Real estate market rules may be revised

By Ihtashamul Haque
October 26, 2007
www.dawn.com

ISLAMABAD, Oct 25: Most of the rules regulating real estate and construction markets are expected to be revised to check corrupt practices and promote local and foreign investment in building industry.Informed sources told Dawn on Thursday that official planners have proposed drastic measures to ensure transparency in the real estate and construction markets.They said although both sectors related to provincial and local administrations, centre’s intervention was necessary to improve a regulatory mechanism to ensure better performance by removing distortions in the real estate business.Apart from foreclosure laws, the regulatory issues concerning the two sectors needed to be worked out afresh.The government was told that well functioning real estate markets are important for reducing and streamlining the cost of doing business for firms in manufacturing, retail, transport as well as construction.Real estate costs form a significant part of the fixed costs of doing business in Pakistan.Additionally, well functioning real estate markets that guarantee titles and lower search costs for ensuring titles also allow firms to use real estate as collateral for accessing funds from banks and other lenders.Since the formal sector financial market depends heavily on physical collateral for advancing funds, secure land titles could allow firms, especially small and medium-sized firms as they have limited assets, to acquire funds from commercial formal sector providers.Construction sector has the potential to not only be a significant contributor to the overall GDP of the country, but to be a large contributor in the year-to-year growth of the GDP as well. It is also a labour intensive industry so that the potential for creating gainful employment through construction activity is also significant.Well functioning real estate markets, planners said, are an important ingredient for allowing construction industry to take off.Pakistan faces significant shortages in availability of housing units (more than 5 million) alone, and if commercial spaces are added to it, shortages are much more severe. Needed reforms in these two sectors could have a significant impact on construction activity for all commercial sector development of housing market and on development of cities.Problems with the two sectors have been repeatedly identified as these are posing significant constraints on growth and they have also been identified.The IFC data-base on cost of doing business, maintained for more than 175 countries, points out that in terms of ease of registering property, Pakistan was ranked 68th (higher ranks are better) in the comity of nations in 2006, down from 57 in 2005, and in terms of ease of enforcing contracts Pakistan was ranked 163rd in both 2005 and 2006.The importance of contract enforcement data, for the real estate market, should be clear from the following: one survey estimates that more than 80 per cent of all civil litigation in Pakistan is related to land disputes.Pakistan does not have an efficient and transparent cadastral system for property registration.What is registered is the transfer of property and not the title (ownership right). So establishing title is a process of following up on previous transfers to establish current rights.There is a ‘search-certificate’ that can be issued by the sub-registrar’s office, saying that the title is good, but this falls well short of a government guarantee of title.Thus the cost of ensuring property title, in terms of finding previous transfers, getting the search certificate, issuing notices in papers and paying for lawyers and other mediators, and possession, can be substantial. Even after due caution, the risk of costly litigation remains.“This distorts the outcomes from the real estate markets in a number of ways to excessive litigation,” the government was told.Commercialisation fee for change of use of property (from residential to commercial) is 20 per cent of the value of the plot.In addition, there are very high development charges by water and sanitation authorities. These charges apply to areas that have already been declared commercial.About the construction, building and zoning codes regarding height of buildings, plot to covered area ratio, rules for space utilisation, etc., remain the responsibility of local governments, but there is a multiplicity of agencies involved here with multiple rules and procedures.There is as yet no realisation of possible environmental impacts of construction and expansion of urban areas into rural areas. These need explicit recognition so that the impacts can be planned for.About rental property, rent restriction ordinance continues to distort incentives for the development of property for rental purposes.The issues here have to do with a) limits on rents, b) excessive tenant rights, and c) differential taxation on rental property. Limits on rents and how much rents can go up by reducing incentives for construction of property for rental purposes as well as incentives for maintaining rented property.Tenant eviction procedures are costly and lengthy, and strong tenant rights again weaken incentives for owners to develop property for rental purposes.High rate of stamp duty and registration fee (three percent and one per cent of value of contract) also discourage registration of rental contracts.Property tax on rented property is still almost 10 times, that on owner occupied property.This differential also discourages property rentals. Since there does not seem to be any sound economic reason for the differential closing, the gap between these two rates could lower the distortion in rental markets significantly.In this regard, establishment of a transparent and efficient cadastral system for property title registration was recommended which should be a high priority (provincial responsibility).It was also proposed that stamp duties on property related transactions and registration fees need to be rationalised (provincial responsibility).Non-registered transactions have to be banned (provincial responsibility).Change of use charges need rationalisation. Development charges by water/sanitation authorities need rationalisation on the basis of costs.Building and zoning codes need to be modernised and hannonized across the province.Possible environmental impacts of expansion of urban and industrial areas need recognition. Rental property laws need to be revised.Moreover, market distorting effects of rent control, excessive tenant rights and differential taxation (registration. stamp duty and property tax) have to be rationalised.