Business industry likely to see boom of investments this year
Interview with Muhammad Talha, President – Naya Nazimabad Gymkhana
PAGE: Tell me something about yourself, please:
Muhammad Talha: I am working in Arif Habib Group for last 10 years. Before joining the Arif Habib Group Company, I served in Al-Abbas Group, Ghulam Farooq Group and EY Ford Rhodes and gained experience in diversified sectors serving clients spanning the Financial, Manufacturing, Trading and Service industries. I have a working experience of more than 18 years in various diversified capacities including property operations. My current engagements include the overall set up, construction and management of an estate of the art Gymkhana Club, Health, Education, Sports facilities and Islamic Center at Naya Nazimabad, Karachi.
PAGE: Your views on the real estate and construction sector of Pakistan:
Muhammad Talha: The real estate sector is playing a key role in the economic development of the country. According to a World Bank report, the estimated housing shortage is up to 10 million units. The gap continues to increase by roughly 350,000 units per year as new housing fails to match the pace of household formation while existing units become obsolete. Since the appreciation in dollar prices, bank policy rates and implementation of stringent policies of FATF by the Pakistani governments and law enforcement agencies, real estate and construction industry is at all-time low. The increase in steel, cement and other construction material prices badly affected the construction industry.
Over the years, Pakistan has lagged behind in the ease of doing business index. However recent steps taken by the present government has shown improvement, as evident from the performance of Pakistan Stock Exchange (PSX). Despite being the sign of improvements, there is a lot of barriers which need to be eliminated, as being in the real sector a lot of approvals are required which restrain or slowdown the process of business flow. There is a need to revamp the system so that hassles faced by businesses is reduced to a minimum level, such can be done by bringing up a one window solution, which would ultimately help the economy of the country to grow at fast pace. For creating an enabling environment in Pakistan for construction industry, construction loan must be provided at subsidized rate to the people who are willing to procure house for self-use. Limits should be assigned to banks for developer and mortgage finance on special rates. Banks be urged to create Specialized Housing Finance companies. The matter of Housing, Construction and Real Estate Development should be given due importance by all state institutions and governments.
PAGE: Your comments on the prices of apartments:
Muhammad Talha: Due to limited supply and high prices of open plots, the demand for apartments are increasing day by day. People are adding additional floors in existing residential houses and selling them as separate floors. The residential units on the declared commercial main roads are converting into commercial hi-rise to match the growing residential and commercial demand in the area. Due to increasing middle class, growth in demand of the households has been increased manifolds and every project which launches gets a decent response with a substantial sales volume.
In Pakistan, we have three types of apartment. One is Budgeted Apartments with a price range of Rs.4,000 to Rs.6,000 per sq. ft, second is Mid-Range Apartments with a price ranges from Rs.7,000 to Rs.12,000 per sq. ft and 3rd is Premium Apartments having price range of Rs.15,000 to Rs.25,000 per sq. ft. depends upon the location and life style. The customers who purchases a new flat/plot/bungalow does have a preference for buying from developers with a good reputation, which issues bankable title like Naya Nazimabad Apartments who are offering inventory at a very affordable prices with world class amenities. In Naya Nazimabad, we are making effort to introduce “Rental Replacement Model” for the first time in Pakistan to buy an apartment on 20 years installment plan through long-term mortgage financing. The offering may establish benchmark procedures, documentation and legal framework to bridge the housing-finance gap in Pakistan.
PAGE: Are taxation issues a hurdle in the growth of the real estate and construction sector?
Muhammad Talha: Construction industry is facing problems due to imposition of heavy taxes and it has urged the Government to rationalize them to facilitate the growth of business activities. The construction sector is providing jobs to millions of people, while more than hundred allied industries depend on it, therefore, the taxes on steel, cement, coal and other commodities should be reconsidered. Further, the Government has brought several modifications to how property buying and selling would to take place. Many new taxes were imposed which created the uncertainty in the real estate sector. Moreover, the work to register non-filers to filers also affects the property market in Pakistan.
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PAGE: Your views on the cement and steel prices:
Muhammad Talha: Both products have a significant impact on the construction industry. The recent budget presented by the present government has outstretched the prices of cement and steel which has badly affected many sector of the economy and particularly the real estate sector. Prices of steel and cement has been raised by 15% to 35% on account of devaluation of currency and the new taxes and duties imposed by the government. Such increase of hike in the prices has shrink down its procurement in the market, which is evident by the fact that many of the existing plants are either being utilized at the minimum level and many of it has shut down their production due to lowering of demand in the market. However, we are hopeful that the construction work on Naya Pakistan scheme shall commence soon and accordingly the supply of cement can be cater off.
PAGE: Why is REIT still not successful in Pakistan?
Muhammad Talha: REITs make real estate investment affordable for the common man. Access to funds allows for quality development benefitting the economy, creating jobs and delivering a better habitat. The present tax regime makes it highly unfavorable to develop real estate under REIT structure
• Dividends from REITs (a closed end collective investment scheme) are taxed at 25%; Whereas, Mutual Funds and all other sources of investment attract Dividend Taxation at 15%. REITs are a type of equity mutual fund, the only difference is that rather than investing in shares, REITs invest in real estate.
• Transfer of property to a Trustee, at the inception of a REIT scheme, must be unambiguously exempt from Capital Gain Tax as it was till June 2015. Such transfer for an owner (who gets REIT units in exchange for transfer of property to REIT) is a non-cash event.
As a result, managing real estate business under REITs is at a distinct disadvantage as compared to under a conventional company structure.
PAGE: Your views on the growth in business activities during next fiscal year:
Muhammad Talha: The macroeconomic challenges will continue to persist with a decelerating growth in the FY 2020. The year 2019 ended with its share of challenges and bleak financial conditions, with higher taxes and stringent monetary conditions. Private and small to medium businesses have faced a rough patch while large scale businesses too have faced a sharp contraction in their business activities. The business industry in Pakistan had suffered a lot in 2019 due to many reasons such as political instability, unrealistic policies, worsening economic conditions and FATF conditions. However, the sector is still expected to see a boom of investments in the year, 2020.