The government is working on a plan to regulate Foreign Direct Investment (FDI) in real estate sector of Pakistan. The Securities and Exchange Commission of Pakistan (SECP) is framing a single legal framework for real estate sector and the State Bank of Pakistan (SBP) has endorsed that the sector may be regulated for genuine inflow/outflow of foreign exchange.
Sources said on Monday that the government has taken decisions to regulate real estate sector during the last meeting held at the Board of Investment (BoI) under the chairmanship of Executive Director General BoI to discuss the SBP's recommendations regarding Foreign Direct Investment (FDI) in real estate sector of Pakistan. Representatives of SBP asserted their previous stance of unjust outflows of foreign exchange and informed the forum that every country has its own dynamics in foreign exchange and SBP's mandate is to stabilise flows of foreign exchange in the country. The efforts of SBP are to plug in loopholes and to watch Anti Money Laundering to ensure legal transactions through banking channels. The perspective of the SBP's proposals is to regulate the real estate sector for genuine inflow/outflow of foreign exchange.
The representatives of SECP expressed the view that after the 18th Amendment housing is a provincial subject and housing societies are registered under various acts in all over the country. He pointed out that joint venture as a company must be registered/incorporated in SECP and real estate sector may have a legal regime. SECP made a presentation on Real Estate Investment Trust (REIT) and also highlighted regulations and opportunities therein. In REIT, there is a minimum requirement of 25 percent of paid up capital to be kept with a third party as mandatory and investors hold maximum 25 percent stake in a REIT scheme and all REIT are required to be listed. He pointed out that SECP is also working on concept paper to have a single law for this sector which would be shared with BoI. Representative of SECP also informed that SECP devised companies (Invitation and Acceptance of Deposits) Rules, 1987. These rules provide directions, policy guidelines and a security to investors. The provinces can get benefit from these rules as well.
Representative of Ministry of Planning & Development endorsed the recommendations made by SBP. Representative of FBR pointed out that transfer pricing mechanism is being used for tax avoidance practices. There are two mechanisms for determining transfer pricing, one is withholding tax and other is transfer pricing practice during auditing. He informed that when foreign taxpayers file their return on tax for exemption of double taxation as per agreement, SBP asks for exemption certificate issued by the Commissioner. FBR fully supports SBP's concerns and recommendations.
The Executive Director General (EDG) BoI briefed the participants about recommendations of SBP relating to real estate sector and decisions made in the last meeting. The representative of Ministry of Commerce was invited to further clarify the views/comments offered by the Ministry in this regard. Representative of Ministry of Commerce stated that Domestic Wing of Ministry of Commerce is focusing on ease of doing business and simplification of investment processes. He also mentioned that they have further examined the proposals and found that these are not against the commitments made in the WTO. Hence, revised views/comments on SBP's recommendations would be sent to BoI after seeking approval from Secretary. Meanwhile, already sent comments may be ignored. In principle, Ministry of Commerce endorsed the recommendations made by the SBP in the real estate sector.
Representative of Ministry of Housing & Works informed the forum that the government had already announced the Housing Policy and objective of this policy is to promote investment in this sector. Ministry of Works was requested to share the policy with the BoI.
Representative of Constructors Association Pakistani (CAP) enquires about actual definition of real estate. The CAP understands that buying of land and its development for residential/commercial purpose is defined as real estate and we should be very much clear about kind of services being received from foreign collaborators. He also clarified that the constructions being taken place under CPEC is out of scope of real estate. The CPEC projects are rather infrastructure projects. He distinguished between contractor and builder/constructors and informed the forum that individual or entity who constructs something and supervise construction is a builder while contractor is an individual or entity that undertakes contract to provide materials and services. The representative mentioned that contractors are required to register themselves with Pakistan Engineering Council and foreign investors and bound to have 30 percent share by Pakistani company in joint venture for transfer of technology into the country. He pointed out that different projects are completed in different phases and how could it be possible for any entity to give the completion certificate. This aspect may also be taken into account while finalising the proposals from competent forum.
Representative of Association of Builders and Developers (Pakistan) informed the forum that real estate sector is facing acute shortage of financing and number of housing projects and incomplete. He also pointed out that outflows in real estate sector are ostensibly not as high as considered. He mentioned that foreign investment in real estate sector is to be facilitated as per law. There is a dire need of financing therefore interest rate must be at low level for revival of this sector. In response, representative of SBP pointed out that financing in housing sector is a focused area of SBP. However, slow recovery of loans in housing sector may also be kept in mind. Representative of ABAD also stated that foreign consultancy fee is not as high as being anticipated by the said regulator.
The representative of KP-BoI expressed that all kinds of consultancy and architectural services are already available in the country therefore, such services with foreign collaborators are required to be finished.
The representative of BoI read out all SBP's representations relating to the FDI in real estate sector before participants and get consensus. After detailed discussion, it has been decided that recommendations relating to real estate sector will be reworded/ refined by SBP keeping in view the discussions/deliberations held in the meeting. The SECP would share their concept note prepared for a single legal framework for real estate sector all over Pakistan. Moreover, Ministry of Housing & Works will share the Housing policy recently announced. Ministry of Commerce will submit revised views/comments on SBP's recommendations after seeking approval from competent authority.
While using the term project completion certificates, the aspect of various completions/phases may be taken into account for finalizing the proposal. ABAD will provide data regarding fee being, charged by the foreign consultants, they added.
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