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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