History of Pakistan Real Estate – Past, Present and Future Part 1

History of Pakistan real estate

The history of Pakistan real estate is a very important topic if we want to learn the real forces at work that affect real estate prices.  Pakistan’s high population growth and rural-urban migration offer huge investment opportunities for real estate. As more and more of the population flock to cities for jobs, real estate prices continue to skyrocket. The real estate sector generates high levels of direct employment as well as generating demand in more than 50 ancillary sectors, such as steel, brick, cement, paint, and other building materials.

According to the most recent World Bank estimates Pakistan’s real estate economy contributes 60-70% of the country’s wealth at around the equivalent of $700 billion. While some other sources suggest more than $1200 billion. It is very hard to estimate the real worth of real estate considering 80% of the wealth is undocumented.

 “The combined direct contribution of construction and housing sectors to the country’s GDP has been consistently higher than 9 percent over the past decade,” – State Bank of Pakistan report.

The old saying ‘as safe as houses’ is still true. Real estate investment is the safest, and also the most lucrative, of investments. Savings provide poor returns and whilst stocks and shares can do much better, is it worth the risk when your money could be wiped out overnight? So, the clever investor knows where there is most profit to be gained.

The Birth of Pakistan’s Real Estate Market

Pakistan’s economy has always relied on real estate. From its inception and independence, the socio-economics of urban migration has driven a requirement for extensive construction projects.  As more and more people moved from villages to the city after independence, real estate investors cashed in for the need for housing and infrastructure to support the new inhabitants.

The upturn of the real estate sector as an industry in Pakistan was initiated from Karachi. The real estate agencies in Karachi were in existence even before the independence of Pakistan. It started with the construction of buildings by Barons and the selling of plots was very rare.

Poor policies and a lack of planning only added to land premiums in urban areas. Where once political instability and lack of government oversight, often crashed the market. With more government regulation, prices are more stable and have marked a prolonged period of consistency.

The 1950’s to 1980s

Karachi saw the first influx of urban migration and a slow and steady rise in real estate. Karachi’s District South became the backbone of Pakistan’s real estate industry. DHA Karachi is created in the ’50s and started to command good investment returns for reasonable prices gaining further momentum in the 1960s.

The market continued to grow with Bhutto’s introduction of an Amnesty Scheme in 1973, which created a real estate boom. However, post-Election riots and a disastrous flood in DHA then crashed the market in 1977. In the same decade Lahore Cantt cooperative society, later DHA Lahore is created.

After a poor economic start of the ’80s, international attention became focused on Pakistan with the onset of the Afghan War. The war attracted moral and financial support from around the world which buoyed the market until the sudden death of then-President, Gen Zia ul Haq in a plane crash in 1988. The ensuing political uncertainty crashed the market once again.

The 1990’s

The nineties played a very important role in the history of Pakistan’s real estate. The ’90s laid the foundation of real estate as we see it today. It started with a slow recovery and property prices flourished from 1992 to 1994 at an average rate. The smart investors understood the true potential of the real estate business. The business of trading plots started to attract people from all over and newer societies started popping up.

After a few years of sluggishness, it gathered pace again by the middle of the decade, only to be hammered down by the disastrous rains and power crisis of 1997. This recession continued till 2001.

Without any proper regulations and taxes, real estate became the biggest tool in Pakistan in the ’90s and 2000’s for those seeking to invest undeclared money.

The 2000’s

The property began to boom after the 9/11 incident, breaking all previous records. However, the bubble burst by 2005. Over-inflated prices ensured the majority of the population couldn’t afford to own their own home. Much of the boom in the ’90s and 2000s is attributed to the participation of white-collared businessmen, un-taxed and undocumented money. The difference between the DC values and actual property increased manifolds during this point and resultantly made real estate a hot spot of undocumented money. In some societies, the DC values did not even represent 20% of the actual values of the asset. This made it easy for people who wanted to invest un-taxed amounts into real estate. The huge investor returns also ensured the continuation of the trend.

The Govt failed to take appropriate action either because of negligence or deliberately. The real estate of Pakistan became tax heaven and speculative trading in plots became the most favored investment. 

The 2010’s

After a slow recovery from overpricing, the market rose once again to surpass all previous records in 2013. Later in the same decade, we saw property reaching new heights by the end of 2015. In 2015, investment in residential property (apartments, houses, and vacant plots) increased by five to seven percent, while in commercial property (including standalone shops, showrooms, retail, and office space), there was an increase of 15 to 20% across Pakistan, despite the levy of Capital Gains Tax, Capital Value Tax and Stamp Duties in the Federal Budget 2014-2015.

In 2016, everything changed as the federal government approved an amendment to the Finance Bill 2001 to regulate the market with DC- approved rates. The Finance Act 2018 introduced important measures to minimize instances of using the property market as a way to avoid tax and also laundering money. This was an effort to clamp down on unregistered and undocumented investments but did have the effect of slowing the market. The Govt started to increase DC values every year to close the gap after years of unchecked growth and tax evasion.

Since there was no action made by the government for years, a large portion of documented white economy investments fell into the grey economy. Instead of investing in the production industry, investors shifted their investments to unproductive plots trading, and the money of investors eventually got stuck.

In addition, the record appreciation of the Dollar against PKR in 2018 & 19 put the market down by at least 50% from its high of 2015-16.

Conclusions

All over the world the real estate industry generally follows a steady growth rate of 5 to 8% per annum. However, while studying the history of Pakistan real estate we learned that during bullish trends the figures inflate up to 40 to 60% growth rate per annum. So why is this? Well, when we analyze the historical data, the reason becomes obvious. The periods of recession are a direct result of over-pricing. The patterns of market trends have remained the same for the 43 years out of Pakistan’s real estate’s 69-year history. There are usually 4-5 years between the peak of the recession and the peak of the boom. The proportion of average increment in prices per annum in populated areas is 4 to 5 percent. However, for unpopulated areas, that is around 9 to 10 percent.

When a recession starts, the prices in populated areas typically fall from 0.5 to 1 percent and prices of unpopulated areas fall to almost 5% or even as low as 50% of the previously increased price. The populated areas represent the genuine end-user market, whereas unpopulated areas became a hive of speculative investments.

The unpopulated/underdeveloped areas such as plots or files more or less have acted like stocks, showing a lot of volatility. While at 3 different occasions in last 2 decades they have given unprecedented gains but for a long period, they have shown either zero or negative growth. Populated or developed areas have remained stable in general and combined with the rental income they have eventually given better returns under all circumstances.

The Government maintained a ‘no questions asked’ policy about the source of the capital coming in, and for decades the sector remained the ideal spot to park black money. This led to the creation of a property bubble with artificial price hikes and a widening supply-demand gap in the housing sector.

Capt (Retd) Shahnawaz Yaqub Bhatti

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