Indicators pointing south for real estate prices

Published July 13, 2020
prices in Pakistan have edged up, according to data from On average, a 600 square feet house that cost Rs3.4m one year ago now costs about Rs3.5m. — File photo
prices in Pakistan have edged up, according to data from On average, a 600 square feet house that cost Rs3.4m one year ago now costs about Rs3.5m. — File photo

THE lockdown, prime minister’s housing scheme, global recession and generally depressed economy all point towards subdued real estate prices in the short to medium term, with possible repercussions carrying forward to the long run as well.

The market capitalisation of real estate in Pakistan is over $1 trillion, said Mohammad Hassan Bakhshi, former chairman of Association of Builders and Developers (Abad). Justifying a figure more than three times the size of Pakistan’s GDP, Mr Bakhshi gave the example of the Naval Housing Scheme behind Ocean Mall in Karachi.

The society has 600 houses, each costing between Rs150 million to Rs300m. Taking an average price of Rs200m, a single small society is worth roughly Rs120bn. Now extrapolate this figure to the various posh schemes and societies all over Pakistan from the Defence areas to Bahria projects.

However, despite the amnesty scheme and the construction package, the rates and rents of commercial residential properties have decreased since the pandemic, says real estate agent Talha Memon from Mehran Real Estate. For example, if the rent in Garden East was previously Rs50,000, it has now fallen to Rs40,000. Similarly, a three-bedroom flat in Clifton that was being sold for Rs30m is now being offered at Rs25m. Despite the lower prices, there are no buyers in the market, only sellers.

The market capitalisation of real estate in the country is over $1 trillion, a figure more than three times the size of Pakistan’s GDP

Though this trend may hold for Karachi, prices in Pakistan have edged up, according to data from On average, a 600 square feet house that cost Rs3.4m one year ago now costs about Rs3.5m.

The former Abad chairman defined anything below Rs5m in an urban area as low-cost housing and Rs5-15m as middle-class housing. Thus, an increase in Rs100,000 for the lower classes is significant and can be explained by recession and massive joblessness that could have increased demand for cheaper homes.

Karachi is and has always been a city of extremes. Where there are sprawling slum areas and katchi abadis, there are also bungalows with pools available for rent at Rs1.2 million a month. Some people are selling furniture to be able to pay their landlord while others are clicking through Defence properties, deciding on homes with monthly rents that are more than what a middle-income class family makes in a year.

However, even the elites of society that can afford Defence properties with jacuzzies and parking space for 10 cars are reluctant to move into high-rent new homes currently. One thing that can be said for the pandemic is that it does not discriminate between classes.

Commercial properties

The work-from-home culture was a novelty in the often seth-run environment of the corporate world where the adage of coming in before and leaving after the boss still applied. The pandemic introduced the possibility of keeping businesses up and running while saving on office costs.

For example, office-sharing portal CoSpace advertises a single-person shared desk for Rs12,000 a month on Shahrah-e-Faisal in Karachi. Keeping that as the benchmark cost, even if 10 people were to work from home, that is a saving of Rs1.4m a year. Not too shabby for a smaller outfit of less than a hundred people.

“People used to purchase expensive front shops or pay heavy rentals but now a lot of businesses have shifted online and thus prefer to invest in warehousing instead. It is hard to say whether this is a long-term trend or not,” says Mr Memon.

Mr Bakhsi concurred saying that builders and developers are now questioning the feasibility of commercial projects.

The NPHP impact

Extremely positive and optimistic about the Naya Pakistan Housing Project (NPHP), Mr Bakhsi defended its affordability by detailing the breakdown given in the table (though he estimated the monthly instalment payments at Rs7,000-8,000).

The housing projects will be set up in three types of sites: outskirts of cities, in place of government quarters and by knocking down katchi abadis. Outskirts of cities include the land before Bahria Town outside Karachi on the National Highway and the Grand Trunk Road in Islamabad. Government quarters and katchi abadis will be regenerated with spaces allotted for people already living there according to the area they are currently occupying.

As idealistic as the plan is, if hypothetically it proceeds forward, what impact will it have on the prices of current housing properties and real estate?

While refusing to comment on prices of specific areas, Mr Bakhshi said that apartments worth (for example) Rs60m are inflated because of lack of supply in the face of high demand. When the housing supply will increase, these prices will come down.

A person able to afford a luxury apartment is not in the same category as those hoping to buy a home for Rs1.7m so the impact on the prices of posh homes is not as linear as an increase in the supply of low-cost housing.

However, katchi abadis do occupy prime real estate in Karachi given that most residential areas have a slum area attached to them or located nearby. Though no proper mapping has been done, various studies place the number of katchi abadis in Karachi upwards of 600-700.

A movement to gentrify slum areas would elevate real estate prices by a significant multiple while bringing down the price of posh homes nearby. For example, it is hard to imagine a penthouse of Rs60m in Bath Island a hundred steps away from a high-rise non-slum building with a solid infrastructure costing a fraction of the price, even if both homes belong to vastly different social classes.

A more likely impact is that to avail the potentially huge opportunity, builders would want to have a faster turnover on houses. So instead of selling 50 houses at exorbitant rates and willing to wait for such buyers, a builder may prefer to sell at a lower price but free up capital to invest in several hundred low-cost flats.

A third possible impact is the basic law of competition: an increase in available housing will force builders to compete on price, quality and timelines, making it a buyer’s market.

Pakistani diaspora

The prime minister appears to have a fond hope of tapping into the deep pockets of the Pakistani diaspora for investment. Helping the country stay afloat, expats sent back remittances of about $20bn-25bn each year. Roughly 50pc of this amount is invested in real estate, says Mr Bakhsi. However, various real estate agents agree that this amount has dried up as well.

Pakistan’s ranking in the Global Real Estate Transparency Index 2020 was 73 (out of 99 countries) whereas India stood at 34 and was counted amongst the 10 biggest improvers worldwide. On a scale of one to five, with one being the best, Pakistan scored 3.88. While the ranking has improved since the 75th position in 2018, it does not provide foreign investors with confidence.

Published in Dawn, The Business and Finance Weekly, July 13th, 2020

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