Best real estate investment Plots vs Luxury Apartments
One of the biggest questions you may be asking yourself in 2020 is which is the best real estate investment moving forward. Although commercial investments are the most fruitful in my opinion if done properly but not everyone has the experience or kind of investment required. In addition if your portfolio is less than a 100 Million I will suggest you not to invest in commercial as a good commercial unit will probably cost you a major chunk of your portfolio.
So today we are going to talk about best real estate investments starting from 3 Million upto 20 Million and we are going to find out what is best for you. This is not applicable if you are looking for a plot to build your own house as it is than no more an investment but you will be utilizing it as well.
There are a few possible options for some one with a limited budget such as:
- Invest in plots.
- Invest in files.
- Invest in apartments.
- Invest in houses.
I am not in favor of investing in houses for various reasons and nor do I see any worthwhile investment in files at the moment specially after the debacle of DHA Multan plots after balloting, investors are really weighing in on that option as well so we will not be discussing that in this blog.
Investing in Plots
Plots have been the favourite of investors for decades specially in Pakistan. However it is not as it seems and if we look carefully we will realize that the maximum number of people who went for long term investments have not really made any huge gains in the plots. Unless you are a savy investor who managed to invest at the right time and pull out at the right time.
The factors which are effecting investments in plot are :
- Slow annual growth.
- Liquidity crunch.
- Supply and demand.
- Government policies.
Slow annual growth
As a case study we will consider phase 7 plots in DHA Lahore in 2011 the average price of 1 kanal plot was only 38 lacs and by 2013 it reached a high with an average price of 1.07 crores, however since 2013 till today the average price has increased to 1.39 crores only in seven years. The data clearly shows that in 2 years from 2011 to 2013 the prices gained almost a 150% however since than the price has only gained a mediocre 5% annually.
The recovery in property prices in 2011 till 2013 is due to the fact that between 2003 to 2005 files in Phase 7 were sold at a high of 6 to 8 million but later on crashed to 3 Million in 2006 and than stayed between 3 to 4 million till 2011.
It is very clear that depending on your timeline your ROI in investment in plot will vary greatly as under:
Purchased in 2005 and sold in 2020 = 3% annual approx
Purchased in 2013 and sold in 2020 = 5% annual approx
Purchased in 2011 and sold in 2020 = 10% annual approx
Purchased in 2011 and sold in 2013 = 75% annual approx.
In a total of 15 years, only 2 years have given you an exponantial growth where as rest of the 13 years you have seen average or below average growth.
It is important that instead of investing blindly you need to invest smartly and find out those areas where you may get the kind of return you got in Phase 7 between 2011 and 2013.
Usually an investor will sell his plot in one area and shift to another and this would indeed increase number of transactions as well as prices in certain areas. However due to inability to sell and lack of intrest by investors to sell at loss they do not have the finances to invest or trade plots in other areas.
Supply and demand
The number of available plots is much higher than the actual demand and that creates the old supply and demand dilema. The higher the supply the lower the prices and vice versa. The plots available in Lahore are good enough to satisfy any requirements for decades to come. In DHA Lahore alone we will we will probably have more than 60000 to 70000 vacant plots (exact number needs to be calculated) once 9 Prism is given possession.
Another major factor we need to consider is present Government polices which are strangling the investments in plots as it sees them as an unproductive investment which does not do much for the economy of our country. In addition no matter what we say in real estate circles, the Government and the genuine house buyers look at this decrease in plot prices in a positive way.
Investment in Apartments
A new trend which we have recently witnessed in Lahore real estate market is the investment in luxury apartments. The trend is picking up and we are seeing huge gains over the past few years even while the property market is slower overall. This facet of property gained momentum as the sun set on the investments in the plots sector in 2016.
The smart investors started to shift there portfolio slowly into luxury apartment buildings offering not only rental income but also capital gains. Just like plots there are various options available in apartments, different buildings will yield different results in future, however one thing that they all have in common is a secure rental income of up to atleast 6% which single handedly beats a long term investment in plots.
Some factors which are supporting the investment in apartment are :
- Rental income.
- Increase in demand.
- liquidity crunch.
- Government support.
Luxury apartments offer as high as 10% rental returns and atleast 6 to 7% at an average. This makes them one of the best rental generating real estate even better than commercials in that aspect. This is supported by another fact that while profits in plot is only materialized after the plot is sold after certain years. In case of apartments if we apply TVM (Time value of money) the 6 to 7 % rental income generated by apartments every year is even higher than 10% average annual gains in plots we see in the best performing sectors.
Increase in demand
Phenomenal increase in demand due to investor interest and genuine requirements as more people are now willing to live in apartments is another major factor influencing the investments in this area. Hospitality sector is also benefitting these luxury apartments which can be used for daily rentals as hotel apartments.
While this is hurting the plots it is benefiting the apartments as it is hard to get hold of a big amount of cash. Luxury apartments however offer an easy installment solution starting from as low as 2 Million, This gives investors an opportunity to invest slowly over a period of few years thus avoiding the liquidity issue in real estate.
Government is supporting the construction so as to promote employment and related industries. This support is not only through rhetoric but also through friendly policies. Policies such as retaining CGT to 4 years only in comparison to plots where it is 8 years are going to support construction projects including apartment projects.
Investing in luxury apartment buildings in Gulberg specially the hotel apartments offering higher rental returns is the best option at the moment as it will give you rental income and genuine capital gains as well. It is also recommended that serviced apartments or hotel apartments are the best choice when it come to rental generation.
In case of plots it is best to wait for those two years throughout the cycle which give phenomenal returns such as 2011 to 2013 in case of DHA Lahore Phase 7. However if you are looking for slow but genuine gains and only interested in plots than investing in developed areas which are going from possession stage to maturity may be your best bet such as Phase 8 of DHA Lahore. In addition investing in Phase 9 Prism which is going from development phase into possession stage in couple of years will also yield good results.
In most cases however in a long term scenario the average gain will vary from 5 to 10% max in most cases when it comes to plots. However some underpriced or areas where value addition is in process such as DHA Multan will show a 100 to 200% increase in a couple of years.
Captain (Retd) Shahnawaz Yaqub Bhatti
Investment Consultant and CEO at Imlaak
Mob : +92 333 1717170 ( WhatsApp)