FCC Sets Aside 'Deemed Income' Property Tax: Positive for Real Estate, Cement, and Steel Stocks

What the FCC decision changed for property taxation

In a significant development, the Federal Constitutional Court (FCC) has set aside Section 7E of the Income Tax Ordinance, 2001. This section, introduced in the Finance Act 2022, allowed the government to levy a tax on 'deemed income' from assets and property. Essentially, it assumed that individuals holding immovable property earned a certain income (5% of the fair market value) from these assets, even if no actual rent or profit was generated, and then taxed that assumed income. This measure was widely criticised for increasing the cost of holding property and discouraging investment in the real estate sector.

The FCC's ruling means that this 'deemed income' tax is no longer applicable. This removes a notable financial burden for property owners and potentially makes real estate a more attractive asset class for investors.

Why it matters for real estate and construction stocks

The removal of the 'deemed income' tax is broadly positive for the real estate sector. By reducing the cost of holding property, it could encourage greater investment and activity in the property market. A more vibrant real estate sector typically translates into increased demand for construction, which directly benefits industries that supply building materials.

For companies in the cement and engineering & steel sectors, higher construction activity means greater demand for their products. This can lead to improved sales volumes and potentially better pricing power, ultimately boosting their revenues and profitability. While the impact on banks is less direct, a healthier real estate market can contribute to overall economic stability and potentially stimulate credit growth in related sectors.

Which stocks, and why

Several companies on the PSX are likely to see a positive impact from this decision:

Cement manufacturers such as Lucky Cement, Maple Leaf Cement, Fauji Cement, Kohat Cement, Cherat Cement, Pioneer Cement, and D.G. Khan Cement stand to benefit. Their core business relies heavily on construction demand, and any policy change that stimulates real estate activity is a direct positive for their sales volumes and capacity utilisation.

Similarly, companies in the engineering and steel sector, including Mughal Iron & Steel, International Steels, and Amreli Steels, are also poised for a positive impact. As suppliers of rebar and other steel products essential for construction, increased building activity will drive demand for their output.

For commercial banks like Habib Bank, United Bank, MCB Bank, Meezan Bank, Bank Alfalah, Bank Al Habib, National Bank of Pakistan, Askari Bank, and Faysal Bank, the impact is more indirect. A more active real estate market can lead to increased demand for mortgages and construction financing, which could contribute to their loan books and overall economic activity. However, this is a broader economic ripple rather than a direct, material boost to their core earnings from this specific tax change.

What to watch

Investors should monitor several indicators to confirm the impact of this decision. Key data points include trends in property transactions and registrations, which would reflect increased activity in the real estate market. Additionally, tracking cement dispatches and steel sales volumes in the coming quarters will provide concrete evidence of a pickup in construction activity. Any announcements regarding new construction projects or government initiatives in housing could also signal a positive shift.