Introduction
Pakistan’s real estate sector plays a significant role in the country’s economy and growth. With improved security conditions, increased tourism, relaxed regulations for the construction sector, and higher rankings on the ease of doing business index, Pakistan is attracting investments and remittances.
However, realizing the true potential of real estate requires accurate and transparent land valuation practices. Land valuations are crucial for financing, sales listings, investment analysis, property insurance, and taxation. Transparent practices can bring improvements in all these areas.
In this article, we will explore various property valuation methods practiced in Pakistan.
Land As An Asset
Mark Twain once advised, “Buy land, they’re not making it anymore.” Unlike company or government bonds, land is a tangible and easily definable asset. It can also be developed over time to increase its utility and value.
Major cities in Pakistan witnessed an 85% increase in residential market value between 2013 and 2018. However, investors and businesses remain hesitant to invest in Pakistan’s real estate sector due to the absence of investor incentives, strict regulations on banking transactions, and high taxes on property transfers.
Pakistan’s land market is also susceptible to speculation and the formation of real estate bubbles. Therefore, accurate and transparent land valuation is crucial to address these challenges.
Land Valuation In Pakistan
Pakistan’s real estate market lacks regulation, as there is currently no government body to oversee developers, regulate real estate agents and brokers, or set standards for best practices. As a result, the land valuation system is based on a decades-old manipulative and undervalued property system.
The government aims to increase tax revenue from the real estate sector by introducing slabs on capital gains tax. However, accurate land valuations reflective of on-ground realities are necessary for effective implementation.
Currently, three different rates for a property exist in Pakistan: the Federal Board of Revenue (FBR) rate, the District Commissioner (DC) rate, and the market rate. In most cases, the market rate is much higher than the FBR or DC rate, leading to a shortfall in tax revenue. Speculators further inflate market rates, allowing illegal or black money to penetrate the market.
Valuation Factors In Pakistan
Several factors determine a land valuation in Pakistan. The location is the most critical factor, considering the physical and socioeconomic characteristics of the property. Soil composition is another important factor, categorizing land into solid ground and filled land. Solid land is more valuable as it is natural and fortified, while filled land requires additional foundation work during construction. The price of surrounding areas, known as comparables, also influences land value. Accessibility and land use also play vital roles in determining land value. Overall, land valuation in Pakistan follows similar principles to global real estate markets, with the only difference being that state valuations are significantly lower than market values.
Valuation Factors In Pakistan
Several factors determine a land valuation in Pakistan. The location is the most critical factor, considering the physical and socioeconomic characteristics of the property. Soil composition is another important factor, categorizing land into solid ground and filled land. Solid land is more valuable as it is natural and fortified, while filled land requires additional foundation work during construction. The price of surrounding areas, known as comparables, also influences land value. Accessibility and land use also play vital roles in determining land value. Overall, land valuation in Pakistan follows similar principles to global real estate markets, with the only difference being that state valuations are significantly lower than market values.
Property Valuation Methods
Regarding valuing investment properties in Pakistan, various methods can help make informed decisions. The following valuation methods are commonly used:
Sales Comparison Approach:
This approach involves comparing recently sold or rented properties with similar features in the area to determine the property’s value. While not entirely reliable due to different buyer preferences, it provides a base value for the property.
Income Approach:
This method focuses on the potential income of commercial properties. It uses the annual capitalization rate (cap rate) to calculate the property’s value based on net operating income. The cap rate represents the expected return on investment.
Gross Rent Multiplier (GRM):
This method is similar to the income approach but uses gross rent instead of net operating income. It calculates the value of a rental property based on the gross rent and applies a multiplier to estimate the property’s value. The GRM is determined by dividing the property’s sale price by the gross annual rental income. This approach is commonly used for residential rental properties.
Cost Approach
This method determines the value of a property based on the cost of replacing it. It considers the land value, construction costs, and depreciation. The cost approach is commonly used for new or unique properties where comparable sales data may be limited.
Development Approach
This approach is used to value undeveloped or underdeveloped land based on its potential for development. It takes into account factors such as zoning regulations, market demand, infrastructure availability, and development costs.
Residual Land Value Method
This method is primarily used for valuing land that is part of a larger development project. It calculates the land value by subtracting the total development costs and desired profit margin from the estimated future sale value of the completed project.
Valuation by Comparable Transactions
This method involves analyzing recent sales transactions of similar properties in the same area to determine the property’s value. It considers factors such as location, size, condition, and amenities. This method is commonly used when there is a lack of reliable market data or when other valuation methods are not applicable.
Investment Analysis
This approach involves assessing the property’s potential return on investment by analyzing factors such as rental income, operating expenses, financing costs, and market trends. It helps investors determine the property’s value based on its income-generating potential.
Conclusion
Accurate property valuation is crucial for various purposes in the real estate sector in Pakistan. While the current land valuation system faces challenges and lacks transparency, there are various methods that can be employed to determine property values.
It is essential for the government to implement measures to improve transparency and accuracy in land valuation, which would not only benefit investors and businesses but also contribute to the overall growth and stability of the real estate sector in Pakistan.
