18 October 2004	Monday	03 Ramazan 1425

Considerable amount of official concern has surfaced recently about the real estate boom in Pakistan. Different quarters are issuing warnings not to speculate on the rising property price. The National Accountability Bureau (NAB) is investigating the affairs of private societies and land developers of Islamabad and Lahore region. In addition the State Bank of Pakistan (SBP) has ordered banks not to lend money for land purchases. This article examines the real estate boom in detail, focussing on:

* The time line history of the recent boom and the different stages of the rising trend.

* The cause of huge appreciation.

* The outlook for real estate investments.

* History of the recent real estate boom.

Over the last two months the print media has given substantial coverage to the rise in property prices in a year. But, contrary to what is being reported, the double digit uptrend started soon after the 9/11 incident in the United States. To clarify, this article explains the trend in phases.

Prior to 9/11, the real estate in Pakistan was undervalued due to the flight of capital and the slump in business within the country. The situation was extremely bad as there hardly were any buyers. Small and medium size investors were least interested in investing in Pakistan, as most of them were in search of better opportunities abroad.

Phase one of the real estate boom: A few months after the US incident, prices of the property started to rise. This was only in the Karachi's Defence Housing Society, Lahore's Defence Housing Society and Gulberg, and Islamabad's F-6, F-7, F-8 sectors, Blue Area and the Jinnah Super localities. The prices in other areas witnessed marginal increases. Rarely a title problem existed on these properties (except for the Gulberg, Lahore, which falls under the Lahore Development Authority jurisdiction).

The sharpest rise was witnessed in Islamabad. Houses which were available for Rs5 million in 2000 and 2001 shot up to Rs30 million by mid 2003 in F-6, F-7 and F-8 sectors. The smallest rise was in Karachi where houses worth Rs5 million went up to Rs12 million in the same period.

Phase two of the real estate boom: In the second half of 2003 most other areas of major metropolitan centres joined the bandwagon. Price appreciation had a large degree of variance. In some localities prices increased by 15-20 per cent, whereas in other areas it was by 35-50 per cent.

Reason behind phase one appreciation: Pakistan started receiving inward remittances from expatriates soon after 9/11. A fair amount was being invested there as these areas have the most transparent property title and transfer procedures. The areas falling under the Karachi Development Authority (KDA) and the Lahore Development Authority (LDA) have probl ems with respect to ownership, as in many cases there are two or more people claiming the ownership of a property and all with documentary proofs. As property prices went up local investors too, joined in.

Reasons behind phase two: Pakistan's economy recorded a growth of 6.4 per cent in 2003-04. This expansion was being fuelled by the easy availability of credit and the lax monetary policy. Private sector credit off-take was at record and banks started to venture into home financing business. It is reported that banks disbursed Rs8 billion for the housing sector but the amount of borrowed money that found its way into real estate purchases was far greater than that.

Many medium-sized businesses such as the exporters, traders, manufacturing unit owners and the agriculturists took out business loans and utilized the funds for real estate investments, due to a lack of legitimate opportunity for small and medium businesses. Thus in real terms a greater amount of money found its way into real estate than the Rs8 billion disbursed by the banks, inflating property prices across Pakistan.

While the easy credit factor caused speculative increase in property prices genuine factors were also witnessed. As economic and business conditions improved in 2002 and 2003 genuine demand for housing also surfaced. Housing projects which were lying empty in the middle class areas of the major cities started to fill up rather quickly at the end of 2003.

Variation in the rise among different localities of the same city is due to the fact that home buyers preferred new places of residence. Investors speculate that the genuine demand for houses will continue to grow as long as the economy maintains its momentum.

Another feature is the preference of individuals to park their excess capital or savings in property investments due to a number of factors. Historically, the appreciation in real estate has been greater than the rate of inflation and the rate of return offered by banks on deposits. In addition a large segment considers interest bearing deposits as'unethical' from the religious point of view.

The outlook: Taking into account the current economic progression it would be wrong to say that there is a real estate bubble. Prices are marginally higher than they should be, and have stabilized over the last two months. But as the inward remittances accelerate (as witnessed over the first two months of the current fiscal year) speculative activity could increase in the sector, which could then possibly develop into a bubble.

The steps being taken by the central bank and other government departments in trying to prevent further escalation are satisfactory in the short term, but in the long term concrete measures need to be adapted.

RECOMMENDATION:

* Improve the state of the KDA, the LDA and other city development authorities, particularly in the areas of title and transfer procedures and in the prevention of encroachment.

* Improve the inner city infrastructure of the metropolitan areas, with special emphasis on public transport service, alternate to road transport.

* Improve maintenance of urban centres.

* Bring outskirt areas of major metropolitan areas into development, and provide them with the needed infrastructure so that living in those areas is not a frustration.

* Ensure that land developers, builders and cooperative societies are transparent in their dealings and that they handover the property to buyers in the designated amount of time.

* Provide genuine medium size business prospects to attract investment away from real estate speculation and into productive avenues.

Conclusion: The appreciation in real estate is not as artificial as some want the public to believe. If economic growth continues as expected the prices are likely to maintain and stabilize. The economic managers are right in trying to prevent a real estate bubble, and short term measures are working. But to maintain stability and prevent downside risk appropriate development measures need to be adapted.