Real estate

Land Valuation in Pakistan

By 10/06/2021 June 14th, 2021 0 Comments

Introduction

Pakistan’s real estate sector holds immense value for the country’s economic growth. The improved security situation, rise in inbound tourism, regulatory relaxations for the construction sector, and higher ranking on ease of doing business index have created a favorable environment for the growth of foreign exchange reserves in the country.    Foreign remittance reached USD 24.2 billion in the first 10 months of this fiscal year, a growth rate of 29 percent compared to the previous year (The News, 2021).  According to UNCTAD’s 2020 World Investment Report, FDI inflows to Pakistan increased from USD 1.7 billion in 2018 to USD 2.2 billion in 2019 (Santander, 2020). However, realising the true potential of real estate largely depends on land valuation and transparency in the sector. Transparent practices in land valuation can help bring  improvement in various areas like sales listings, investment analysis, property insurance, and taxation.  Continue reading to understand land valuation practices in Pakistan.

Land as an Asset

Buy land as they are not making it anymore, Mark Twain once advised. Land is a tangible and easily definable asset compared to company bonds or government bonds. Land can  be developed over time to increase its utility and value. Major cities of Pakistan experienced an increase of 85 percent in their residential market value between 2013 and 2018 (Wani, 2020). However, investors and businesses remain hesitant of investing in Pakistan’s real estate sector due to absence of incentives for investors, strict regulations on banking transactions, and high taxes on  property transfer. Pakistan’s land market is susceptible to speculation and formation of real estate bubbles by artificially inflating the prices of land in boom phases. Therefore, an accurate and transparent land valuation can alleviate most of the problems faced by investors in the real estate sector of Pakistan.

Land Valuation in Pakistan

Pakistan’s real estate market lacks regulation as currently there is no government body to oversee activities of developers, regulate real estate agents and brokers, or set standards for best practices. The system of land valuation is therefore, based on the decades old system that is manipulative and undervalues property. The government is trying to bring in additional tax revenue from the real estate sector by introducing slabs on capital gains tax, but no proper step can be taken in this regard unless accurate land valuations that are reflective of the on ground realities are not carried out. Currently, three separate rates for a property exist in Pakistan. The first is decided by the Federal Board of Revenue (FBR), the second is determined by the District Commissioner (DC), and the third is the market rate. In almost all cases, the market rate is much higher than the FBR or DC rate. Therefore, the government remains unable to generate sufficient tax revenue as most  transactions are carried out using market rates. As the market rates are also inflated by speculators to give an advantage to certain groups, illegal or black money also penetrates the market.

 

Typically, land is valued according to several different factors in Pakistan. Location is the most important factor that determines the worth of any land. . Value that is derived from location is based on the physical and socioeconomic characteristics of the property. Another important factor is the soil composition. As new housing societies and commercial areas are developed, the land is usually levelled by compaction after filling it with soil. This divides land into two categories namely, solid land and filled land. Solid land is also more valuable as it is natural and fortified by earth, whereas filled land must be strengthened by adding foundations during construction, increasing the overall costs (Goss, 2019). These two attributes can be considered among the physical attributes of land. In terms of the socioeconomic attributes, the price of surrounding areas is the major consideration. These are referred to as comparables and must be similar in their characteristics to the land being evaluated. Accessibility and land use also play a vital role in deciding the value of a land (Qureshi, 2016). Therefore, like all other global real estate markets, land is valued in the same way in Pakistan, with the only difference being that state valuations are way below the market value. This hurts tax and revenue collection from the real estate sector, making the call for an established land valuation system a necessity.

Conclusion

Realising the true potential of real estate largely depends on the accurate and transparent valuation of land. Being a tangible, definable, and scarce asset, it is fairly easy to calculate the value of land, provided that data on all the required indicators is found accurately. All major cities of Pakistan have experienced an 85 percent increase in their property value over a period of just five years. As investors and foreign businesses remain hesitant to invest in the real estate sector of Pakistan due to a number of malpractices and regulatory challenges, accurate and transparent land valuation can pave the way for reform in the real estate sector.

Bibliography

Goss, M. (2019). Dynamic Factors Affecting Land Values. Retrieved from https://www.agchoice.com/blog/dynamic-factors-affecting-land-values

Qureshi, S. (2016). Valuing Property. Retrieved from https://www.thenews.com.pk/tns/detail/561574-valuing-property

Santander. (2020). Pakistan: Foreign Investment. Retrieved from https://santandertrade.com/en/portal/establish-overseas/pakistan/investing

The News. (2021). Remittances rise to all-time high in 10 months. Retrieved from https://www.thenews.com.pk/print/836580-remittances-rise-to-all-time-high-in-10-months#:~:text=KARACHI%3A%20Remittances%20to%20Pakistan%20hit,bank’s%20data%20showed%20on%20Tuesday.

Wani, S. (2020). Landlords Inc. Retrieved from https://www.dawn.com/news/1592061

Research Questions

What is land valuation?

How is land valuation practiced in Pakistan?

Key Takeaways

Foreign remittance reached USD 24.2 billion in the first 10 months of the fiscal year, a growth rate of 29 percent compared to the previous year.

According to UNCTAD’s 2020 World Investment Report, FDI inflows to Pakistan increased from USD 1.7 billion in 2018 to USD 2.2 billion in 2019.

Realising the true potential of real estate largely depends on land valuation and transparency in the sector.

Land is a tangible and easily definable asset compared to company bonds or government bonds. It can also be developed over time to increase its utility and value.

Major cities of Pakistan experienced an increase of 85 percent in their residential market value between 2013 and 2018.

Investors and businesses remain hesitant of investing in Pakistan’s real estate sector due to absence of incentives for investors, strict regulations on banking transactions, and levying of high taxes while transferring property.

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