Where to invest? Investment in Construction Projects in Pakistan vs files and Plots | Part 1

Construction Projects in Pakistan vs files and Plots

Today we will try to figure out if construction projects in Pakistan compare to the files and plots investment in Pakistan. If you want to be successful then you must follow the path of a successful person. Unfortunately in entire Pakistan, the number of billionaires does not even cross into double figures. Whereas the city of Newyork alone is home to 118 Billionaires and this is not even the state with the highest number of billionaires. The crown goes to California with 165 Billionaires. This brings into question that the business practices in our country are not only crude but old-fashioned and ineffective. We must be doing something wrong and today while we discuss real estate investment in construction projects, plots & files, we are going to address what we are doing wrong.

We must change and embrace the modern concept of economy and investments or else we accept poverty as our fate.

Why we may need to change our perspective?

Real estate has and will always be one of the major stakeholders in the economy of any country. In Pakistan, we have been sucked down in the speculative trading of plots and files for decades which does not hold any real value. Billions and trillions have been stuck in land which does not produce anything and is more than sufficient to handle any housing demand of the rich for the next 3 to 4 decades. Yet, we continue to make more societies for the rich, ignoring the poor and in the process making it even harder for them to find a place they can call home. 1% of Pakistan’s elite hold 9% of real estate, whereas the poorest 33% hold only 4% of the land.

The best part is no one is really creating any wealth from it at least not anymore. Recent research by our team suggests that even with the latest hype in the real estate market plot sector in last year the actual gain in terms of USD has been hardly 20% approx in the last 5 years. This only amounts to 4% per annum return on your investments.

Today we are going to critically compare investments in construction projects, plots, and files and see which one really ticks more rights than wrongs and where should you look for your future investments.

Availability on Installments

Most of the construction projects are come in installments, whereas most real estate investments in plots and files are generally lumpsum. Although some societies now do offer plots or files in installments the prices are generally very high for such plots and files and therefore don’t offer very good returns. DHA on occasion offers a few plots or files in installments but the real problem besides the limited number is that the files and plots are not usually balloted and therefore they carry the inherent risk of location balloting.

In the recent past, only Dream Gardens offered numbered plots on installments and I have not seen any other big society developer following the same path.

So while construction projects offer you a lot of options, price ranges, and variety for installment projects, plots and files don’t or have very limited options and therefore only construction projects really tick the box.

Liquidity

This is one of the most debated topics and while it is important to factor, liquidity comes with more risk which will be covered later. In general, files offer the most liquidity in almost all kinds of markets. Liquidity in plots can be debatable though as we have seen that during the recession period between 2016 – 2020 it was very hard to sell a plot except in mature areas. However, when the market is trending up plots are also much easier to sell.

Construction projects are usually for end-user and therefore offer almost similar liquidity during recession periods or otherwise. You should consider a construction project like selling a house which does take some time but it is evergreen.

Files certainly tick this point, whereas plots offer medium liquidity and are followed closely by construction projects with the least liquidity but comparable to plots considering they sell in all kinds of trending markets.

Trading

This certainly is considered as the strength of files, these can be traded very quickly and for a savvy investor, this can save him millions in a very short time period. Plots may perform very well during an up-trending market but will most likely underperform during long recession periods.

Construction projects in Pakistan offer some good trading opportunities especially when the project is being launched. However, in order to do effective trading in projects, you need a strong sales team on your side. Later on, the construction projects offer great and stable trading opportunities but will generally require longer periods to resale.

Stability

The volatility in files makes them valuable for short-term trading, at the cost of stability. Plots especially in mature areas offer a lot more stability in comparison. However, in an underperforming and underdeveloped location, plots are also very volatile and therefore we will not rank them at the top.

Construction projects usually offer a stable growth pattern, from launch to completion of basements, and then from grey structure to possession, they will keep adding value. Being an end-user commodity they offer the most stability which you can not get in other areas of real estate.

USD Factor

USD is now a very important factor in our real estate as the PKR has a history of continuous deterioration against the $$$. The only way you can cater to USD appreciation is through investment in installment projects. Projects that offer rental income after completion give you even more stability against the USD appreciation in the future.

Files and plots are usually lumpsum investments, this means that you have to pay 100% of the amount upfront. Non-availability of dependable societies such as DHA,  offering plots and files on installments in value for money is hard to find.

Risk

Files happen to be the most riskier not just because of price volatility but also because they are subject to location ballot. While societies like DHA offer almost negligible risks there have been issues like DHA Valley in Islamabad and DHA city in Lahore. Risks related to time and delays in the ballot in addition to the location of the plot after the ballot make files the most riskier of investments especially in societies other than DHA.

Developed and under-possession plots even if do not offer much growth are very secure especially in DHA. However, we can not say the same thing when they are under development. We have seen that even in possession phases some plots will not get possession due to certain legal problems in that area. Although this is a very limited occurrence and usually DHA will accommodate investors, a lot of private societies do not.

Construction projects in Pakistan have their own kind of risks which are usually related to delays, although investors are much more relaxed in terms of delays when it comes to plots or files but they lose patience with construction projects rather early. However with crystal clear land allocation and exact unit numbers construction projects are much less risky than files and may as well be at par with plots.

Timelines

Files and plots are part of entire societies and have a much larger timeframe for maturity. Bigger societies even take longer than 2 decades from launch to maturity. Phase 9 Prism is almost 1.6 decades old now since its launch and we haven’t seen the possession yet, DHA Multan is almost a decade old and we only have partial possession. Some new developers such as Lahore smart city are trying to change this trend by trying to offer possession early on as they acquire land before the launch, this can certainly bring the 2 decades down to 1.5  if happens.

Projects, on the other hand, have a much shorter time period, usually, 4 to 7 years is all that it takes for a project to be successfully mature. This is one of the reasons they outperform plots and lands in long-term trading as plots and files will go through a few cycles of recession during the long time span of 20 to 25 years, whereas construction projects will usually not suffer such recessions and will offer stable price increase throughout.

Capital Gains

Plots and files offer medium to high capital gains respectively. But only if you can master the art of speculative trading. Long-term capital gains in plots and files are usually very low and are generally upset by inflation and dollar appreciation. Files carry an inherent risk of downside and success is not always the case.

In contrast, construction projects in Pakistan offer slow but stable capital growth combined with installments the resultant ROI is much greater without suffering through long periods of recession.

Rental Income

This one is a clear-cut case in favor of construction projects which end up giving you a rental property. Plots and files are obviously not even in the race.

Rental income is one of the most important aspects of your real estate portfolio offering you regular cash flows. You can see more about how rent can eventually double your money in comparison to gains in plots and files in our blog.

Fraud

This was not part of the video but I am going to include it here. This is probably one of the most misunderstood of all the factors stated above. While risk, delays, and problems with developers exist in plots as well as construction projects. Construction projects have a much less percentage of being involved in fraudulent activity as compared to files.

As per LDA, more than 500 societies in Lahore are illegal and 45 are fake, which means they do not even exist on the ground. The problems in the development of a society can be attributed to an irregulated real estate infrastructure. Developers will sell more files than the land they have acquired for the purpose to generate cash flows and is one of the most common fraudulent practices. Do not confuse this with files issued by DHA as those files are only issued after land acquisition. Although the Government has enforced stricter laws now to ensure such things do not happen we still don’t have a crystal clear procedure to establish that.

Construction projects in Pakistan have very well-defined land and better regulations which saves them from such scandals. Similarly, if you have allocated plots then the element of fraud is almost reduced to low as well.

Where to Invest?

One size doesn’t fit all and at the end of the day, it will depend on which suits you the best. In addition, you will have to carry out your own analysis of each type of file, plot, and construction project in Pakistan to analyze its potential in the future. These are not the only factors that will determine where you should invest. The most important element at the end of the day is which investment can give you maximum returns as early as possible while keeping your investment completely safe.

However, if everything else ticks beside the factors mentioned above you can select and make a choice depending on your priorities.

If you require liquidity and risk is not an issue files will be a great option. However,f you want more stability, you can look at both plots and construction projects. Finally, if you want to generate cash flows and rental income, your only option is construction projects.

To make it easier and help you decide as per your goals considering that all other factors are constant and totally based on the factors above, your choice should vary as per objectives as under:

Files:

Suitable if you need liquidity and are ready to take the risk of making losses or low profits. More like the performance of hard hitters like Shahid Afridi and Asif Ali, it may not work every time and you will have a very low run rate but you can change the face of the game when it clicks.

Plots:

If you are looking for stability at the cost of capital gains. Just like the reliable middle-order batting performances of Misbah-ul- Haq,  and Shoaib Malik.

Construction projects:

An all-rounder performance suitable for you if you are looking for medium-term trading, rental income, and stable capital gains. Similar to the performances of Waseem Akram and Imad Waseem. Even if you don’t perform in one department you may perform in another.

So are you wondering why we left the legends out? Well, the trophy goes to imlaak because we can lead you and steer you in the right direction at the right time giving you an outstanding performance just like Babar Azam and Imran Khan.

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Captain (Retd) Shahnawaz Yaqub Bhatti

Investment Consultant and CEO at Imlaak

Mob : +92 333 1616160 ( Whatsapp)