At an estimated size of Rs7 trillion or so, Pakistan’s real estate market has been operating like an informal, yet parallel stock exchange.

The housing shortage on the other hand is estimated to be around 10m units, growing further by almost 300,000 units a year.

On top of that, the formal financial sector caters to just two per cent of all housing transactions as informal flows from overseas Pakistanis and domestic black money keep speculative investments flourishing in private housing ventures.

A company engaged in real estate shall not announce any real estate project unless it has obtained the SECP’s approval

Understandably then, the real estate sector operators made their fortune owing to a regulatory vacuum and inefficient revenue machinery, as the federal and provincial governments looked the other way for political reasons.

In the process, tens of thousands of gullible individuals lost their life time earnings amid scattered legislation and governing bylaws in municipalities and local governments.

No wonder therefore, that the property industry suffered from serious credibility challenges — low public confidence, unfair business practices, weak transparency and limited financial inclusion. All provincial governments failed to effectively bring a booming sector into the real economy and pay even a fraction of what realtors earned.

An ambitious revenue measure launched last year by the federal government through capital value tax and revised valuation of properties finally ended in yet another tax amnesty.

An overwhelming chunk of the housing schemes continue to be governed under the Cooperatives Societies Act of 1925, or specific acts of parliament for various development authorities like the Capital Development Authority (CDA), Defense Housing Authority (DHAs), Karachi Development Authority and so on; with their bylaws governing the likes of Bahria Town.

The key regulators — the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) — have been advising the government to provide an overarching legal framework to bring these fly-by night investors into the formal economy.

Taking a step forward, the government has now brought the property sector in the ambit of the Companies Act of 2017 that the National Assembly passed recently.

Section 456 of the said act, which is yet to be cleared by the Pakistani Senate to become a law, would therefore be the governing law that would have precedence over all past laws and bylaws of provincial and federal development authorities.

It binds companies and cooperatives to get clearance from the SECP before inviting or accepting finances from the general public.

“Notwithstanding anything contained in this Act or any other law, any company (project) which invites advances from the public for a real estate project shall comply with the provisions of this section”. They would also be governed like any other company defined in the companies’ ordinance.

It says that a company engaged in real estate shall not announce any real estate project, unless it has obtained the approval of the SECP and all necessary approvals, permissions, NOCs etc., of the concerned authorities besides such additional disclosure requirements as may be notified.

The approvals are those required as per applicable general, special and local laws, having jurisdiction over the area under which the real estate project is being undertaken.

Such companies would also need prior approval of the SECP before making any publication or advertisement of real estate projects.

They would also not be entitled to accept any advances or deposits in any form whatsoever against any booking to sell, offer for sale, give invitation to persons to purchase any land, apartment or building without approval of the SECP and concerned authorities.

Under the new law, companies would also not be eligible to accept a sum against purchase of the apartment, plot or building, as the case may be, as an advance payment from a person without first entering into a written agreement for sale with such person.

In case of a nominal fee for application — an allowed exception — they would then need to maintain and preserve such books of account, records and documents in the manner as may be specified.

They would also be required to deposit any sum obtained from the allottees, from time to time, in a separate escrow account opened in the name of the project, and comply with the SECP directions regarding accounting frameworks. They would not be allowed to start any activity which had not been previously been allowed by the SECP.

The law requires that the escrow accounts be dedicated exclusively for carrying out the project and no attachment shall be imposed on the payment of such escrow accounts for the benefit of creditors of the real estate company. The real estate company shall recognise its income in accordance with International Financial Reporting Standards notified by the regulator.

The SECP would be bound to provide copies of any returns or information submitted by real estate companies free of cost to the concerned authority (CDA, RDA, KDA etc) on request, to enable them to regulate the real estate project under their jurisdiction in accordance with the applicable laws.

These conditions will be in addition to, and not in derogation of, the law.

The concerned authority under whose jurisdiction the project is being undertaken by the real estate company shall continue to exercise its authority in a manner provided in the relevant law.

The violations of this law would be liable to a penalty of level 3 on the standard scale, leading to the project being wind up.

Published in Dawn, Business & Finance weekly, March 6th, 2017