Real Estate Is Down In Pakistan – Pakistan’s commercial real estate economy is officially dead and will not revive until around 2030, owing to weak government policies and outdated treatment of the sector.
Pakistan’s real estate business has long been a pillar of its economy, providing investors with rich returns while also housing the country’s rising population. However, the REIT sector has encountered hurdles as a result of recent political and economic upheaval. With the end of the 2024 elections and the establishment of a new administration, there is renewed optimism for economic changes and stability. In fact, the State Bank of Pakistan noted that “the combined share of housing and construction in the country’s GDP has been consistently higher than 9 percent” at the start of this year. However, the real estate industry is currently experiencing a slump.
Why Real Estate Is Down In Pakistan?
“The property market has declined the most in the last two years. Many people hope for a comeback, but it is too early and unlikely before 2030. The domestic real-estate market, which has fallen 25% in the last year alone, will recover at a painfully slow pace from its deepening downturn, with the same team of policymakers expected to table more anti-development policies in the upcoming budget,” according to The Yard Marketing’s prominent real estate developer.
Because of the rising work-from-home trend, high central bank interest rates, and zero attempts to promote policy that helps shift funds from the informal property market into banks, immovable property values are unlikely to return to their peaks for another decade.
It’s clear that values will take much longer to return to those levels, and in my opinion, the GDP rate we’ve projected to return to the peak given the scale of the collapse we forecast over the next several years is higher than the pace in the previous 10 or 20 years. So it’s feasible that the recovery will not begin until 2030, as planned, and could last well into the 2035s. Domestic and global developments hint at a catastrophic economic collapse before recovery.
The commercial real estate business has been under pressure since the country’s regional banking sector went into upheaval. Regional investors, such as doctors, judges, and land mafias, who have possibly the largest stack of petty cash in the country (apart from banks), are grappling with tighter credit conditions and rising interest rates. Land files and plots have lost more than 50% of their value, and losses sustained by foreign Pakistanis have hampered further investment in the sector.
Economic Downturn and High Inflation
Pakistan’s economy has faced challenges in recent years, with rising inflation eroding purchasing power. This directly impacts the ability of potential buyers to invest in property. As the cost of essential goods and services increases, discretionary spending on real estate takes a back seat. Additionally, high inflation leads to increased construction costs for developers, further impacting affordability.
Rising Interest Rates
The Pakistani government has implemented measures to curb inflation, including raising interest rates. While this might be effective in controlling inflation, it makes mortgages more expensive. This discourages potential buyers who rely on loans to finance their property purchases. With higher borrowing costs, the monthly installments become a significant financial burden, deterring many from entering the market.
Concerns About Market Saturation
A rapid surge in development activity in recent years has led to concerns about oversupply in certain segments of the real estate market. This is particularly true for luxury apartments and high-end housing projects. With a limited pool of buyers for these properties, a glut in the market puts downward pressure on prices, leading to a correction.
Government Policies and Regulatory Uncertainty
The current real estate climate lacks clear and consistent government policies. Frequent changes in regulations and a complex approval process create uncertainty for developers. This discourages investment and hinders new projects, further impacting market activity. Additionally, some government policies, such as increased property taxes, have dampened investor sentiment.
Shifting Investment Priorities
Investors may be shifting their focus away from real estate due to the current market conditions. Alternative investment options, such as stocks or bonds, might appear more attractive in a volatile real estate market. This shift in investor behavior can further contribute to a decline in demand and property prices.
Impact of Global Events
The ongoing global economic slowdown and geopolitical tensions also have a ripple effect on the Pakistani real estate market. A decline in foreign investment and a cautious approach from international investors can contribute to a sluggish domestic market.
Real Estate Is Down In Pakistan: Trends and Recovery Prospects
While the current situation might appear concerning, it’s essential to consider potential future trends and recovery prospects:
- Market Correction and Consolidation: The current downturn may lead to a necessary market correction, with property prices stabilizing at more realistic levels. This could make real estate more accessible to a wider range of buyers in the long run.
- Focus on Affordable Housing: The government and developers might shift their focus towards developing affordable housing projects to cater to the needs of a larger segment of the population. This could revitalize the market by attracting new buyers who were previously priced out.
- Impact of Infrastructure Development: Investments in infrastructure projects like transportation networks and utilities can improve connectivity and increase the desirability of certain areas. This could lead to localized pockets of growth within the real estate market.
- Emerging Technologies and Online Platforms: The integration of technology and online platforms can improve transparency and efficiency in the REIT sector. This can attract new investors and buyers seeking a more streamlined experience, potentially including virtual tours and digital property management tools.
Beyond the factors mentioned above, demographic trends also hold significance. Pakistan’s population is becoming increasingly urbanized, which could lead to a long-term increase in demand for housing in major cities. However, ensuring this demand translates to sales will depend on addressing affordability concerns and creating a business environment that encourages developers to cater to this growing need.
Navigating the Market in 2024 and Beyond
For both buyers and sellers navigating the 2024 market, here are some key considerations:
Buyers
Conduct thorough research to understand fair market values and avoid overpaying for properties. Consider negotiating prices and exploring areas with potential for growth, such as those undergoing infrastructure development or with a shortage of housing in a specific category (e.g., family-friendly apartments). Be patient and wait for the right opportunity before making a purchase.
Sellers
Be realistic about pricing and adjust expectations based on current market trends. Consider offering flexible payment options or renovation incentives to attract buyers. Explore the possibility of targeting a different buyer demographic if your property falls into a currently saturated segment (e.g., luxury apartments).
Conclusion
While the current real estate downturn is significant, it’s a chance for correction and future growth. By understanding what real estate taxes are deductible in Pakistan, you can significantly reduce your tax liability. Remember, proper record-keeping, choosing the right filing method, and staying up to date makes the process easy.