Building two houses on one foundation: A dual approach to the housing crisis

As we are approaching a new era in the history of Pakistan it is important to address those issues which have obstructed future development and progress.

One of these areas is the continued and unrelenting losses which certain state-owned enterprises are currently hemorrhaging which take away valuable resources from the economy..

What relevance does this have to a property blog? The shortage of land for development contributes to the housing shortage, the alleviation of which requires construction of between 1-1.5 million new homes a year depending on what survey you are reading. One of the major reasons for such shortage is the absence of social housing or state built affordable housing. Social housing is important as the price of land is considered prohibitory for a large section of the public. Approximately 60% of Pakistanis cannot afford housing at the prevailing market rates. One of the reasons for the high price of land can be attributed to a shortage of land for development. Quite simply, we cannot build enough units for the necessary demand, and those properties which are being built and sold are, in part due to high land prices, unaffordable to 90% of the population.

The Federal and Provincial Governments, SOEs and municipalities have significant land holdings. The new Federal Government is in the process of exploring the possibility of selling off Federal Government owned properties for the purpose of raising revenue to retire debt. Leaving that to one side, in this article, I will focus on how we can release land and defunct properties held by SOEs to increase the amount of available land for development to build more homes.

Nowhere is this issue more apparent than in our cities.   It is in the cities where the housing shortage is most pronounced. According to the National Report of Pakistan, 2015 for HABITAT III issued by the Federal Government Ministry of Climate Change:

Pakistan is the most urbanized nation in South Asia and its urban population has risen from 32.5% in 1998 to 40% in 2014. If current trends of rural to urban migration continue this share, will exceed 50% in 2025.

The challenge of providing homes for such a rapidly urbanizing population is made more difficult by the policies of local authorities and their control of urban land within Pakistan’s cities. According to the World Bank’s Policy Paper Making Spatial Change in Pakistan Cities Growth Enhancing 90% of the city land in Karachi is publicly owned and it is widely perceived that local authorities such as Karachi Municipal Corporation are reluctant to release such land for development. The report’s findings are quite damning and conclude:

In consequence, there is a large amount of unused state-owned urban land even when there is growing unmet demand for land.

A large portion of such “state land” is not only owned and maintained by local authorities with little in the way of clearly defined guidelines and criteria but also by SOEs. SOEs own vast tracts of land throughout the country.  The numbers are very revealing. Pakistan Railways owns 167,690 acres, Pakistan Steel Mills owns 19,013 acres. Much of this land is undeveloped and entirely un-productive – but we are not sure exactly how much because no comprehensive audit has taken place, or if it has, it is not publicly available. There have also been many instances where land has been encroached upon by developers as well as other Government entities (Pakistan Railways estimated that 4,120 acres of its land amounting to approximately 89 billion rupees has been encroached upon as of December 2017). While this may be acceptable for certain entities such as Pakistan Railways (a long-standing land bank is necessary for the purposes of future track induction), this does not discount large plots of land and unproductive properties especially within cities which are barren or have decaying buildings used by SOEs in prime locations.

Furthermore, there should be clear directions and guidelines on how to dispose of any non-productive land or land that could be used in a more socially and commercially viable way.

These are my proposed solutions:

1. A comprehensive independent audit of all land and property owned and maintained by State and Provincial Government owned entities including SOEs . This should include an analysis of all developed land, vacant land, and any land reserved for development. A report should be prepared setting out all land holdings of government entities, including SOEs. Unproductive land also includes offices in prime locations in urban areas, the sale of which can raise significant funds. Such offices can be relocated at reduced cost to other areas at a fraction of the cost.
2. The management of the SOE should be given the opportunity to present its case and respond to any report. The final decision and evaluation on any sale should however rest with the federal Government (for federal entities and provincial government for provincial entities) possibly in the form of Sovereign Wealth Fund (SWF) to be set up by the incoming Federal Government to improve state-owned enterprises.
3. If the above steps reveal a significant and valuable land bank, we should proceed towards the sale of the land.
4. Sale of land and properties should be based on the following considerations:

• Retire debt (Federal and Provincial) and mitigate losses of SOEs as part of a larger comprehensive strategy to be devised and implemented by the SWF.
• A portion of land should go towards low-cost and/or subsidized housing which enables customers to purchase and/or lease units at subsidized rates. This could be facilitated as part of a broad-based low cost-housing finance strategy which the incoming Government is currently formulating.
• The remainder of the land should be sold to private developers for the purpose of maximizing revenue, in a fully transparent manner. This could include public auctions to the highest qualified bidder.

5. SOEs should not be allowed to become property developers and/or landlord but be fully divested of all land holding as well as exert no operational or management control of any developments built on the sold land/properties.
6. All issues regarding evaluation of property and sale of land should be the responsibility of a dedicated real estate regulator established by the Government of Pakistan. Where possible the assistance of private consultants and private parties should be used as part of the evaluation and sale process.
7. As a general rule, all land sold to private developers should be sold on freehold basis. This will increase the marketability of such land. This will attract significant value to any property bought and sold. The example of Eighteen shows that developers can sell at a premium if they are selling land and property on an unencumbered freehold basis.
8. Full-scale privatization of the SOEs will not in itself derive the best market value of the land. Selling off land and property separately will yield a greater value as such sale is based on property market considerations and not the overall valuation of the SOE.
9. All construction activities of developers should be strictly monitored to ensure that the completed property is in accordance with the plans approved by the relevant real estate regulatory authority.
10. As part for a larger incentive package for developers, certain financial incentives should be granted to developers. This should include tax breaks, reduction of transfer fees, stamp duties, project registration fees etc. The nature and extent of such concessions will depend on whether the developer is building social/affordable housing or a standard commercial project. This incentive package should be in addition to any such package included in any future Housing Policy.
11. As far as possible new homes should be constructed within the cities or on brownfield sites (i.e. land that has been previously developed or been constructed on), thereby reducing the need or incentive for developers to utilize precious agricultural land for new housing societies. Also developing brown field sites will cost less than green-field sites, as the costs of connecting roads and other essential infrastructure will not be significantly less than areas which are further afield and remote.
12. The increase in significant number of housing stock onto the market could reduce the supply and demand shortage and potentially reduce the overall cost of property.

The above are good faith suggestions based on my knowledge and experience, and I welcome all comments and critiques in this regard. Pakistan is at the crossroads of its development. There is a need to use all available resources, especially its land to develop the economy of the future which Inshallah will benefit all Pakistanis and not the chosen few. Using our immense land bank in a fair transparent and regulated manner, could provide a much-needed catalyst to solving two longstanding problems at the same time.