Is the property market recovering?

The budget of 2016 brought nothing but bad news for the real estate sector, dampening the enthusiasm of investors, property developers and real estate agents alike and bringing the market to a virtual standstill. The initial proposal introduced in the budget was aimed at documenting property transactions at fair prices, to enhance government revenues and bring black money into the tax net. Strong resistance from stakeholders however brought a quick shift in this proposal, giving way to the FBR’s notified valuation tables rather than valuation of individual properties. These tables enhanced the property valuations from the DC rates but still offered deep discount of up to 50 per cent from market prices. This watered down proposal did little to assuage the concerns of investors and the real estate sector continued to face lull and inactivity. Further resistance and protests from real estate stakeholders convinced the government to go back further and introduce amnesty scheme under the Income Tax (Amendment) Act of 2016, despite much opposition from Federal Board of Revenue. The amendment provides a legal channel to turn black money into white through payment of a nominal tax of three percent. While some of the real estate pundits are now predicting the market to recover through this stimulus, others keep on comparing this stagnation as a prelude to a further serious market bust, similar to what was witnessed almost a decade ago. While investors continue to feel uncertain in the market, the real question remains as to which way the market is expected to move and when.

Before predicting the future market movement, it is important to draw a comparison between the real estate crises of 2005 and 2016. In 2005, the market grew into a big bubble, where the prices would jump significantly on a daily basis. The investors used to pay a token amount to secure transactions and within weeks would sell it onwards, virtually doubling their investment, without ever paying the full price. As a result, smaller investors, who could perhaps afford to buy a single plot, deployed their capital to purchase multiple plots with 10-20 per cent down payment for each and made a fortune within days. Other small-time savers followed suit and invested whatever savings they had in the real estate market. This hyped demand was clearly artificial and anybody with a sane mind could predict a bust down the road.

One fine morning, panic overcame the market and prices started falling down. Within days, the prices were slashed to half and continued to plunge further. Transactions with token deposits could not materialise and investors reneged on their contracts. A few holding the properties were stuck with them, while others sold precious properties for peanuts. Blood was on the street and the market took more than 6-7 years to recover.

The 2016 crisis however was neither induced by a bubble nor was that severe. It was the result of an ill-conceived policy, with unclear objectives, without taking into account the consequences and with a sudden blow to the most active investment sector of the country. While the property prices registered significant growth in the last two years, things were definitely not as risky as 2005. Improved law and order conditions, next generation infrastructure laid out by the incumbent government increasing connectivity and the positive vibes around CPEC helped in growth of property valuations. While prices were unrealistically inflated at a few places, overall the market had a realistic positive outlook. The new tax proposals however sent a wave of fear amongst investors that they are being watched and would be subjected to inquiries for source of capital. While this was of major consequence to people with black money, the fear of facing the state even instilled fear in investors with genuine capital. Lack of clarity around the proposals also gave rise to apprehensions that there could be a retrospective effect. Consequently, investors held off their decision to undertake transactions, overseas Pakistanis stopped sending money back home and whatever capital was available in the country was channelled to the stock market.

Since most of the buyers and sellers were genuine and were not merely transacting based on token payments, there were very few defaults. In the absence of a liquid market, prices could possibly plunge, if a significant number of sellers need to liquidate their investments instantly and cant find enough buyers, sending a panic signal in the market. Luckily, this did not happen, with prices gradually sliding down in 10-30 per cent range, without any sudden fall.

Now in the aftermath of this ongoing crisis, the government decided to bail out the market through the real estate amnesty scheme. It however remains unclear why the government toyed with the market in the first place. If it was about raising revenues, then why the consequences were not predicted and if it was about transparency and documentation, then why the government has now compromised and created a backdoor to whiten the black money.

Irrespective of this unclear government policy, this amendment if anything is a positive step from investors’ perspective considering the previous proposals. But since the scheme does not have a deadline, which is usually a characteristic feature for such amnesty schemes, the investors are in no hurry to make use of this offer. Most of them, it seems, want to wait and see how the scheme is rolled out and what could be the possible caveats. With the passage of time however, and with some more decline in prices, it is expected that prices would become more attractive and investors would finally find courage to re-invest in the market. This could possibly take 3-4 more months and it can be expected that market will start to rebound by March or April 2017.

From the government’s perspective, it should be recorded as a case study for unplanned tax policies and the havoc they can play with the market and private sector. Moreover, with the perpetual validity of amnesty scheme, the government should realise that it would be a permanent incentive to promote parallel economy. At this stage however, the government should refrain from making any more changes and further shattering investor confidence. If the government really wants to stimulate the property sector, the best course would be to pre-announce future tax policy, with an assurance that not much will be changed in the next few years.

On the bright side, this disaster was God send since the positivity prevailing in the market prior to 2016 budget was very well pushing for another real estate bubble and the new tax proposals inadvertently brought a correction and a sanity check in the market. Going forward, property investors should remember that while emotions may drive market prices in the short term, in the longer run the real estate prices would always be pegged with fundamentals such as housing demand, rental values, commercial zoning laws, investment alternatives and credible property developers. For now however, the investors should start looking at the market again, identifying attractively priced opportunities with solid fundamentals since those are the ones likely to result in highest returns.

Published in The Express Tribune, January 23^rd, 2017.

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