ConstructionCovid-19InfrastructureLand use planningReal estateSustainable developmentUrban planning

The Impact of COVID-19 on Real Estate Sector of Pakistan 

By 07.01.2021 January 11th, 2021 0 Comments

Preamble

The world has been highly impacted by the COVID-19 pandemic with almost all markets and industries undergoing some form of change to adapt to the new normal. This blog presents the impacts of COVID-19 on the real estate sector of Pakistan while highlighting how the global pandemic has impacted different sectors linked to real estate development in the country. . The blog also explains how the future of real estate might look like after the pandemic and what changes are expected in the overall development of the market. 

Research Questions

  1. What was the state of the real estate sector in Pakistan before the outbreak of COVID-19? 

  2. How has the real estate market been affected by COVID-19? 

  3. What measures were taken by the government to offset the negative impact of the pandemic in the realty sector?

  4. What is the outlook for the future of real estate? 

Introduction

The outbreak of COVID-19 has severely affected the global and Pakistani economy. The Government of Pakistan (GOP) took unprecedented steps to curb the spread of the virus and minimise the harmful impacts of the pandemic. However, with the magnitude of the challenge, the evolving nature of the situation, and the uncertainty associated with the outcomes, persistent efforts will be needed in the longer run. The estimated real estate market value in Pakistan is over $1 trillion (Dawn, 2020).  With the real estate market already struggling at the start of the outbreak, the outlook for the sector remains gloomy and subject to speculation in the market. The lockdown restrictions affected all business and commercial activities. Many offices are now adopting the work from home model, which has further implications for the real estate market. Online shopping has picked up in trend after shortages of supplies in-store and movement restrictions due to the lockdown. Since people now look for areas where social distancing can be maintained, the demand for small apartments and buildings with tight spaces has also been impacted. Tourism, travel, and hotelling are the most affected due to lockdown restrictions. Since these sectors are most related to real estate, a sharp dip was seen in the revenues. Therefore, COVID-19 has heavily impacted the real estate market in Pakistan, and without serious effort on the part of the government to uplift the sector, the effects will reflect in the years to come. 

The Realty Sector Before the Pandemic

Pakistan experienced a dark phase in its real estate market since 2017 due to political instability, tax policy confusion, and uncertainty in the economic and financial policies. But there were several reasons why the sector showed promise for 2020. With an increase in the tourism industry by 70 percent, mainly due to government initiatives, the prospects for the real estate presented a positive outlook. Pakistan improving in its ease of doing business index, the introduction of digital vision Pakistan, and the China Pakistan Economic Corridor (CPEC) projects all contributed to increased activity in the realty sector. Investor confidence greatly improved after the coming of a new government in 2018. That is mainly due to new regulations coming up and an increase in the overall safety and security situation of the country. The launching of the Naya Pakistan Housing Program (NPHP) generated substantial activity in the market as financial institutions were given subsidies to provide loans for affordable housing under the project. The promise of five million homes being built in five years highlighted the government’s interest in the construction and realty sector. The announcement to set up a real estate regulatory authority also strengthened investor’s confidence. Therefore, real estate in Pakistan was poised to take off in growth, until it became victim to impacts of COVID-19. 

Impacts of COVID-19 on The Real Estate Market

The COVID-19 pandemic was first reported on 31st December 2019 in Wuhan City, Hubei Province of China. The first case of COVID-19 in Pakistan was reported in February 2020, and subsequently, a lockdown was imposed in the next month. Since health is a primary concern for any individual, everything else was given secondary value. Mobility of the population became restricted, and social distancing measures were adopted in open and public spaces. A high level of uncertainty was felt in almost all markets. As industries and businesses came to a standstill amid lockdown restrictions and deteriorated economic activity, many lost their jobs and found themselves in financially troubling situations. With global supply chains disrupted and imports and exports coming to a resounding halt, a negative growth in GDP was expected for the first time since the fiscal year 1951-52 (The News, 2020).

A trend was seen whereby people started pulling out investments from the stock market due to the financial difficulties presented by unemployment and economic pressures. It was feared that people would take investments out of real estate due to the same reasons. As the offices of all major property developers and construction companies were closed, work in the realty sector also came to a halt. The construction and real estate sector employs the highest number of skilled and unskilled labour after agriculture. The labour force survey of 2017 suggests that there are 27.3 million workers in the informal sector (Pakistan Economic Survey, 2020). Most of this labour consists of rural to urban migrants who predominantly are daily wage workers, and as they became unemployed overnight, their situation deteriorated the most.  

Another debilitating hit to the realty sector came in the form of travel restrictions as the majority of the overseas investors show interest in Pakistan’s real estate market due to tourism. Since contact intensive businesses like restaurants, gyms, hotels, and the like thereof were not allowed to continue, many of them were not able to survive during the lockdown period and were forced to close down. This affected the commercial real estate market as more and more businesses vacated premises in order to turn to online platforms or establish business elsewhere on a smaller scale. Again, due to lockdown restrictions, the corporate sector adopted the work from home model and subsequently realised that a majority of workers employed in the companies were not actually needed on the premises for their jobs. This reduced their demand for office spaces and human resources. Demand for residential spaces and apartments increased, and demand for luxury housing and commercial property decreased.

Government Measures to Kickstart the Real Estate Sector

The government was quick to realise that their two primary aims, providing five million housing units in five years and establishing 10 million jobs, will remain a dream unless the real estate sector is revived. Real estate can have a snowball effect on the economy as more than 40 allied industries come under its umbrella (Business Recorder, 2020). As the world continued to enforce strict lockdowns, Pakistan was among the first countries to impose a policy of smart lockdowns. In this manner, only those areas where infectivity was rising were locked down, and the general market was allowed to conduct business while following the COVID SOPs. This resulted in an effective flattening of the coronavirus cases and subsequent opening of the construction sector. An amnesty scheme announced by the Prime Minister encouraged investors to focus on the real estate sector. The government also proposed a reduction in taxes for the transfer of properties. Previously, an increase in this tax resulted in an overall degradation of real estate buying and selling. 

The government recently also decided to sell off state properties worth $15 billion to overseas Pakistanis to generate growth in the economy (Dawn, 2019). In an effort to maintain a balance between lockdowns and generating economic activity, the government also incentivised construction activity by April 2020. First, the sector was given the status of industry and investors in the sector would not be asked about their income for the next financial year. Another major relief was that the construction industry would now be paying fixed tax and if the construction is related to NPHP or any other affordable housing scheme, then the tax will be reduced by 90 percent (Shahnawaz, 2020). Also, during the financial year 2020-21, anyone selling their personal residence will be exempted from paying capital gains tax. Furthermore, withholding tax on materials and services was abolished (except steel and cement). Lastly, a Construction Industry Development Board (CIDB) has been established to promote construction in the country and help the sector in resolving their demands from the government. 

Conclusion

The world has been hit hard by the COVID-19 pandemic. Developing countries like Pakistan have already found it difficult to cope up with complete lockdown restrictions, and with the construction sector activities coming to a halt, it became an alarming situation as most of the informal sector employment outside agriculture lies in real estate. The government has taken extraordinary measures to ensure that the real estate sector is revived as the promise of 10 million jobs and five million houses in five years heavily depend on the smooth functioning of the sector. Although much has been achieved in an effort to revive the construction industry and encourage sale and purchase of property, it remains too early to judge the overall impact of COVID-19 on the real estate market of Pakistan.

Key Takeaways

  1. As industries and businesses came to a standstill amid lockdown restrictions and deteriorated economic activity, many lost their jobs and found themselves in financially troubling situations. 

  2. With global supply chains disrupted and imports and exports coming to a resounding halt, a negative growth in GDP was expected for the first time since the fiscal year 1951-52 that the country recorded negative economic growth.  

  3. The government recently also decided to sell off state properties worth $15 billion to overseas Pakistanis to generate stimulus in the economy.

  4. The construction sector was given the status of industry and investors would not be asked about their income for the next financial year. 

  5. The construction industry would now be paying fixed tax and if the construction is related to NPHP, then 90 percent of that tax will be reimbursed later. 

  6. During the financial year 2020-21, anyone selling their personal residence will be exempted from paying capital gains tax. 

  7. Withholding tax on materials and services was abolished (except steel and cement). 

  8. A Construction Industry Development Board (CIDB) has been established to promote construction in the country and help the sector in resolving their demands from the government. 

Bibliography

Dawn. (2020). Indicators pointing south for real estate prices. Retrieved from Dawn: https://www.dawn.com/news/1568592

Pakistan Economic Survey. (2020). Pakistan Economic Survey. 

Business Recorder. (2020). ICCI hails PM package for real estate sector. Retrieved from Business Recorder: https://www.brecorder.com/news/588038

Dawn. (2019). Govt to sell unused state properties at Dubai Expo. Retrieved from Dawn: https://www.dawn.com/news/1520525

Shahnawaz, A. (2020). Govt links amnesty to builders with project completion. Retrieved from The News : https://www.thenews.com.pk/print/723124-govt-links-amnesty-to-builders-with-project-completion

The News. (2020). Pakistan saw negative economic growth first time after 1952: State Bank. Retrieved from The News: https://www.thenews.com.pk/print/745560-pakistan-saw-negative-economic-growth-first-time-after-1952-sbp#:~:text=KARACHI%3A%20The%20State%20Bank%20of,recorded%20a%20negative%20economic%20growth.

 

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