Please note that FBR values are not the only factor to consider when analyzing real estate prices and it is best to consult a professional consultant before investing.
When FBR values were launched in Pakistan
In 2016, FBR values were first introduced by the Nawaz Shareef Government when Dar, the finance minister, launched the FBR assessment tables in the 2016-17 budget. Stakeholders initially rejected the idea. However, the government and real estate later agreed, and the appraisal rate was initially released for only 12 cities on July 31, 2016. Coverage increased to 20 cities in 2019 and 40 cities in December 2021. FBR price was introduced in 20 cities. for the first time. This is significantly higher than the price of District Collector (DC), but of course below the market price.
Why do we need the FBR Land rating chart?
The new FBR values are used to calculate federal taxes such as capital gains tax and withholding tax. Pakistan has three real estate appraisal rates: FBR rate, DC rate and the real rate. Internationally, real estate transfers are taxed at actual transaction amounts, but in Pakistan, real estate was taxed at DC values by 2016, and later, federal taxes were taxed at FBR rate, and provincial taxes are collected at DC rates which both are. below real market rates even today.
The FBR value is used to determine the following:
- Taxes payable to the federal government.
- White money statement according to the FBR land value at the time of purchase.
So when FBR values increase, property taxes increase. Second, the white money needed to carry out that transaction increases. While both of these affect real estate trading, the white money statement is much more important and has far-reaching consequences.
The dirty secret of Pakistani real estate
The Pakistani housing market has long been a safe haven for billions and trillions of black money, which is part of our informal economy. Almost every corrupt individual in our society parks his or her poorly earned money in real estate. In addition to this, industrialists and entrepreneurs will park huge amounts of untaxed money in real estate. This has transformed our real estate industry into the 21st century as it has become an easy source of hiding undeclared or black money.
The other important part of introducing FBR values, then, is to stop this black and undeclared money from ending up in real estate.
To understand how real estate is the refuge of black and gray money, let us assume that a certain property has a market price of 1 crore but an FBR value of only 30 Lacquers. This means that if you pay 30 lakhs to the seller through the banking channel and the remaining 70 lakhs with cash, you have successfully invested 70 lakhs in real estate that is poorly earned or untaxed. Now when you sell the property after a certain number of years and declare the extra money as profits, it will become your white money.
How it affects Pakistan and its economy
Land developers in Pakistan soon realized that there is a huge potential for new real estate development to attract this black and gray economy. These new developments would experience the rapid business and speculative cycles, making them even more attractive to investors. Now, not only can they easily invest black or gray money in real estate, but they also have a chance to make money through speculative trading.
Simply put, a corrupt employee, a drug lord, a terrorist, etc. can easily park all their ill-gotten money in real estate, and a businessman can easily defraud taxes by investing in real estate. Real estate in Pakistan has served as a lasting amnesty for all these people to save and invest their undeclared money. This resulted in significant price bubbles seen in 2002-2005 then 2011-2013 and now in 2020-2022 after the tax amnesty was given to the construction sector.
Now that property prices are rising, white and declared money is also being invested in these areas and offering an easy money-making opportunity. As a result, our industrial and manufacturing sectors have suffered as investors have felt that real estate in Pakistan is easier and safer than a developing industry, and is shifting their investment to real estate, especially in the last two decades.
Impact of FBR values increases
If the FBR value increases, the white money needed to buy certain land increases. We all know that our informal economy, which includes this black money, is around 50% so we can assume that real estate transactions will be reduced by 25 to 50% in the coming years. This effect will be more neglected in sectors where FBR value has increased and is around 60 to 70% of the market price. Any subsequent increase will further decrease these transactions in affected areas. Overall, since March 2022, I have seen the following effects on some of the real estate sectors:
- The recent increase in FBR values will reduce transactions of residential plots in certain phases of DHA Lahore. This can result in very slow growth or negative growth in the coming years.
- Business plots and rental locations in DHA Lahore will thrive due to the huge difference between FBR values and actual market values.
- FBR land value will not affect the prices of DHA Multan, Gujranwala and Bahawalpur as there is a negligible increase. Rather, we may see an increase in real prices as speculative traders move to these areas.
- Construction projects will become more attractive to investors, especially those registered with the FBR amnesty scheme.
- End users and wolf holdings in mature areas will continue to thrive.
If your company or city is not included in the above analysis, you can use the above logic to find out the effect of an increase in FBR values. However, FBR values are not the only factor you need to consider when evaluating real estate and may not be 100% accurate. So, please consider other factors such as development, current prices, market sentiment, etc. before investing.
The team of our experienced consultants is always here to help you choose property investments wisely.
Advice for investors
In the future, Government will take more stringent measures to direct this informal economy to industry and manufacturing. The government has already granted amnesty to these sectors and the roadmap is now clear. The market is already expecting more real estate taxes and a further increase in FBR values in the next budget. While some of us may not be happy about the rise in FBR prices, in the long run, it is very good for the real estate sector of Pakistan. A prosperous economy will create more wealth for the people of Pakistan and strengthen their purchasing power to invest in real estate.
We, as patriotic Pakistani, should support the Government of Pakistan in its action against corruption and tax fraud. Prosperous Pakistan is in everyone’s favor and will end up in a prosperous real estate in Pakistan as well. It is, therefore, best to invest in real estate, which is not the center of such black money and is unjustifiable by stricter government repression against the informal economy and black money.
Meanwhile, if you want to read more such exciting lifestyle guides and informative property updates, stay tuned to Feeta Blog — Pakistan’s best real estate blog.
