The fake wealth trap of real estate investments in Pakistan | Living in a fools paradise

Be aware, this article is going to change your mindset and your life so read it carefully as we debunk the fake wealth trap of real estate investments in Pakistan. Read this carefully and if you have questions feel free to comment and ask questions.

After almost 10 years of going through various cycles of real estate investments myself, I realized that most of us are not creating any real wealth. So are we living in a fool’s paradise and accumulating fake wealth? This prompted me to do some research and analysis of the previous 15 years of investment cycles to find out what exactly are we doing wrong.

During our search for the truth about real estate investments, we found out that there is a huge difference between returns in USD and PKR. While you may think you have made money in PKR that may not be true in terms of USD. Eventually, almost every other thing in your life and your purchasing power is dependent on the USD and not PKR. This means that if your wealth is not growing in terms of USD, then you are actually not getting any richer.

USD is therefore one of the most important factors of wealth creation. This is especially true for ex-pats who invest in USD and expect to take their returns in USD.

The Dollar vs PKR and Real Estate Investments

Just to understand how important this aspect has been we will select Phase 6, 1 Kanal plot in DHA Lahore as an example and compare its price in various years since 2005 in USD. Most of the real estate investments follow a similar pattern with slight variations.

Year 2005 

1 x USD = 60 PKR

Avg price of DHA Lahore Phase 6 in 2005 =  9 Million  (USD 150,000)

Year 2010

1 x USD = 80 PKR

Avg price of DHA Lahore Phase 6 in 2010 = 6.6 Million (USD 82,500)

Year 2013-2014

1 x USD = 100 PKR

Avg price of DHA Lahore Phase 6 in 2013 = 15 Million (USD 150,000)

Year 2016

1 x USD = 105 PKR

Avg price of DHA Lahore Phase 6 in 2016= 24 Million (USD 228,571)

Year 2019

1 x USD = 160 PKR

Avg price of DHA Lahore Phase 6 in 2019 = 28 Million (USD 175,000)

Year 2021

1 x USD = 172 PKR

Avg price of DHA Lahore Phase 6 in 2021 = 42 Million (USD 244,000)

Long Term Trading

Looking at the USD chart for Phase 6, 1 Kanal plot it is very clear that long-term trading is almost worthless. I know many people who have kept plots in these phases for more than a decade and while you may have beaten inflation or PKR depreciation, you have not created any meaningful wealth.

Most people have this idea that the longer they hold a plot or file the more fruitful it is. Unfortunately, I hate to break this bad news that is not the case. At least the property in Pakistan does not adhere to that law. In 2005 the plot which was at USD 150000 is merely USD 244000 today. Even buying it in 2019 gives you multiple times better ROI instead of buying it 14 years earlier in 2005.

Actually buying the phase 6 plot in 2010, then selling it in 2016 and buying it again in 2019, and selling it again now in 2021 would have been really quite profitable.

The reason that makes long-term trading worthless is that someone who held the same property for 15 years is making much less money than the one that held the same property for 10 years. This very aspect makes long-term trading riskier which can eat at your wealth-creating efforts like a termite.

Trading Plots and files in Speculative Cycles

The speculative trading cycles are the next option most investors opt for. It is really a good option but with only two big problems:

1. You do not know what the future holds. So everything you do is based on either a guess or information which may not exactly work the way you want. It is much easier to just look at the past data and see where you should have invested but planning it for the unknown future is not for everyone.
2. If you are unable to execute or the market doesn’t work the way you hoped, you can get sucked in for a very long recession period.

Speculative trading is much easier said than done and it was not until 2016 when the recession hit the real estate markets that investors realized what they were doing wrong. A considerable portion of investments got stuck in a couple of areas as some investors thought it was worth a try to wait and hold further. These areas included Broadway Phase 8 commercial, residential plots in various areas such as Phase 7, 8, and 9 of DHA Lahore, Malikpur, Shivpur 4 marla commercial files of DHA in Phase 8 ex Park View, and later on Gwadar.

Resultantly with a huge portion of investments stuck in recession, investors failed to grab new opportunities that popped up from 2017 till 2020 such as indigo heights, Goldcrest Mall, DHA Peshawar, Downtown Mall, and DHA Multan.

Although the return on investment was much better than long-term trading but still not very impressive as it included long periods of recession with zero to negative growth.

What does the data say?

For the sake of argument, let’s suppose everything went well and being the smart boy that Mr. X is, he kept money safely in the bank from 2005 -2010 and then invested in phase 6 plots in 2010, then took an exit in 2016, and then took an entry again in 2019 and took an exit now when the average price of a plot is at 42 Million.

To achieve this Mr. X needed to make seven decisions during these 16 years. These included selling in 2005 and then investing in reliable areas to earn at least 10% per annum. Taking an exit from wherever your money has been and then reinvesting in 2010 in real estate. Repeating the same again from 2016 to 2019 and then finally taking an exit in 2021.

The room for error is almost zero, if Mr. X took an exit in 2013, it could have backfired. Similarly, if Mr. X was not able to take an exit in 2016 the results would be different.

Lastly, It was also important to execute a profitable trade during the recession periods between 20015-2010 and later in 2016 to 2020. Timely exit from these investments and taking an entry back in real estate would have to be surgically precise.

How many of you are confidant that you can read the market and carry out this kind of trading in the future?

The Good Old Rental Income

Rental income has always been considered a very vital and important source of income. However, not many people believe that it can make you rich as speculative trading would. Some General problems you may encounter with rental income are:

1. If you have not invested in the right rental property, your capital gains may suffer.
2. Houses in Pakistan are the worst form of rental income due to huge depreciation and only 3 to 4% rental returns per annum.

While selecting a rental property that would give you at least 6% rental return and some good capital gains over the years may be a challenge but it is by far much easier to execute than speculative trading. In addition, now you have the option to invest in properties that may offer 8 to 10% return through rentals per annum over your initial investment.

Rental cash flows may seem minimal when you start but over time they build up and give speculative traders a run for their money. It will not be wrong to say that slow and steady wins the race because you have much better chances to be rich if you invest in rental property instead of plots.

What does the data say?

Now for the sake of argument let’s say Mr. A who is not as smart as Mr. X and was not sure if he can pull off that miraculous 16 years cycle with such accuracy. Therefore he decided to buy a property that gave him regular cash flows and average capital gains.

Mr. A invested 9 Million in a rental property that gave him an average of 10% capital gains per annum and 6% rental income which increased by 10% every year. Lastly, he invested his rental income in assets similar to where Mr. X kept his money during recessions to make 10% profits per annum on them and the results are going to surprise you.

YES, that is absolutely correct that Mr. A almost made the same amount of money as Mr. X and without ever having to go into the complications and risks that Mr. X took.

The magic actually happened because of the compounding effect on the rental income, this is one factor we never consider when we discuss rental properties. 

The 16 years of rental income which started at a mere 540000 per year ended up at 4 crores when accumulated and compounded at only 10% per annum. This is where most of you do your math wrong and only calculate the rental income and do not consider the impact of profits over your rental income.

The way forward

The speculative trading cycles of real estate and rental income properties are almost at par when creating real wealth. Rental income is an easier and more stable way to ensure your success as compared to speculative trading. You can surely mix them both or opt for rental income alone, but I will never recommend just opting for speculative trading.

Lesson Learned

1. Rental projects are ever-green investments that will give you good returns in almost any kind of market.
2. Rental properties are the backbone of your real estate investments.
3. Plots and files should only be invested for speculative trading cycles.
4. Long-term holding of plots and files is counterproductive in general and has not rewarded investors in the last 15 years.
5. For better chances of success rental income is far more effective than any other investment in real estate.

I will soon publish a detailed FAQ about rental properties which will include answers to some questions below:

The FAQ (Coming Soon) Subscribe Now

Q-1 Rental properties depreciate and therefore do not offer such high returns?

Q-2 Rental properties take time to build and therefore cannot offer returns as shown?

Q-3 In rental properties, issues can arise such as lower tenancy which can decrease your ROI?

Q-4 Houses or commercials give more capital gains than apartments?

Q-5 Which is the best rental property amongst houses, apartments, commercials, and shops?

Q-6 Holding some properties will give you better or equal returns as speculative trading and rental income?

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Captain (Retd) Shahnawaz Yaqub Bhatti

Investment Consultant and CEO at Imlaak

Mob : +92 333 1616160 ( Whatsapp)