April 6, 2020 (MLN): The Prime Minister Imran Khan on Friday announced an incentivized package for the construction industry in order to increase employment opportunities in the country in the wake of coronavirus outbreak.
This announcement brought with it a whole lot of hope and reprieve for several investors, a glimpse of which was caught in the performance of stock markets on the very same day. It is an undeniable fact that the construction sector has stood neglected for a very long time, and has been a host to several challenges arising from changes in the economic and regulatory environment.
According to a research report by Arif Habib Limited, factors such as the provision of the money trail, assessment of income and increase in valuation of real estate has really shaped the construction industry for what it is today. In addition, regulations pertaining to CNIC requirement, restriction on the sale of construction material to non-registered clients of over Rs. 10 million has taken a further toll on the sector.
To address all these problems as well as minimize the impact of COVID-19, the Prime Minister has come up with this package which has definitely instilled hope in the restoration of the construction sector.
One of the important factors in the relief package announced last week is the provision of Special Tax for builders and developers by the Federal Board of Revenue (FBR). By virtue of this, the income of builders and developers will be treated as a separate class and will be subjected to a distinctive tax regime depending on the land area i.e. per square foot for construction and per yard for development.
These people will also be allowed to avail tax credit of up to 10x of the tax already paid under this regime. Moreover, except for steel and cement, the withholding tax on all building material shall be waived off.
Aba Ali Habib Securities has also shed some light on the impact this relief package will have on different sectors. According to its research report, the Cement and Steel sectors shall be the obvious winners from it, as the rise in demand for housing resulting from a growing population will positively impact their financial performance.
As of now, the country is facing a housing shortage of around 10 million units, which is expected to rise further in the coming years. And for every 0.5 million housing units, there will be a demand of 7 MTs for cement and 2.3 MTs for steel.
The banking sector will also be one of the beneficiaries, as the package will open doors for facilities pertaining to mortgage financing. With the help of SBP, banks will be able to earn spread over their subsidized loan rates. The Banking sector was previously embroiled in quite a few challenges resulting from lower economic activity and a higher interest rate of 13.25%. Besides, the low availability of housing finance had resulted in gross outstanding mortgages borrowing of just Rs. 103 billion for the CY 2019.
The Allied sectors of Pakistan will also be impacted substantially from the package, as per the research report. The revenues of allied sectors are expected to increase as a result of higher demand for float glass, tiles and ceramics, pipes, fittings, and cables, to name a few. Moreover, the real estate sector will also see a surge in their property portfolios.
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