KARACHI (March 03 2003) : In Pakistan, the real estate market has a history of cyclical moves. On average after every five years it hits the new peak before easing off. Normally, the price rise or the booming trend survives for a period of 12 months to 18 months before easing down to hit the price, 20 percent above its previous lows.
The bearish move then prevails for the next 3 to 4 year's time.
Hence the recurrence of the cycle takes place after almost every five years.
The SBP keeps a strict watch on the country's monetary policy and the currency movement and manages the affairs quite effectively.
The SECP looks after the affairs of our stock market, although the Badla rate is still the dominating factor of our equity market, which is responsible for our brittle stock market.
Following the 9/11 events, the financial sector is giving a lot of emphasis on the rising foreign exchange reserves, the rise is due to curb on illegal money and certainly because of the positive measures taken by the State Bank of Pakistan.
All this has compelled flow of remittances through banking channel resulting sham rise of our foreign exchange reserves.
Secondly, Pakistan's stock market also made hefty gains due to sham fall of discount and government treasury bill rates and available surplus liquidity.
BIGGEST GAINER: It is estimated that the real estate market has risen by around 20 percent in various cities of Pakistan.
The biggest gainer is Karachi's Defence Housing Authority, Port Qasim Authority Industrial Area and Korangi Industrial Area.
DHA's Karachi is the most active real estate market in Pakistan, as there are more than 30,000 commercial and residential plots available, which change hands from time to time.
The change of hands can be judged from the fact that the DHA registration office refuses to entertain more than 55 registries per day to avoid rush and on daily basis, the authority issues next forward registry date.
The price of the land in the DHA has doubled in a year's time. Although, from trading perspective in terms of capital, the size of our real estate market is small in comparison with our stock or exchange market.
However, the size of amount involved for one single trade requires large sum of money for a common to participate.
Hence participation is by few and selected group of wealthy people, who can spare a minimum cash amount of Rs 2 million for one single trade.
According to one security brokerage house, “the real demand was created when Pakistanis living abroad started purchasing land in Pakistan so that in future if they plan to migrate they have an alternate.
There are other very simple reasons, which attract real estate market as there is no capital gain tax on real estate earnings and therefore the income is not taxable.
There is no monitoring agency, which keeps a check on the price movement, the demand and supply factor largely depends on the liquidity.”
When the Recorder reached an analyst of a leading brokerage house to know his views, he said, “the application of the trading technique is same, weather it is currency, bonds, interest rates or real estate.
The market is overvalued, and the correction is on the cards. The current price will not stay forever.
When our stock market cannot hold, despite our economy showing all sorts of positive signs, how can one expect the real estate price to remain stable at current level? I would like to caution all those who are in the market to take quick profit.
We have a bad history, once our market dips it takes years to recover. Our market requires one bad reason to nosedive, once the sellers get serious there will be no buyers at that time or who knows that the capital gain tax is introduced in our next budget.”
A real estate broker when approached for his comments said, “the market has room for another 5 to 10 percent rise, but at this time of moment I am a bit confused that why are the buyers so still buying?”.
An executive of a former nationalised bank reminded that about seven years ago a strong group of builders approached his management and wanted to place deposit in USD, which was equivalent in billions of rupees, when dollarisation was the order of the day.
Most of their money was earned through execution of their real estate deals, which lead to the collapse of real estate market, he said. “I suspect, anytime there can be a repetition of such a move.”
Another Clifton-based realtor, who has a large community-based client, said, “we are not recommending our clients to purchase plots at current levels.”
He pointed out that in their latest in-house magazine, circulated amongst the real estate brokers, there are over 500 plots advertised for sale as compared to the last week's 200 sellers.
He added: “To protect my clients I have suggested them to demand 10 percent cash payment from the buyers, so that when the market turns around the buyers may find hard to breach the contract and simultaneously my client, the seller, gets the protection.”
BUILDER's VIEWS: When a builder was approached, for his views, he said: “At present, our community is building around 200 bungalows in DHA, we have to pay a little extra to purchase a land, as all the houses were sucked away by the buyers after the 9/11 event due to sudden demand.
Hence due to shortage of houses, a new 500-sqr yard house is sold for no less than Rs 10 million. Our only fear is that a reversal in the real estate may block our investments if the buyers shy away.”
Overall the Business Recorder survey has showed that cement industry grew by 15 percent, out of which 4 percent was Afghanistan's share, while the major production was in Northern Area, which means that the NWFP had the lion's share.
The cement industry is already suffering due to cut-throat competition. Therefore, transportation to other provinces would not be feasible for the industry. All this does not lead to any substantial growth in the housing sector.
Furthermore, although the SBP is encouraging the housing sector and is looking for rapid growth, but from banks perspective the housing law of the country is a borrower friendly and thus banks are not too keen to make aggressive lending unless they are provided with solid protection so that their lending does not get bad.
The million dollars question is that will our real estate market make further leap or will it settle down at the current level or will the investors set another trap for the novice for the next five years.