The real estate dilemma in Pakistan

A common topic of conversation in any household is real-estate however when you dig deeper and ask why one should invest in this sector the answers are conflicting and go against fundamentals of real-estate valuations. Development should be encouraged within an economy such as Pakistan but resources should be diverted to ventures which increase productive capacity. The country’s low productivity is responsible for the stagnation of manufacturing , balance of payments and lack of quality jobs.

As one travels from Islamabad to Lahore on the famous Grand Trunk road an individual can observe endless advertisements of housing projects. Investment in plots is counterproductive for the weakend economy as capital is diverted and the problem is so dire that the manufacturing sector finds it in its best interest to invest in real estate rather than invest in innovative practices. Albeit not all real-estate ventures are unsuitable for investment, one such housing project is the DHA. It’s a well known fact that DHA is administered professionally and there is an element of trust between the consumer and provider however if one digs deeper the reason for it being a sprawling community is due to it being backed by certain real-estate fundamentals. For instance a retired military officer has a disposable income to afford certain amenities offered by a housing project albeit one can argue whether the valuations are on the high end.

Upon further investigation it was highlighted that these housing projects have not faired well due to the lack of a disposal income among the masses and overseas Pakistani losing confidence in the real-estate market. In past decades growth in the sector was observed significantly due to investment by overseas considering the allure of opulent living spaces however a lack of regulatory oversight has contributed to fraud and hindered overseas from investment. The real-estate market in upper central Punjab was fueled in the past three decades by overseas who invested primarily so they had a connection with Pakistan and wanted to have a home in Pakistan however like any migration trends real-estate investment comes to a halt after the subsequent generations feel a disarray with the home land of their forefathers and assimilate to the culture of the migrated country. A similar trend was observed around the turn of 20th century when migration took place from European countries such as Ireland and Italy to the United states of America.

The second question which arises is why these empty plot of lands are being valued by real estate developers on the high end. While the price increase is attributed to unmet demand however the speculative activity and the belief that property will keep increasing have also contributed to the inflated property prices. A glaring example is of my home city Islamabad. This time around I spent some time to explore and understand the salient features of the economy and real-estate sector of Islamabad and I was Gob-smacked to learn the
perceived property prices in certain areas. I say “perceived” as valuations used within real-estate transactions in most cases are not backed by a certified professional.

Neither Islamabad promises quality jobs nor it’s the financial capital of the country, nor there is promising manufacturing sector. The major economic activity I observed was entertainment such as fine dining , cafes and tea houses and the main driver for these eatry’s were not tourist’s but local residents. With such a situation and limited disposable income , the housing pricing in the capital is a bubble and to some extent is fueled by ill-gotten wealth. With the real-estate market playing in this manner it has pushed housing prices in established areas beyond the life time income of an average citizen. To note the boom in the real-estate sector has caused upward mobility of many families who either had generational wealth or were at the top of the income distribution.

A sector which is co-related with real-estate is construction. This sector is the backbone of the economy as it has contributed to the development of the country however the question is whether the growth was organic and sustainable. Growth of the big construction giants in the country has been based on government contracts & with the government facing a deficit these companies will face cashflow shortages. Furthermore large construction projects have a timeframe of 5-10 years and with rising inflation coupled with the government running deficits there would be a push for escalation costs. This in turn will force these companies to enter the already crowded residential construction market or resort to the selling of assets.

Considering the nature of the industry a central regulator needs to be formed by the government which can govern the relevant authorities such as CDA & LDA. The absence of an authority has resulted in practices such as “Bayane-pe-Bayana” being fostered which incentives an investor to make quick money. With the development of a central regulator it will allow the government to re-divert resources from inefficient and outdated institutions, deterring the mushrooming of unapproved projects, maintaining consistent quality standards across cities & curbing this practice of “developing for the sake of development”. An individual who grew up in Islamabad was in awe of the greenery however in the past few years it has transitioned into a concrete jungle with housing projects being set up right left and center. With a central regulator real-estate development can be evenly spread across the countries rather than focusing on few tier 1 cities.

If the real-estate sector has to perform at its potential the financial services and insurance sector will need to be play its part. The banking sector will need to free up capital so it can It facilitate financing for home buyers and offer capital for real-estate developer. However with the current “perceived valuation’s” a salaried employee can not afford to take up a mortgage.

This is not simply an issue pertaining to economics as there is a moral dilemma involved as-well. The nature of a Pakistani household is such that parents build a house big enough for their offspring to live alongside however their offspring aspire to leave the country for better opportunities & in most cases do not return to the country leaving their old parents in a huge house.

The question arises “What good is the property when the offspring don’t even live with their parents & enjoy the property which their parents built”

Furthermore a few players who have pocketed huge sums of money at the expense of the general population do not even live in these housing projects. If these projects are so remarkable as advertised then why don’t the developers reside in these housing societies.

The last dilemma is “does the country want the youth being pulled into this sector and being incentivized into becoming property dealers rather than white collar professionals such as Scientists, Doctors & Economists”. In my personal opinion I would rather want to see an economist who can contribute to the dwindling economy or a scientist who can develop patents.