By Nasir Jamal
Pakistan’s real estate market is expected to regain this year some of the sheen it had lost in 2014.
Last year had proved to be a very dull year for the property market because of security and political conditions, as well as other inherent factors that hampered growth of this sector, said Akber Sheikh, a major developer from Lahore.
Like him, some others are hopeful that the market will ‘recover some of its momentum’ seen in 2013 in the wake of a smooth transfer of power from one elected government to another.
“Returns on investment in real estate/property were lower than the expectations of investors, as the market moved much slowly than in 2013,” Zeeshan Ali Khan, CEO of Zameen.com, a property portal, said.
“At certain points during the year — for example, during and after Ramzan — the market even came to a complete standstill for a while. But despite the problems, the year saw excellent growth in some areas and became stable.”
‘High interest rates are hampering growth of the property sector and are detrimental to the construction and the 30 allied industries. They are also the reason why our housing finance-to-GDP ratio is below 1pc’
The low return on investment means many Pakistanis are investing in Dubai’s real estate. According to a leading Dubai property portal, Pakistanis invested AED3bn in Dubai in the first half of 2013. This investment burgeoned to AED4.5bn in the first six months of last year.
“For Pakistanis, investment in Dubai property amounts to hedging against currency devaluation, as the Dirham is tied to the dollar; so they are virtually investing in dollars. Besides, the return on investment and equity are much higher than in Pakistan,” Zeeshan said.
Most investors and developers consider political uncertainty and poor security conditions as the biggest factor behind last year’s ‘slower growth in the market’. Yet, they say these factors are temporary. Several regulatory and other factors are also stopping the property market from realising its full potential.
“Lack of transparency in land records, very high interest rates, and weak legal and regulatory protection for investors are a few major factors hampering growth of real estate in Punjab in particular and the rest of Pakistan in general.
“If we want to attract investors in this sector, we will have to create a more transparent market through digitisation of land records, establish a strong and functional regulatory authority, develop a mortgage market, and bring down interest rates to the regional level,” Zeeshan argued.
Mortgage rates in Pakistan are in the range of 15-18pc, compared to 2.15pc in Hong Kong, 2.7pc in Japan, 7-8pc in China and 8-12pc in India. “High interest rates are hampering growth of the property sector and are detrimental to the construction and the 30 allied industries. They are also the reason why our housing finance-to-GDP ratio is below 1pc, whereas in India it is 9pc.
“Even lending by the House Building Finance Corporation is available at 16pc. Interestingly enough, India had followed our HBFC model and established its own HDFC. But it has grown much faster than Pakistan’s HBFC,” he said.
Additionally, the developers must be facilitated by government agencies. “The government should create a fund like a Real Estate Investment Trust to support private developers to spur growth in the property market,” the co-founder of the property portal said.
Most agree that Pakistan’s real estate market is cheaper than India’s — as far as urban property prices are concerned. For example, property prices in Islamabad are about 30-40pc cheaper than those in New Delhi. “But if you go to suburban areas, property prices in Pakistan may be higher than those in India,” Zeeshan added.
The fact that property prices in Pakistan are still affordable as compared to India is one of the many reasons why our rate of urbanisation of 3.2pc is higher than India’s 2.01pc. However, India has done a good job at increasing housing supply by adopting a more liberal mortgage policy, low interest rates and supporting its private sector.
Meanwhile, property rentals have grown faster than real estate prices in the last one year. “Rentals are driven up by the gap between demand and supply. Property in general and land in particular is an investment product and investors can afford to hold off their investments and wait and watch. Tenants, on the other hand, unfortunately don’t have that choice,” Zeeshan said.
He said the average rental yield in Pakistan is between 3-4pc. “Even high rental yield areas like Johar Town, Lahore, and Clifton, Karachi, offer a return of about 5-6pc per annum, meaning it will take an investor about 20 years to recover his investment in terms of rental income. This is also why a lot of investment goes into Dubai because the rental return there is about 8-10pc.
“Property is a very strong investment product, particularly because ours is a cash-based market that is largely risk-free. Almost everyone has a real estate concern, and this includes people from all walks of life; businessmen, government employees, bankers all invest in real estate.”
A major chunk of investment in real estate is coming from overseas Pakistanis. “For the majority of overseas Pakistanis, property is the investment of choice. Pakistan received $16bn in remittances in the last financial year. Of this, $2-3bn was directly invested in real estate. So anyone who has some savings prefers to invest in property since the market has never seen a crash like the stock market,” he concluded.
Originally Published in Dawn, Economic & Business, January 12th, 2015