Pakistan’s real estate sector is a fast-growing industry with a vast potential to contribute significantly to the GDP. Due to a mostly undocumented real estate sector, many areas prove to be a bone of contention between the buyer, seller, developer, and state apparatus. Since real estate in Pakistan is usually considered an informal market, policymaking must cater to the administrative, financial, land-use, and environmental regulations.
Efficient regulation is the key to realising the market’s true potential and boosting economic growth. Effective regulation is mostly positive in the long run, even if the immediate results point towards a downward shift in economic development and investor interest. That is mainly due to a large amount of illegal money parked in property and developmental projects.
Pakistan has taken significant steps in forming a real estate regulatory authority, which aims to address a multitude of challenges across the real estate market. Therefore, regulating real estate can help ease the processes related to finance, administration, and development, thereby boosting the real estate sector, and achieving economic growth in the long run.
Problems of Real Estate in Pakistan
The challenges associated with real estate in Pakistan are spread across multiple fronts. They range from poor documentation, fraudulent transactions, and flawed future planning to a lack of policies and a regulatory framework. Until 2014, the sector remained untaxed, with the state maintaining a no questions asked policy (Rashid, 2019). Pakistan’s real estate sector grew by 118pc in the last five years and is one of the least transparent or regulated globally (Rashid, 2019).
Buying, selling, renting, and developing land requires tedious planning and step-by-step execution of tasks. An administration fraught with nepotism and corruption is the first impeding hurdle for new players trying to establish themselves in the industry. Lengthy processing of applications creates bottlenecks for development companies and disrupts the supply chain. When it comes to the litigation of land-related cases, the matter is exacerbated by incoherent land records and databases.
The absence of incentives for investors also impedes Pakistan’s ability to develop its real estate sector and provide revenue collection for the GDP. Tax revenue collected from this sector remains far below its true potential because real estate has become a haven for tax evaders to park vast amounts of illegal money over the past few decades. Until 2014, the sector wasn’t taxed, turning it into an ideal destination to launder money and hike prices through artificial bubbles (Rashid, 2019).
Therefore, Pakistan continues to face serious challenges in its real estate sector, and the absence of a proper regulatory framework undermines public confidence in the sector.
Areas Requiring Regulation in the Real Estate Sector
The real estate sector requires many individuals, corporations, and state entities to collaborate with buyers, sellers, and developers. Financial services provide a backbone for smooth cash flow and equity in the market. Investor confidence takes a major hit due to the prevalence of fraudulent payments and incomprehensive and poorly planned financing schemes for buyers and investors.
Secondly, administrative issues take the utmost importance as much corruption and illegal practices occur due to a lack of regulation in the documentation and filing of applications. Since buildings are not constructed to be demolished later, there is a pressing need for regulation of building construction and bylaws to ensure sustainable infrastructure. This is also important from the perspective of land-use design as the multifunctionality of land is a significant consideration in the modern age.
Lastly, the rapid development of agricultural lands and unplanned expansion of urban centres also impact the environment. Regulations are required to minimise developmental projects’ environmental impact and costs in real estate growth. Undoubtedly, many areas need urgent attention of the authorities towards policy making, implementation, and regulation.
Pakistan’s Efforts Towards Regulating the Real Estate Sector
Pakistan has taken the much-needed step of passing the Real Estate Regulation and Development Bill 2019. The Real Estate Regulatory Authority (RERA) will be formed to manage and oversee the real estate sector effectively. RERA will act as a consultant/advisor for the government in real estate matters. This will include everything from housing societies to buildings to other development projects.
According to the act, registration of real estate agents and development companies will be necessary before buying and selling property. Developers will have to seek approval from the authority before starting any new developmental project by providing details of past projects and advertising campaigns. Advertisers will also need to seek permission from the authority to promote any new development projects and investment opportunities on mainstream media outlets.
The Real Estate Regulatory Authority will also protect the rights of both real estate agents and the individuals to whom the property is allotted. Civil courts will not take on the cases related to real estate disputes that fall within the purview of the RERA or appellate tribunal. Therefore, cases shall be decided in 60 to 90 days in the ambit of the authority itself.
Pakistanis, over the years, have developed a reputation for investing in properties abroad. This can again be attributed to the unfriendly nature of the local industry. This can be fixed with all the development underway by RERA in rectifying the real estate landscape. This will bring back investment to Pakistan, but it will also, in due course, get overseas Pakistanis thinking about investing back home. A single window system for ensuring time bound project approvals will also help in the timely completion of projects for greater investor confidence. Lastly, measures to facilitate digitising land records and financial transactions will go a long way in establishing a transparent and trustworthy system.
Impact of Regulations on Real Estate: A Global Outlook
A look at global trends on how the introduction of regulation impacted the real estate sector can provide an insight into the future of Pakistan’s process of regulating real estate. Compliance usually remains low in the initial years due to many cumbersome requirements needing to be fulfilled before approving current and upcoming projects. In the case of India, which recently adopted a similar act, there has been slow adoption and implementation of the law in true letter and spirit (Outlook Money, 2019). Also, in India, at the end of 2018, nearly 5,000 complaints were received, and over 3,100 orders passed. 79% of rulings were in favour of buyers. That should estimate the speed and extent of buyer protection that RERA offers (Outlook Money, 2019). Therefore, it can be concluded that compliance in Pakistan will gain momentum slowly as the capacity of the young authority will not be able to process the vast number of administrative tasks.
A study conducted in the European real estate market shows positive and negative impacts financially. With the benefits of regulation, an increase in welfare and a decrease in systemic risk and uncertainty can be seen. Regulations also make corporations more resilient to downturns. Tight regulation of banks increases market confidence in financial stability. On the other end of the spectrum, financial regulation can also be seen as a regulatory burden because it increases the cost of risk diversification and operating and compliance costs, reducing the number of investors (Hoesli, Milcheva, & Moss, 2017). Looking at Pakistan’s highly underdeveloped financial sector, the impact of financial regulations will boost the industry by helping incorporate illegally parked cashback into the system. A rise in investor confidence will follow due to payments being made through proper documented channels. Therefore, financial regulations will benefit Pakistan in the long run, even if some backlash is faced in the early stages of implementation.
Suggestions for Real Estate Sector
A strong future in the real estate sector largely depends on an early implementation of a transparent regulatory framework. Pakistan needs to urgently introduce international best practices to increase investor confidence and realise the sector’s true potential. As the country’s outlook changes over time, there might even be a chance that foreign companies will start investing in developmental projects and offer better services to Pakistani citizens. Where land disputes and regulatory processes often take years to resolve, streamlining, harmonising, and modernising tedious processes and laws related to land and property development will enable builders, developers, and real estate agents to act on problems and issues of consumers and tenants swiftly. New regulations should be made by working closely with all stakeholders, keeping in mind each stakeholder’s different needs and challenges. Following the public-private partnership model, state institutions should serve as a bridge between the government and all third parties involved. Lastly, robust strategies need to be developed to remove impediments for foreign investors and developers entering the market.
Real estate holds great potential to revitalise and boost Pakistan’s economy. Lack of regulation in the administrative, financial, constructional, and environmental domains seriously affects the sector’s growth. But recent steps, such as the passing of the Real Estate Regulation and Development Bill 2019, provide impetus to future prosperity and development of the industry. If urgent steps are taken to introduce transparency and digitisation of land records and the speedy resolution of land cases, exponential growth in investment can be expected. Therefore, regulation is key to building sustainable development and reimbursing investor confidence in real estate.
Hoesli, M., Milcheva, S., & Moss , A. (2017). Is Financial Regulation Good or Bad for Real Estate Companies? – An Event Study. The journal of Real Estate Finance and Economics.
Outlook Money. (2019, May 2). Retrieved from Outlookindia: https://www.outlookindia.com/outlookmoney/real-estate/two-years-of-rera-impact-on-the-indian-real-estate-2991
Rashid, A. (2019, March 23). Will PTI’s housing programme address the root causes of the housing crisis? Retrieved from Dawn: https://www.dawn.com/news/1439813