Exposing the dirty secret of Pakistan real estate | Black money and FBR values

The dirty secret of Pakistan real estate

The FBR has announced new land valuation tables and revised property prices all across Pakistan as of March 2022. Targeting the dirty secret of Pakistan real estate “black money”. A lot of people do not understand what are these prices and why they will have an impact on certain sectors of the real estate market. So in today’s blog, we will try to explain to you the concept of these FBR values, why were they introduced, and how they can impact real estate trading and prices in the future.

Please remember FBR values is not the only factor to consider when analyzing real estate prices and it is best to consult a professional consultant before investing.

When FBR values were introduced in Pakistan

In 2016, FBR values were first introduced by the Nawaz Shareef Government when Dar the finance minister, introduced the FBR valuation tables in the 2016-17 budget. Stakeholders initially rejected the idea. However, the government and real estate officials later agreed, and the valuation rate was initially communicated only for 12 cities on July 31, 2016. Coverage increased to 20 cities in 2019 and 40 cities in December 2021. FBR pricing has been introduced in 20 cities for the first time. This is significantly higher than the District Collector (DC) price, but of course below the market price.

Why do we need the FBR Land valuation table?

The new FBR values are used to calculate federal taxes such as capital gains tax and tax withholding. Pakistan has three real estate appraisal rates: FBR rate, DC rate, and the actual rate. Internationally, real estate transfers are taxed at actual transaction amounts, but in Pakistan, real estate was taxed at DC values before 2016, and later on, federal taxes were taxed on FBR rate, and provincial taxes are collected on DC rates both of which are below actual market rates even today.

The FBR value is used to determine the following :

1. Taxes to be paid to the federal government.
2. White money declaration as per the FBR land value while purchasing.

So when FBR values increase, taxes on property increase. Secondly, the white money required to carry out that transaction increases. While both of these impact real estate trading, the white money declaration is much more important and has far-reaching consequences.

The dirty secret of Pakistan real estate

The Pakistan real estate market has long been a safe haven for billions and trillions of black money, which is part of our informal economy. Almost every corrupt individual in our society parks their ill-earned money in real estate. Besides this, industrialists and business owners will park huge amounts of untaxed money into real estate. This transformed our real estate industry in the 21st century as it became an easy source of hiding undeclared or black money.

The other significant part of introducing FBR values, therefore, is to stop this black and undeclared money to end up in the real estate. 

In order to understand how real estate is the haven of black and grey money, let us assume that a certain property has a market price of 1 crore but an FBR value of only 30 Lacs. This means that if you pay 30 lacs to the seller through the banking channel and the remaining 70 lacs through cash, you have successfully invested 70 lacs into real estate, which is ill-earned or untaxed. Now when you sell the property after a certain number of years and declare the extra money as profits, it will become your white money.

How it affects Pakistan and its economy

The land developers in Pakistan soon realized that there is a huge potential for new real estate development to attract this black and grey economy. These new developments would undergo rapid trading and speculative cycles, making them even more attractive for investors. Now, not only they can invest black or grey money easily in real estate, but they also stand a chance to make money by speculative trading.

Simply put, a corrupt public office holder, a drug lord, a terrorist, etc can easily park all his ill-gotten money in real estate, and a business owner can easily cheat on taxes by investing in real estate. Real estate in Pakistan has been acting as an ever-lasting amnesty for all these people to save and invest their undeclared money. This resulted in major price bubbles seen in 2002-2005 then 2011-2013 and now in 2020-2022 after the tax amnesty was given to the construction sector.

Now when the property prices rise, white and declared money also gets invested in these areas and offers an easy money-making opportunity. Resultantly, our industrial and manufacturing sectors suffered as investors felt that real estate in Pakistan is easier and safer than developing industry, and shift their investments to real estate, especially in the past two decades.

Impact of FBR values increase

If the FBR value increases, the white money required to purchase a certain land increases. We all know that our informal economy, which includes this black money, is around 50% so we can assume that real estate transactions will be reduced by 25 to 50% in years to come. This impact will be more renounced in sectors where FBR value has increased and is around 60 to 70% of the market price. Any subsequent increase will further decrease these transactions in affected areas. In general, as of March 2022, I see the following effects on some of the sectors of real estate:

1. The recent increase in FBR values will reduce transactions of residential plots in certain phases of DHA Lahore. This may result in very slow growth or negative growth in years to come.
2. Commercial plots and rental plazas in DHA Lahore will prosper because of the huge difference between FBR values and actual market values.
3. FBR land value will not impact DHA Multan, Gujranwala, and Bahawalpur prices, as there is a negligible increase. Rather, we may see an increase in actual prices as speculative traders move to these areas.
4. Construction projects will become more attractive for investors, especially those registered with the FBR amnesty scheme.
5. End-user properties and rental properties in mature areas will continue to prosper.

If your society or city is not included in the above analysis, you can use the above logic to figure out the impact of FBR values increase. However, FBR values are not the only factor you need to consider while evaluating real estate and may not be 100% accurate. So, please take into consideration other factors, such as development, present prices, market sentiment, etc into consideration before investing.

The team of our expert consultants is always here to help you choose property investments smartly.

Advice for investors

In the future, Government will take stricter measures to direct this informal economy towards industry and manufacturing. The government has already given an amnesty to these sectors and the road map is now clear. The market is already expecting more taxes on real estate and a further increase in FBR values in the coming budget. While some of us may not be happy with the increase in FBR prices, in the long run, it is very good for the real estate sector of Pakistan. A prospering economy will create more wealth for the people of Pakistan and enhance their purchase power to invest in real estate.

We, as patriotic Pakistani should support the Government of Pakistan in its crackdown against corruption and tax evasion. A prosperous Pakistan is in everyone’s favor and will ultimately end up in prosperous real estate in Pakistan as well. It is, therefore, best to invest in real estate, which is not the hub of such black money and is foolproof from a stricter Government crackdown on the informal economy and black money.

Captain (Retd) Shahnawaz Yaqub Bhatti

Investment Consultant and CEO at Imlaak

Mob : +92 333 1616160 (WhatsApp)

Mob : +92 300 2048048 ( WhatsApp)