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Factors Behind Stagnant Real Estate Business In Pakistan

Author : William Kng

Real estate business, which was believed to be one of the most risk-free and profitable businesses in Pakistan before 9/11, now offers very little prospects for realtors. According to many surveys, rates of commercial as well as residential properties of Pakistan have been stagnant for over six years. The condition is less bad in some of the posh areas of Lahore such as the DHA and Bahria Town.
Because of a lack in demand, most of the housing societies (including Wapda Town, Johar Town, NFC and Safpak society) offer residential and rental properties at affordable prices. However, the value of property increased in the DHA and Bahria Town during the last two years. The reason behind this increase is perhaps the high living standards offered by these two localities.
As far as the condition of real estate in major cities of Pakistan is concerned, it has sadly been noticed that the current unrest and violence in Karachi has give the value of Lahore real estate a boost of about 30%. The affect of Karachi's unrest has been unnoticeable on properties in other parts of the country. Discussed below are four factors which contribute to the overall stagnant condition of properties in Pakistan.
1) High CVT on Property Transfers
The transfer of any kind of property falls under one of the main categories which include surrender, power of attorney, gift, transfer of property to filial, exchange or purchase. All of the above mentioned transfers are subject to Capital Value Tax (CVT) of 4%. This amount previously was as low as 2%, and has doubled in a couple of years. This tax is applicable on every residential property equal to more than one kanal, whereas all commercial properties have to pay this tax upon transfer without any exception. This tax is one of the hurdles for buyers interested in investing in Pakistan real estate.
2) High interest on mortgage rates
Developed countries use mortgage rate as a tool to improve their real estate values but in Pakistan mortgage loans are so high that they serve the purpose of repelling investment. With mortgage rate ranging between 15-20%, the rental value of properties has increased 4-6 times. After the 2008 property slump in Pakistan, many investors were declared defaulters. Now, the banks are not willing to reduce the mortgage rates. On the other hand, people's limited income makes it difficult for them to pay such heavy installments. The uncertain market conditions have made them reluctant to investment in properties in Pakistan.
3) High fear of political instability
The depressing political situation of Pakistan has led to rapid changes in policies. Even worse is the condition of law and order, which is preventing buyers, investors and developers from making an investment in the real estate sector. On the other hand, banks now offer a profit of 14% on fixed account deposits. For that reason, people feel more inclined to deposit their money in banks. This has snubbed the circulation of money and is also a reason for market's stagnancy.
4) High rate of inflation
Inflation also has its role to play in the adverse conditions of Pakistan real estate. It has severely affected people's purchasing power because of which they can no longer afford to buy high-end properties. With diminutive incomes and the ever increasing prices, people are having a hard time getting properties on lease. On top of that, the high interest rates on installments make repayment almost impossible. Officially, the inflation rate is reported to have undergone a drop of 2% in August 2011, yet people aren't any better off than they were before.
All of the above mentioned factors have a role to play in the abysmal conditions of the real estate sector of Pakistan thus, prolonging the state of stagnancy in prices.

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Tags:   Pakistan properties, Pakistan real estate, Lahore real estate, Pakistan property, inflation, political instability, interest, mortgage

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Submitted : 2011-10-18    Word Count : 682    Times Viewed: 565