Impact of relief package on real estate prices

Impact of relief package on real estate prices

This is a big question of the day, what and how much impact the relief package given for construction sector will have on real estate prices ? These are unchartered territories, in our lives we have not come across such a situation before and the most recent pandemic which can be compared to Covid 19 was the Spanish influenza back in 1920.

There was one big lesson which Spanish influenza taught us “ The world will go on, we will find a cure and the recession will be just a temporary phase“.

So first of all and most importantly, get the fear out of your minds, so that you can think more clearly and act accordingly. It is time that we start planning and implement solutions to come out as a winner in the present day world.

Having a house is a basic necessity and no matter what happens we all need one.

Government of Pakistan recently announced a detailed relief package for the construction industry to boost economic activity and secure millions of people going job less. Real estate is closely related to the commercial & private construction industry and therefore will have significant positive outcomes from this package.

Let us have a look at those positive impacts on real estate prices one by one and how they may change the market.

Amnesty for source of income

In my opinion this is the most important among all other steps taken to increase investor confidence and build positive sentiment in the market.  This technically means that Purchasers, sellers, developers and builders will not be required to furnish source of income on any project which is started before 31st Dec 2020. They can either buy new land or start a project on already owned land without worrying about declaring source of income.

This clause is applicable to only those areas which are developed and therefore will not effect areas like Phase 9 prism or Phase 10 but will surely bring positive sentiments in Gulberg, Phase 6, 7 and 8 of DHA Lahore and other developed areas in the country.

This is a general amnesty and therefore even those people who hold public office can take advantage of this.

The big question is how much we are expecting to be invested in real estate? Well the answer is that it can be a phenomenal amount let me give you an idea of how much revenue was whitened in the past 2 amnesty schemes offered by PTI and PML (N) Governments.

During the PTI government amnesty scheme a total of 137,000 people availed the scheme by offering Rs70bn (about $432 million) in revenue and whitening Rs3 trillion worth of undisclosed assets whereas a year back the PML-N’s scheme fetched a little over Rs124bn (about $1.05bn), brought 83,000 new taxpayers into the tax system and whitened about Rs2.5tr worth of assets

Insane amounts right? 

This time the amnesty is even more lucrative you do not have to pay any tax and it gets more insane you can spend it throughout the length of the project which should be completed by Sep 2022.

So 2.5 years of amnesty for black money to be dumped into construction projects across Pakistan.

No one has any idea how much black money is laying out there, however it is estimated to be in billions of dollars and even if we consider that only an estimated 20% (1 tr Pkr) of amount previously whitened through the past 2 amnesty schemes is pumped up in real estate construction sector in these 2.5 years. We are surely going to see it jack up the property prices in two main sectors.

• High rise construction projects all across the Pakistan such as Downtown Mall, Goldcrest Mall, Madison square and springs apartments are going to be main beneficiaries of this amnesty, as they offer the most secure and safe option for all such investments. We will certainly see a rise in demand and possibly a phenomenal increase in prices in the high rise in days to come.
• Developed areas such as Phase 5, 6, 7 and 8 of DHA Lahore including residential as well as commercial plots will be the secondary beneficiaries of this scheme and we are most likely to see a rise in plot prices over the next 7 to 8 months in these areas.

10 to 15% reduction in construction costs

The reduction on sales and excise duty on construction material will bring down the construction cost. This will be applicable on all kind of commercial construction, including houses, high rise etc. The lowering of these prices will bring down your construction cost by atleast 10% to 15%. So if you were planning to build your house etc than this may be the right time to start one as the construction cost of 1 Kanal house in DHA Lahore may come down by 2 to 3 Million atleast.

This is a huge incentive for builders and developers alike as Pakistan faces a shortage of 10 Million housing units which is expected to grow to 13 Million by 2025.

The decrease in the house price will bring buyers in the market, who will be looking to take advantage of this situation and secure a house at a cheaper price.

This also implies that there is a chance that the present houses that are built already may have to lower prices, however this may not immediately effect the prices as new houses being built will take an year or more to come in market.

This can have an impact on the price of plots as builders and genuine buyers look to take advantage and construct there houses.

CVT & stamp duty reduced by 3%

Stamp duty of 5% has now been reduced to only 2%. In my opinion it isn’t that big a deal for a genuine buyer as it will only lower the cost of transaction of 1 kanal plot in DHA Lahore anywhere between 3 to 4 lacs depending on which phase you are buying. However in the commercial sector it will have a slightly more impact.

The real benefit of this goes to investors who will feel more bold and will go for Biana as the transfer cost is lower they will be more comfortable to even get it transferred and sell it out later.

This on its own may not have much impact in the present circumstances however once combined with the above two we just see another value addition which will help in bringing back the market confidence.

House finance at 6 to 7 percent only

Pakistan has never been an ideal place for house finance but that is all about to change as state bank has given directions to banks to offer mortgage at just 6 to 7 percent. This may be a very ideal situation for people who were planning to build there house but lacked finances.

I will hope that banks come up with some easy plans and are aggressive in giving out loans and if that happens it is surely going to motivate a lot of people to start building there own house.

This can also help to spark plot buying and thus will surely impact the prices in a positive manner.

Misc steps

Besides these 3 major steps which give us a clear indication that real estate prices will go up, there are other things which may not have a direct impact on prices as such but will bolster investor confidance such as CGT waiver on first house and fixed tax for builders.

Conclusion

High rise seems to be the most appropriate investment at this point in time, considering ease of investment, profitability and safety of investment. We will soon discuss all the pros and cons in our next blog.

However if you can take more pain and do your own construction than constructing a house/commercial or even just buying a plot in a developed area may save you some money as well.

Capt (retd) Shahnawaz Yaqub Bhatti

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