DESPITE the federal government’s U-turn on property valuation rules, there has been a temporary slump in real estate transactions, in posh localities of major cities, due to a lack of interest from big investors.

An additional reason for the decline in the real estate business of well-to-do areas is the recent ruling of the Supreme Court against Bahria Town, Karachi, one of the country’s largest housing schemes. This, according to market sources, has scared many big real estate speculators who used to shift investment from Bahria Town to Defence properties, and vice versa, by way of purchasing property files of one area only to sell the same of the other area.

On the other hand, in property markets located in neighbourhoods of middle-income groups, both the pace of property transactions and property prices have shown a modest increase.

“Under-valuation was an issue in the previous system (of property valuation) but that cannot be resolved by giving the job to the FBR, known for issuing SROs after SROs to benefit some at the cost of others”

Real estate activity in mid and low income group areas is on the rise where properties whose market prices have been determined to be up to Rs4m by the FBR, are doing a roaring business, realtors say. The market price of these properties is still higher than the FBR assigned value, but people are feverishly dealing in them, knowing that the documented price (up to Rs4m) is exempt from the capital gains tax, they say.

On the other hand, in areas where the FBR determined price of properties is more than Rs4m (and there are many such areas in major cities), investors-cum-speculators have suspended activity because these market prices, despite being far lower than the actual prices, will now attract a capital gains tax. It is not just the payment of tax as such, but the ultimate documentation of the deals that is making them nervous, market sources claim.

Another serious problem has arisen with regards to the valuation of industrial plots:t industrialists have refused to accept the FBR determined prices. According to a Dawn report, prices of industrial and commercial plots in major industrial estates of Karachi have been raised several fold. A former president of the Federation of Pakistan Chambers of Commerce and Industry told this writer that a delegation of businessmen would soon meet the finance minister to find out “how on earth did the FBR arrive at these new prices?”

Top realtors of Karachi say that the boom seen in the real estate market before the announcement of the initial policy on property valuation was, in large part, aimed at “allowing some big investors, including both the ones enjoying political connections and the ones close to the establishment, to earn windfalls.”

According to them, this breed of investors (read speculators) always get wind of what’s on the horizon, strike some dramatically bold deals, amass billions of rupees and disappear from the scene, only to test their skills somewhere else.”

Realtors privately shared many stories to support their viewpoint. Regardless of how true such stories are, the ‘indecent haste’ shown in revisiting a sound policy on property valuation itself belies the government’s claim that it is serious in documenting the real estate sector and broadening the tax base.

“It’s no more than a joke to hand over the business of property valuation to the FBR, as this would open the flood gates of corruption,” remarked a senior official of the Sindh finance department. “Under-valuation (of properties) was an issue in the previous system (of property valuation by district revenue officers) but that cannot be resolved by giving the job to the FBR, an entity known for issuing SROs after SROs to benefit some at the cost of others.”

Under immense pressure from real estate speculators and investors, Finance Minister Ishaq Dar made concessions in property valuation rules earlier this month which some analysts saw as a U-turn on his earlier proposal to tax property at market rates.

The initial policy envisaged that a panel of professional property valuers, approved by the State Bank of Pakistan, would determine the market value of properties as opposed to the mode of valuation by district revenue officers.

The prices under this mode were not updated with rising market rates, thus, in many cases properties were under priced to the extent of one-tenth of the prevailing market prices. To address this, the finance minister amended the policy and assigned the job of property valuation to the Federal Board of Revenue.

The move was seen by many financial analysts as a blatant compromise on transparency in the process of valuation.

Besides, the government exempted property transactions worth Rs4m from the levy of a capital gains tax. Earlier, this exemption was available to transactions up to Rs3m.

Immediately after taking over the job of determining the ‘fair market price’ of properties, the FBR issued new price tables for properties in big cities without revealing how these prices were arrived at. The new rates, though higher than previous ones set by district revenue officers, were still far below prevailing market rates.

The revaluation of industrial plots, carried out by the FBR, as a result of the change in the original valuation policy has agitated industrialists. They say that the newly-determined prices, in some cases 400-600pc higher than previously-assigned values, are prohibitively high for industries that were preparing to expand.

A senior central banker told this writer that the intent of the government, to hand over the job of SBP approved professional valuers, was weak right from the beginning. “This was done in the backdrop of growing concern on our low tax-to-GDP ratio which couldn’t get a boost unless the real estate sector’s mess was cleared up.”

But as the subsequent developments revealed, this weak intent crumbled easily.

Published in Dawn, Business & Finance weekly, August 15th, 2016