^{Korangi road-Karachi Pakistan [photo credits to hassamq7 [1] via flickr]}

With an estimated shortfall in housing construction of 270,000 units, it would seem that Pakistan is ripe for foreign investment in its real estate market.

Problems facing the property sector in Pakistan are very low rental yields, adverse tenancy laws, absence of title to property and high property taxes. However, Pakistan’s Securities & Exchange Commission (SECP) has been considering the regulatory framework ^[2] for Real Estate Investment Trusts since 2005. The latest news is that the SECP has made public its draft recommendations ^[3] for the framework. The SECP has now embarked on a consultation exercise with the property sector on the subject but there still doesn’t appear to be a target date for the advent of REITs. Furthermore the draft recommendations do not seem to shed any light on subjects such as foreign and non-resident holdings in REITs and the repatriation of dividends.

According to the SECP’s “Promoter’s Guide” foreign corporations are permitted to take controlling interests in infrastructure and industrial zone investments but housing and construction investment regulations require the the title of the property is lodged with a locally incorporated company. Whether that entity can be a wholly owned subsidiary of a company incorporated abroad is not clear. The Islamabad, Karachi and Lahore Company Registrations Offices provide advice on incorporation for foreign owned entities.

An alternative route into investment in Pakistani real estate available right now would be to buy shares in a company like Emaar of Dubai, which is developing residential properties close to Islamabad (Highland & Canyon Views) and Karachi (Bundal, Buddo, Crescent Bay). Clearly Emaar with its international profile is not a pure Pakistan gambit but it does offer considerable expertise ^[4] for the investor. The company also owns hotels in Pakistan and plans retail investments. The occasion of Sheikh Mohammad bin Rashid al Maktoum of Dubai’s visit to Islamabad in June last year was used to announce a raft of investment plans by Dubai Islamic Bank and Dubai World. Indeed, a good understanding of the principles of Islamic banking would go a long way in helping astute investors to profit from the Gulf interest in the country. The UK private equity house, Hamilton Bradshaw, the owner of Benjy’s sandwich bar chain, has also shown an interest ^[5] in developing real estate interests in Pakistan.

The latest comment from Pakistan suggests that the property market is experiencing something of a speculative bubble ^[6] is in progress. Certainly the Karachi stock market has had a turbulent time recently. After rising steeply from January to the beginning of July, it has since experienced a steep correction. The extent to which Pakistani real estate investment is impacted by changes in stock prices is not well researched but investors should weight out the current global uncertainty and the repeated rumours of a return to complete military control.