Pakistan real estate price correction PKR and USD 2016 till 2019
Pakistan real estate correction PKR and USD 2016 till 2019
Real estate in Pakistan has been slow since 2016 when the Government announced tax reforms. Prices stumbled shortly afterwards and a steady decline set in and like all property bubbles in the past this one also finally burst. This is the nature of things in our world, for every rise there is a fall and it is so true when it comes to real estate or stocks or for that matter any kind of trading market.
The fact of the matter is that the prices will never keep going up in a single line rather they form a pattern of highs and lows.During an up trend it makes higher highs and higher lows and in a down trending market it will form lower highs and lower lows. Property has been in an up trend ever since we set foot in this world and with growing population & economy it is expected to get more expensive throughout the 21st century.
What is real estate correction
In terms of stocks etc, a correction is generally defined as a 10 percent or greater decline in the price of a security from its most recent peak during an uptrend. The same is applicable when it comes to real estate because some times due to higher demand the property gets over valued and at one point you will start seeing less buyers and than a correction cycle initiates resulting in prices coming down till it reaches around its actual assessed value or a state of balance. In terms of property this cycle may take a few years and price will eventually settle down at a much lower price than the peak.
In time due to negative sentiment in the market the demand lowers and so does the price because of general rule of supply and demand. Eventually it gets undervalued and it is at this time that the informed investors starts investing again. This renewed interest starts to change the sentiment of the property and eventually lift the price up. In time more and more investors join in and the property price again rise higher than the actual assessed value and we finally start seeing lack of interest from investors which eventually pushes the market into next correction.
This entire process is not as simple as it looks as you will see that some sectors in property market will continue to grow even when in general the property is in recession. This happens because every sector has its own cycle as well and it may happen that while one sector is undergoing correction the other sector may be preparing itself for an up trend.
Recession is the best time to invest
It is a proven fact that recession is the best time to invest as it offers you lowest possible risk and a huge upside opportunity. The most important thing however is your timing as that will determine your overall rate of interest. The easiest way to analyze that is to see how much the property prices have fallen.
This requires a strong heart and mind with a deep understanding of the market as psychologically while we were ready to invest in the same property at a higher price earlier, now we feel that we should not even when the property is a lot cheaper. We being social animals instinctively tend to follow the crowd as moving with crowd makes us feel more secure. However when it comes to investments this is not really applicable. Successful people have understood this and use their mind rather than instinct to make a decision and while majority is buying they tend to sell and when majority is selling they take it as an opportunity to buy cheap.
The property is undervalued
The real estate prices have been down trending since 2016 June in Pakistan, however in the year 2018 the huge PKR depreciation of 28% against USD has resulted in the under evaluation of the real estate sector. Pakistani real estate sector is highly dependent on Expats and while the local investors do not see a huge downside so far in term of PKR the Expats are starting to see an opportunity because the prices have come down a huge percentage in terms of USD.
The calculations below are for some sectors of real estate and are based on actual transactions and not demands. Also we have only accounted for certain portions within that sector which we consider are suitable for investment rather than entire areas as under :
- MB front commercials accounted for in our fact sheet are between 1 to 125.
- Mb back commercials from 240 to 358.
- Phase 8 proper 1 Kanal plots of S,T,U,V,W and X.
- Broadway 8 Marla commercials on back only.
- Phase 8 Z Ivy green only 5 Marla in Z6
Now this is very interesting as you can see that while some sectors show positive growth in terms of PKR but are negative when it comes to USD and there are those which are negative both in PKR and USD. This is also important to notice that regardless of an over all perception of a negative real estate there are sectors which have performed, as you can see a 90% gain in DHA Peshawar and some other areas of DHA Lahore performing in terms of both USD and PKR.
Recommendation
If you are a long-term investor targeting 3 to 5 years time frame than this is the best time to invest specially if you are an expat. Broadway commercials in Phase 8 and 4 Marla commercial files of DHA Lahore are one of the top options in this scenario.
If you are a mid-term investor looking for 1 to 2 years time frame than you should look at DHA Multan and DHA Peshawar.
If you are a short-term investor than you can consider DHA Multan for a one year trade or else I will suggest that you wait for the market sentiment to change.
It is hard to predict an exact bottom or when exactly we will see the market to start a positive uptrend again, however in my personal opinion we may see optimism to build up in 2020 and 2021 and markets reaching peak around 2025. However this is a general sentiment and the performance of various sectors within the next up trend may vary greatly according to market demand and supply.
Captain (Retd) Shahnawaz Yaqub Bhatti
Founder and CEO at Imlaak
Mob: +92 333 1616160 ( WhatsApp)
Expect increase in DHA and Bahria prices in the current year and after two years it will hit 60-70 percent increase. Since Malik Riaz has dodged the bullets of court saving many people with him. And yes of course many hard earned people s money. These two are the market driving ones and largest property conglomerate in Pak. Plus if Property dealer or property business associations are able to get any pro property policy from government then expect more increase.Property and Gold prices are ever green investment compared to USD. We will soon going to see a fall in USD against PKR. Pro property policies, Non filer being allowed to buy property, seizing those who are storing USD ‘s. Upcoming budget and IMF will harmonize the situation.
US dollar is a huge bubble too. After signing up with IMF, it is bound to become slow and will not increase the way it did in past months. Maximum it ll reach probably around pkr 150 and will fall back. Buying property would be still better than buying dollar or invest in stock market. Many non filers are the people who came/earned from abroad, doing jobs, businesses etc and have proper earning. For filing first time they do not have to prove everything, they need to declare everything. Many of these people are not zardaris or shareefs or the elite who avoid tax. Also keep in mind that population is increasing, so will be the cities.
although i agree with your overall premise that prop market is ripe for investment given low prices … but i don’t get the logic behind linking valuation with dollar … plots are not international commodities pegged to dollar.
I think his focus was more towards expats rather than end users .So thats why comparison was against USD.
Dear Murtaza, USD is the worlds reserve currency , ever wonder why do we calculate foreign reserves in USD? there are two important reasons for giving USD values
1. USD vs PKR determines actual growth or loss in wealth, when USD goes up everything goes up even real estate as well mainly because of reason No 2 but partially because construction and developmental costs increase as well.
2. Expats form the backbone of our real estate economy and they calculate prices in USD, as rightly stated by Syed Hassan. So when expats start seeing an opportunity to invest that can change the sentiment of the market.
Dear Shahnawaz,
First of all, the foreign reserves are not calculated in USD, they ARE actually USD (99%, the rest a few other currencies) which are held by Pakistani banks in their US Nostro accounts.
Now coming to valuing property in Pakistan by linking it to dollar is erroneous in my opinion due to following:
1) as the cash flows that these assets generate are not in USD, they are in PKR. This is not like gold where USD movement impacts the price of the commodity because that commodity is internationally traded on london metal exchange.
2) Secondly, property unlike gold, is not a standard commodity linked to global dynamics. property in any place has its own dynamics and the cashflow that it generates is ultimately linked with the economy of its location. In case of gold the valuation moves with USD because it is traded in USD globally. On the other hand a plot in DHA is not traded globally on an exchange in USD.
3) In case of expats, i agree that they do take into account USD appreciation as a significant factor, but if you are a prudent investor then this is an incomplete approach as you also need to look at the ultimate dollar terms return on your investment and given the fundamental change in pakistani tax regime with regards to property, in the long run it is not going to be an asset where people inflate its market by investing their black money.
What would be really helpful to see from your side is what sort of future rentals do you expect from all the assets that you mentioned in your table and the basis for those rentals so that we can have a sense of the cashflow from these assets and ultimately be able to come to a valuation using a discount rate.
I think you misunderstood, it was not about USD being used to calculate foreign exchange reserves because foreign exchange reserves is not a currency at all, it is all the assets which may include dollars or other currencies as you mentioned and even Gold is a foreign exchange reserve. However we use USD for ease because of its status as Global world currency rather than PKR.
As for your point no 1 and 2, I will explain it in a future blog, how a rising USD can effect real estate.