Real estate bubble ready to burst? FAQ Session
Real Estate Bubble | FAQ Session
A real estate bubble or property bubble occurs periodically in local or global real estate markets and typically follows a land boom. A land boom is a rapid increase in the market price of real property such as housing until they reach unsustainable levels and then decline. This period, during the run-up to the crash, is also known as froth. Speculative trading in Pakistan real estate has always been dependent on amnesties and relaxation in the Government policies. When the Government announced the construction Package in 2020 to mitigate the economic effects of Covid-19, it was clear that property will take a sharp uptrend. This is exactly what happened and in a short period of one year, we have seen prices gain at least 50 to 60% in most areas.
Income source amnesty finally ended on 30th June 2021, however it was not the only factor at play. Decreased taxes, relaxation in capital gains tax, and depreciation in PKR also played a major role in the formulation of this uptrend. Right now we stand at a very important junction and we need to reanalyze the trading strategy we have been following for the last year.
I am a strong believer that every trade opportunity is based on logical conclusions and at the end of the day, the logic prevails. So here is a list of few questions you may be asking yourself regarding your real estate investments.
Q1 – Will the property prices continue to rise further with the same momentum?
Ans – Short answer is NO, property prices have already shown a record high in the past year and real estate has coped up on the deficiencies of the previous years. Investors are especially wary of this fact and have started to shy away from investing further in hyped-up areas. At best we may see a 10% increase per annum from hereon. However, the chances of correction are greater at the moment.
Q2 – There is still a huge demand for plots although as per your comments investors are not buying, so who is?
Ans – This is true that the demand for plots still exists in the market but it is due to the greater fool theory at work. The investors are making an exit while the inexperienced real estate investors are jumping on board. It is the fear that the prices may rise further and they want to lock in on while they still can.
Q3 – What is the profit risk assessment if someone invests in plots or files right now?
Ans- In my opinion, the profit-risk ratio stands at 70:30. There is a 70% chance that the market may stall or enter a correction phase, while there is a 30% chance that the prices may continue to rise by 10 or 15% in 2021-22. Although there are some lucrative areas that still exist if you are interested in investing in plots and files.
Q4 – What are the lucrative areas where investment is still feasible in your opinion?
Ans- We have seen that real estate continued to grow even during a downtrend in certain areas where infrastructural development was taking place. Places like DHA Peshawar and DHA Multan showed phenomenon growth regardless of the time frame. It is because of the fact that once real estate is being developed it acts as value addition and therefore prices grow higher regardless of a downtrend or an uptrend.
Q5 – DHA File prices have peaked recently, do you suggest investing in files at this time?
Ans- The biggest risk you can take right now is investing in DHA Files at these prices. You must remember that even when the market is stable file prices remain the most volatile. I would never personally make a bet on files as their prices can be easily manipulated. Files are otherwise not on the list of my favorite investments unless they are being offered at a very low price. The unpredictability during location balloting is an additional huge risk and in order to trade them effectively, you need to be a savvy investor. I, therefore, suggest that you should wait for a correction before trying to invest in any kind of file.
Q6 – What is the best investment one can make today?
Ans- In my opinion any place where infrastructural development is in full swing should still be attractive and safe for investments. Value addition always helps real estate prices no matter what cycle we are in. The biggest advantage however goes to construction projects and high-rise which have gained a huge advantage over plots and files since the Government income source amnesty is still applicable to them till March 2023.
Rental properties are another evergreen option that you should consider for a safe and steady source of income.
Q7 – What is your investment advice for expats?
Ans- Expats are the easiest target for investors who are now in the exit process. The process is simple, the local market investors start to purchase plots or files earlier in the cycle and thus increasing the price. This causes fear among expats, once they come to know of the increase in price. The fear to miss out on further gains and crowd mentality makes them take entry at higher prices a bit later in the cycle. So although there is no threat to the capital investment, the inability to gain much further is going to force them to hold investments for a relatively long time.
Q8 – Which is the best option for expats, speculative trading, construction projects, or rental properties?
Ans- While speculative trading may seem very lucrative, it is not a practical option for expats. The window for speculative trading is usually short and most of the times expats are unable to achieve the right time to sell. This is further reinforced by the fact that due to Covid-19 restrictions worldwide, traveling is even harder nowadays. Expats who have invested in construction projects or rental properties have been the biggest winner in real estate in the past.
Q9 – Which is the best construction project in your opinion?
Ans- Just like societies you need to study the developer’s plan, launching price, design elements, and amenities of a building. These factors will decide the future prospects and gains you may expect in times to come. Gulberg Lahore will remain the hotspot of apartments and high-rises in Lahore, followed by DHA and surrounding areas. Hotel rooms are a big no in my opinion, whereas serviced apartments or hotel apartments offering rental will remain the biggest gainers in times to come.
Q10- What is your final recommendation?
Ans- Purely from an investment point of view, it is time to take an exit from plots and files and pocket your profits. Move your investment to construction projects and rental properties especially if you are an expat. Local investors can still take advantage of new society launches where prices are attractive or areas like DHA Multan which still hold a good investment potential.
There is yet another avenue that could be profitable, I never thought I would say that but even buying a house will also benefit you quite a lot. I expect construction prices to rise in the future by at least 20% or more, this will eventually benefit all developed houses, commercials, and apartments in general.
Capt (Retd) Shahnawaz Yaqub Bhatti
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Thanks for input but strongly disagree that correction is coming this year. There are few things that need to be looked at to see if market will remain stable, go up or down. Inflation rate, volatility of exchange rate, interest rate, remittances and political situation. Inflation rate is at a much lower rate than pre corona levels and stable now since last year (very good for real estate). Exchange rate is relatively involatile, yes it is going up and down by few rupees but not being heavily devalued or appreciated like case was in 2016 crash or previous crashes when currency heavily devalued.
Then, comes the biggest factor of interest rate. Interest rate is 6% lowest it has been in years. If you look at every boom of real estate, interest rates were always at lowest points in that period. Govt and State Bank have made it clear they expect to keep interest rates at that level until 2022 budget at least because of growth-oriented economics. So local investors will keep money in real estate instead of banks (gold is already a bad investment now). Remittances are at a record high and look to be continuing in same manner. Political situation of PTI is excellent, recent downfall of PDM and IK’s sweep in Kashmir show that there is political stability. An additional point is that amnesty scheme exists till mid 2023 to construct houses so high construction rate will keep prices going up.
And last point is that Imran Khan is a poster boy for Pakistan’s economics now which is important because people, investors and business community believe in him. Investor confidence is high simply because of people’s trust in IK.
Minor correction of 1-2% don’t matter but I firmly believe that until 2022 budget, prices will slowly go up or remain stable because of all the factors above. And if you look at history of real estate, there has never been a boom period of less than 3 years and more than 4 years. We are only into the 2nd year of the boom period right now so we have a lot of time to relax and enjoy profits before exiting market.
Also some news: Projects in pipeline: Tarin agrees to review SCP extension request – Pakistan – Business Recorder (brecorder.com)
Someone just whatsapped this to me. If amnesty is extended, then for sure market is going to go up.
It is clear that even if it is extended it will be for projects in pipeline not new ones , the ones which have been processed but could not be completed, this has nothing to do with plots and files.
The wording is uncertain. From what I understood, project in the pipelines mean they were sent for approvals but long delays in approval process meant they were not given go ahead by deadline for amnesty scheme.
Anyways, lets see what happens. Just the fact that they are discussing extending it is good news for construction and real estate.
That is my point as well, whatever way you may interpret, slow increase 10% or less in price or correction or even if prices remain stable means you should not invest further for the sake of investment.
I don’t think correction is possible at all for this financial year. Point of my comment was that every factor and situation affecting real estate is positive. Then, budgets are always make or break for the market and budget for 2021-22 was positive news for real estate. I don’t see any chance of a real correction until 2022 June now when next year’s budget will be announced. PTI Govt has been very pro-construction and real estate so far.
And slow growth is always good as it means that the growth is natural instead of speculative or hyped. If returns are coming, I will hold any property until I clearly see some of the factors I mentioned going red. And of course one must wait for every full information to arrive so definitely no one should be selling any property (unless urgent need for funds) until amnesty extension news is confirmed.
Imlaak is based on the foundation of consultancy for those who need help with real estate investments. Many times in the past these people ended up losing millions after buying real estate at hyped-up rates.
The unfortunate reality is that most experienced investors use the inexperience of others to their advantage and create confusion and noise in the market.
Income source amnesty is gone for good, even if some projects get a go-ahead it is not for the entire real estate market.
Construction projects are not affected at all as income source amnesty is applicable till March 2023.
10% increase per annum is not at all an attractive figure, it hardly beats inflation and PKR depreciation.
We’ll have to wait and see what happens with amnesty extension, cannot say for certain where it will be applicable. Waiting a week or two for the news on this won’t be a huge deal. Anyways, right now is not the time to sell as Muharrum is about to start, chances are you will get poor offers. Even if you’re encouraging people to sell, instruct them to correctly sell after ashura.
As a local investor, 10% per annum is better than nothing. Much better than keeping money in the bank for now and far, far better than gold. And it does enough to combat inflation. I don’t see what would be the alternative avenue of investment other than real estate right now. As I mentioned, if you’re getting returns, why sell? You only sell when you seriously see things going south and right now, I only see them staying same or getting better. Because in a year or two, there will come a time where the market will take a nosedive and remain in that state for 3-4 years where you will see little to no profits.
As for investors that lose money, well they’re perhaps too emotional about their investments rather than logical. Gullible people can always educate themselves by keeping themselves up-to-date with the market and using maximum information to make optimum decisions. I’ve been investing in market for almost two decades now and there is a method to time the cycle correctly. It takes time to learn it.
Very comprehensive input sir..