Revision in valuation: Real estate, building sector to suffer

LAHORE/KARACHI/ISLAMABAD: The FBR’s decision to enhance properties' value is likely to further depress the property market that has seen a severe cut in the transactions after the ban on non-filers to buy property above Rs5 million.

The current measure would create more problems for the common man. Khalid Rehman, a leading property dealer operating in DHA Lahore, said before the ban on non-filers to buy property above Rs5 million, the daily transactions in DHA alone numbered 200.

Read Here: FBR’s Valuation of immovable property

He said each of these transactions provided hundreds of thousands of rupees revenue for the federal and local governments and for the housing society as well.

He said after the ban the transactions dwindled in DHA, EME and in another affiliated DHA societies the transactions were down to 35. It has resulted in a huge revenue decline for all stakeholders. He said before the recent announcement of FBR to enhance the property value for taxation purposes, the difference between the deputy commissioner’s rate and the FBR rates in DHA was only in few thousands. After the recent enhancement by the FBR, the difference has increased to over several hundred thousand. For instance, he added, the official property value in Phase 9 of DHA was Rs400,000 per kanal. He said at this rate no filer could buy a property in most of the developed societies. Rehman said now even 12 transactions a month would be a dream for all the societies where the property rates have enhanced above Rs5 million.

Gohar Ejaz, Chairman Lake City Holding, one of the most sought after society of Lahore, said the enhancement of property value for the FBR taxes seems to be in line with the market value but this step would certainly impact property transfer. He said in his society non-filers already were not eligible to buy one kanal plots because of the higher value. He said so the enhancement of rates would not impact his society. He said his main issue was the ban on the non-filers to buy property above Rs5 million. He said currently the sale and purchase of medium valued property has been restricted to 800,000 active filers. He said 209 million citizens were denied the right to buy most of the real estate in the country.

Hasan Butt, a property dealer operating on Canal Bank Road near Thokar, said there is already an acute shortage of housing in Pakistan. He said this government is creating hardships for the middle class through various measures. The latest increase in the property values by FBR, he added, would eliminate the chances of a respectable middle class family to even dream of owning a house. He said one fails to understand that on the one hand this government promises to build five million houses for the poor and on the other it is denying private sector opportunities to build houses. Butt wondered what would be the criteria of transfer of government-built houses each of which would definitely cost more than Rs5 million (including the cost of land and it deemed property transfer charges). Would the houses be transferred to filer’s only, he wondered? He said the FBR through its various measures is trying to ensure that the real estate and wealth concentrate in few hands.

The President Lahore Chamber of Commerce and Industry Almas Hyder, who is also a member of businessmen panel of the government, said the rulers should think realistically. He said almost 99 percent of the properties in Pakistan were registered at much lower than the actual value. He said the government should announce a one-time amnesty for all properties and regularize them on the actual value. Moreover, he added, the ban on non-filers was discriminative. “The people of AJK and Gilgit Baltistan are not required to file tax returns. The agriculturists also need not file tax returns on their agriculture income; the Pakistanis living abroad also need not file tax returns.” He said all these segments of society were denied the right to buy property which is unfair. He said enhancement of property values should be realistic but every citizen of this country should have the right to buy real estate. The real estate sector has termed the recent upward revision in the plots’ values by the Federal Board of Revenue (FBR) anti-investment saying the decision was taken without taking the stakeholders onboard. The FBR jacked up the valuation rates of real estate plots by 15 to 25 percent on an average in all the major cities of the country to increase tax collection by up to Rs75 billion.

In some posh areas of Karachi, the FBR has jacked up the valuation rate from 15 percent to 110 percent depending on the locality. Chairman Association of Builders and Developers (ABAD) Hassan Bukhshi said the rates were revised without consulting the stakeholders. “It is a sudden move and we don’t even know that any such exercise is being planned.” He said ABAD had proposed elimination of both the DC and FBR rates, so the properties could be booked on the actual transaction values. “We had proposed that the federal government and provincial government could collect 1.0 percent each as tax on transactions based on the actual value, as this could discourage under-declaration,” Bukhshi said, adding that their proposals were not considered. The realtors and builders do not expect a slide in the housing rate in the middle-low income areas of the urban centres, but they do foresee prices falling in posh areas where the market is driven by investors. Bukhshi said real estate and construction sector was already very slow due to political and economic uncertainty, while policies were being modified on a daily basis. “There is no buying and selling in the market. This recent revision in the values would further worsen the situation for the industry.”

The ABAD chairman said real estate sector was the largest employment generator after agriculture and if this industry slowed down, millions associated with the sector would be affected. He said the decision was under review across the country and ABAD would announce its future course of action on Monday. The volume of activity is next to zero as the investors are driven out while a mismatch of demand and supply keeps the deals from materializing. The Senior Vice President Federation of Pakistan Chamber of Commerce and Industry (FPCCI), Mirza Ikhtiar Big said it was unjust for the FBR to take such a measure without consulting the stakeholders. “The industry is already in trouble after 930 commercial buildings in Karachi were given demolition notices. This upward revision in the property values would hurt the industry a lot.” Baig said FBR should have consulted the stakeholders before taking any revenue generation measures to avoid creating any market uncertainty.

Advisor to President FPCCI Mazhar Ali Nasir, on the other hand, appreciated the decision saying the revision in property valuation would discourage black economy. “Actual property values are still much higher than the recorded values and these need to be increased further going forward.” The property market in Pakistan has grown vertically since 1990s, pushing unit price beyond the reach of ordinary people. The promise of quick high returns attracted both the households and investors to the arena. Besides, the undocumented status made it an ideal destination to park the unaccounted wealth. “The dollar is trading at around Rs140, discount rates have been increased by 4.5 percent in a year, and now this much increase in the property values. These measures are only going to dampen the investor sentiments,” Zeeshan Khan, a real estate agent said, adding the market values of properties would not come down instead the cost of buying and registration would increase.

Consequent upon the increase in the valuation of real estate by the FBR there will be an increase in tax revenue in the following two ways. 1. A buyer will have to ensure that he must have sufficient white money to buy property. If he does not have, then either he will not buy or will manage to make more money white by way of paying more tax. 2. The seller of property, if selling his property within three years from the date of purchase, and receiving more white money against sale of his property will have to declare more profit on sale of property and will pay more tax. 3. Additionally stamp duty on registered sale deeds will also be increased due to increase in valuation and this will benefit the provincial governments.

After the federal and provincial governments’ failure to forge consensus on unified valuation rates, the FBR has jacked up valuation rates of properties for all major urban centers. However, realtors claim the move will have a far-reaching negative impact on the real estate sector. The Bureau has proposed a mechanism for placing an independent third party to fix valuation rates. The provinces are not ready to revise DC rates because it’s linked with their rates of stamp duty.

If the provinces decide to increase the DC valuation rates then they will have to reduce the rate of stamp duty. But they are used to with their existing system and don’t seem ready to reconcile their valuation rates with the center. “Even the FBR has sought technical assistance from the World Bank (WB) to suggest mechanism after studying valuation system placed in both developed and comparable economies including the Indian system in this regard,” a top FBR official confirmed to The News on Saturday. Sources said they increased average valuation rates to bring uniformity and after analyzing market value rates in different cities of the country.

In case, they said, the FBR found any major discrepancy then they would be ready to rectify it. They are of the view that the market rates are still 40 percent higher than average rates notified by the FBR after recent hikes and the FBR intended to further jack up its valuation tables in coming July 2019. When former president of Association of Builders and Developers (ABAD) Arif Jeeva was contacted for comments, he said they proposed to the government to bring unified valuation rates but decrease the FBR taxation rate to 1 percent from the existing 3 percent for filers and 6 percent for non-filers.

He said they had decided with former finance minister Miftah Ismail that the FBR would charge 1 percent tax and would have power to buy back property if someone would show less value but it was never implemented. He said the foreign investors had got confused with three different valuation rates, as it would discourage potential investors.

The ABAD Chairman Hassan Bakhshi told this correspondent that they had sent out written proposals to the government for placing unified valuation rates and bringing down the tax rates simultaneously in order to simplify the system. “We have proposed to the FBR to bring the tax rate at 1 percent,” he added.

Umar Farooq Manan, CEO Park View, told this correspondent that there was a need to bring consistency and fair-play in policies in order to give certainty to investors and developers of real estate. Rauf Chaudhry, former president Property Dealers Association Islamabad, said the FBR had made deliberations with the property sector for 30 days before finalizing valuation rates in 2016 and it was committed valuation would be increased in a gradual manner but with the change of government the bureaucracy had taken a U-turn and all of a sudden the valuation was revised upward without taking them into confidence. He said there were several allied industries which were run because of having boom in real estate but now it seemed that the decision was taken to destroy this sector.

Under S.R.O.120(I)/2019, the FBR has notified value of immoveable properties in respect of 196 categories of areas of Karachi. As per S.R.O.118(I)/2019, the FBR has notified values of immoveable properties in respect of areas/categories of Jhang. The FBR has also revised values of immovable properties of 538 areas of Gujrat. In 701 areas of Sialkot, the FBR has revised values of immovable properties. The FBR has revised values of immovable properties of 31 areas of Sargodha under S.R.O.128(I)/2019. In 338 areas of Sahiwal, FBR has revised values of immovable properties. Under S.R.O.126(I)/2019, the FBR has notified the value of immoveable properties in respect of 28 areas/categories of Rawalpindi. The FBR has notified values of immoveable properties in respect of 426 areas of Quetta. The FBR has revised values of immovable properties of 339 area of Peshawar under S.R.O.124(I)/2019.

The FBR has notified values of immoveable properties in respect of 593 areas of Multan. The FBR has also revised values of Immovable Properties in 17 areas of Mardan. Under S.R.O.121(I)/2019, the FBR has notified value of immoveable properties in respect of 1234 areas/categories of Lahore . The FBR has also revised values of immovable properties in 892 areas of Jhelum. Under S.R.O.117(I)/2019, the FBR has revised values of immovable properties in 90 areas of Islamabad. In case of 26 areas of Hyderabad, the FBR has notified value of immoveable properties in respect of areas/categories of Hyderabad.