Pakistan’s real estate divide

Is the country’s real estate market too elitist?


The year 2016 was forecasted to be an extremely promising one for Pakistan’s 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 Government’s 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, Pakistan’s real estate market – on the back of increased Foreign Direct Investment (FDI), CPEC infrastructure projects (Read our story CPEC’s 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 Property taxes were increased and the outdated District Commissioner (DC) rates for property valuation were replaced by the FBR determined market values for documentation and taxation purposes (Read our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 Pakistanon 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 Pakistan’s 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 Pakistan’s 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 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 Sheikhani’s 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 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). Karachi’s skyline has also been undergoing noticeable changes. In neighbourhoods that were traditionally home to the city’s 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, doesn’t 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.

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 Karachi’s 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: ABAD’s 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 Pakistan’s 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 Pakistan’s (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 one’s 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 years.”


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