Think twice before investing in plots
The present market conditions are complex due to the ongoing Corona virus pandemic. This require a deliberate effort to take advantage of Govt’s construction relief package for investing in plots. The real estate market has responded positively to Govt’s initiatives and investment oriented buying is at full swing. The prices in most areas of DHA Lahore have gained their lost glory and prices are almost equal to that in 2018 in terms of USD. Although if accounted in USD, there are no substantial gains till now.
This was expected and we told everyone about the forthcoming uptrend in real estate back in April 2020. However the market was thirsty and prices rose by 30% in hardly 2 months, filling up the vacuum much more faster than anyone could have assumed.
The big question, however, is will this continue with the same pace and for how long?
Let us find the answer to these questions with logic and fact and carry out a study if investing in plots is a feasible option at this time.
The Bulls & the Bears
The bulls argue that Pakistan real estate has the potential to grow manifolds. Although the stats suggests that it only grew 10 to 15 % per annum at max. However the price spikes of 2002 – 2004 and then later in 2011 to 2013 – do suggest that real estate offers some great opportunities for speculative trading.
If you are investing in plots, there is one concerning aspect to this trend in Lahore. Whilst the newly developed areas gained, the older ones simply stopped producing any considerable gains. This phenomenon can be attributed to two things:
- The new phases are better developed than the previous and offer better living.
- The price of plots is determined by investment potential rather than genuine demand.
While the former should impact the prices to some extent in newer phases, I believe the much bigger reason for price increase is investment oriented buying. This is exactly why, as certain phases reach maturity, investors starts to shift to under developed phases giving them the boost while the older phases only experience slower gains.
Another argument given by Bulls is that Pakistan is facing a housing shortage of 10 million houses. The gap further widens every year and is expected to reach 13 Million by 2025. This supports the claim that we need more plots for our growing demand and as the supply is less than the demand, the prices of property shall rise.
The above argument is actually quite misleading. Analysis of rental property values with respect to income levels was conducted for 50 cities of Punjab. The population was divided into 6 income brackets, and the percentage of housing units available to them to rent was calculated on the basis of 30% of their median household income. Figure below shows the gap between the percentage of urban households within the six income brackets and the proportion of housing units available to them for rental purposes. The same analysis was done for house ownership to validate and triangulate results. While the statistics in the orange boxes show the percentage of Punjab’s households that earn monthly income within the below-mentioned categorizations, the green boxes show the percentage of housing stock available to households of that specific income bracket.
The figure highlights the mismatch between the proportion of households who can afford a certain type of house and the percentage of that type of housing units available to that population proportion.
The actual housing shortage is in fact conditioned by income levels. However, the concentration of new developments remains to serve the middle and higher income groups. Resulting in a surplus of housing units for these income groups.
Plot Sizes & Vacant Plots
By determining what plot sizes are available in our housing schemes, we can figure out which income group is being targeted. The image below shows the approved housing schemes in Punjab and the percentages of plot sizes in them. The average plot size in approved housing schemes is 10.9 Marla. The higher plot size in these schemes make them unaffordable for low income groups.
Presently, more than 68% of plots in all schemes across Punjab are empty and only 28% are constructed while 10% are under construction. This shows a mismatch between people’s affordability and availability of housing stock.
As per stats in DHA Lahore, there are only 30000 houses approx, however more than 100000 plots are vacant. It took almost 4 decades for DHA Lahore to fill up first 5 Phases, how long you think it will take to fill the next 5, considering they are a whole lot bigger than their predecessors?
Time to face the truth
Due to the unaffordability of these plots for a large proportion of the population, they are more commonly used as a speculative investment by the higher income groups. Therefore, although the cities are experiencing a rapid increase in housing schemes emerging in the peripheries, they have no effect on the actual housing shortage for the lower income groups.
- High income groups are not short of housing, it is mostly the low income groups which suffers housing shortage.
- We have a huge surplus as 68% of plots in societies are vacant.
- More than 1 Lacs plot are empty in DHA Lahore alone.
- Whenever the investors pull out, the market will crash.
Prices of real estate are determined by demand, population growth, economic growth etc. However in Pakistan they are determined by investor sentiment and black money. The drop in real estate prices in 2016 was only felt in investment oriented areas, whereas genuine growth in real estate was never effected.
What to expect?
Since 2016, the Govt has been making policies to curb the investments in plots. However Covid19 changed all of that and in order to support the economy the Govt had to give a relief to let the investment circulate. However looking into post Covid19, once the economy settles down, we will see the continuation of old polices, curbing investments in plots.
This does not mean that investing in plots will not give returns. On the contrary, they will still remain a viable option for investment. The growth however will be slower followed by longer time periods of downtrends. I expect a lot more volatility in these sectors in times ahead and while it may be viewed as a negative, an opportunist investor sees it as a time to make lots of money.
We are a “Boom Boom” nation, after all who does not want to become rich over night. Regardless its logical or not, investments in plots will keep happening. Real estate will continue to grow by 5 to 15% no matter what. Investors will always be part of the game regardless of volatility except when the reality sets in. However even investors know these limits and do not expect it to grow 10 times in next 10 years.
What to do?
Now that you know the real picture, it may be easier for you to decide what to do. It is just better to go for short term trading when it comes to investing in plots and put your long term investments in places where actual demand really exists. No one really can speculate with 100% accuracy but you can keep your risks down by diversifying. This is exactly one of the reasons that since 2016, I have been preaching to invest in rental properties.
Look at stock markets, anyone who starts down the road to becoming a trader eventually comes across the statistic that 90 percent of traders fail to make money when trading the stock market. This statistic deems that over time 80 percent lose, 10 percent break even and 10 percent make money consistently.
The stats may differ in real estate and outshines stocks at times, as it is not as complex and losses are minimum. But getting rich will remain a dream for most of you as one bad trade may offset your entire lucky season.
Our 1 crore challenge is designed around these studies to make the best out of speculative investments. To mix things up we bring the best rental generating assets to your table to maintain a strong and stable investment portfolio, ensuring that your money is always safe & growing. The choice is yours, you can run after the illusion or face the reality, follow us and build on solid income in real estate.
Captain (Retd) Shahnawaz Yaqub Bhatti
Investment Consultant and CEO at Imlaak
Mob : +92 333 1616160 ( WhatsApp)