there is a demand-supply gap of close to 12 million housing units. This is not only contributing to
the viral growth of katchi abadis, it is putting an unbearable strain on people earning average salaries, given that the
current development in housing units are targeting people with monthly earnings above Rs 100,000.

There can be no doubt that there is a huge demand for housing across Pakistan; the problem is that the profits
generated from building low-cost or even average housing pale in comparison to projects that target high-end
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residential ownership. Builders and developers are running businesses and they cannot be blamed for taking care of
their bottom line. It is, in fact, the Government that needs to take a realistic view of how to initiate and successfully
complete low-cost or even average housing projects. Periodically such projects are announced but rare are those
that reach completion and of the few that do, they have either been built to such substandard levels and without any
understanding of the requirements of the people they are destined for, and are consequently uninhabitable, or even
worse, they have been allowed to be co-opted for purposes other than housing. Perhaps a more effective way would
be to initiate multiple public private partnership programmes on the one hand, and on the other to create an
environment conducive to lending and mortgages. The Government has done well in initiating the process of
documentation and transparency, but there is a long, long way to go before Pakistans real estate sector can work
for the benefit of all and not just a few Pakistanis.

-- Mariam Ali Baig

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