But let me give the real estate agent his due and try to explain his reasoning: The slump in property prices is due to political instability. Stable government – and appreciating prices – are only just round the corner. That is why, if one invested now, one could make a handsome profit by the end of the year. The real estate agent attempted to reinforce his argument by pointing out that Middle Eastern developers Emaar, Alghurair Giga, Creek Island and Damak were present in Pakistan. The suggestion was straightforward: I can’t be wrong if the big boys are still here; after all, they must see something, otherwise they wouldn’t be here. To misquote Churchill, never has someone been so wrong about so much in so little space.It defies reason to link the stability of the real estate market in this country to the wisdom of Middle Eastern developers. And it is simply naive to think Pakistan will resolve its deep and fractious political problems in a few months. But, then again, real estate agents are a strange breed. Given the enormous sums of money involved in the real estate business, it’s surprising that the industry hasn’t done a bit of self-regulation and, at the very least, imposed a professional qualification on its members. We have professional qualifications for lawyers, dentists, accountants and doctors. We even have practice qualifications for architects, engineers and contractors. One has to be a registered member of a stock exchange in order to buy and sell shares in a listed company. But when it comes to the purchase and sale of real estate, we somehow don’t seem to mind the fact that former cattle rustlers, qabza groups and well-know hoodlums try and pass themselves off as “real estate agents.”
First, a small clarification. The “real estate” market in Pakistan is a euphemism for the construction of (i) private residential estates on agricultural or waste land; and (ii) the construction of commercial high-rises on residential land. Since Partition, vast tracts of cheap, plentiful and arable land around our cities has been taken over and put to use to accommodate urban growth. These tracts of land are suburban sprawl and form the backbone of our current real estate market. Because rent control keeps residential and commercial rents artificially low, people tend to forget about rising land prices. Then, before one knows it, it’s impossible to buy land in the city for a new business enterprise or new house and the only alternative is to invest in new properties made available by private developers near or beyond city limits. Meanwhile, as existing residents get pushed towards the new suburbs, their residential properties are picked up for commercial uses. One can see for themselves. Barring the odd exception, residential development takes place on agricultural or rural land, commercial development takes place on residential land.
The past decade was kind to Pakistan’s real estate market. Post-9/11 foreign remittances, coupled with social conditioning that land (and gold) are always the soundest investment, meant there was a boom in the real estate market. Much of the new development was picked up by speculators seeking a high return or by prospective homeowners investing in a future homestead. The last two years have seen the speculative property boom in Pakistan become a whimper. It has been replaced by the roar in the Middle East. A poorly functioning economy here and a booming real estate sector has meant that speculative investment is now diverting itself to the more secure property investments in Dubai, Abu Dhabi and the other real estate markets in the Middle East. Some estimate that the loss to Pakistan is in the region of $3 billion. Meanwhile, prospective homeowners are facing problems of their own. Inflation and the rising costs of construction materials like cement and steel means that many plans to lay down a family home have been postponed until better times.
What does this mean for our real estate sector? Take a look for yourself. Much of the residential housing accommodation remains empty. Prospective homeowners haven’t moved in and speculators haven’t found murghas willing to take on a losing proposition. If there is a newly constructed high-rise you see with empty offices, this is also the reason why. Of course, this is not to say that demand for housing and commercial accommodation doesn’t exist. It does, but current property prices make it impossible for a vast majority to anything but dream of a place of their own. Meanwhile, we have unlicensed real estate agents willing to sing songs about the bright future of real estate investments.
Another aspect of the real estate sector is so obvious that it escapes most people’s notice. This is thje phenomenon of property pricing. Having worked in the real estate sector and taught property law for the last many years, I can state with some surety that there is no rational system of assessing land price in Pakistan. It is true that we have measures, like the DC rate list for instance. Or the average of prices paid for adjacent properties sold in the past few years. Or the “market rate” as assessed by a District Price Assessment Committee. But these measures have their own limitations and often overlook important price determinants.
The DC rate list is a table prepared under the authority of the Stamp Act, which is a tax statute that levies a charge on transactions based on the value of the transaction. It was never meant to be, nor is, an accurate representation of the price of real estate. The average price paid for property is another vague estimate, but it is based on the pricing system inherent in Colonial land acquisition legislation which, among other things, was designed to allow the state to acquire land for the least amount that one could call compensation. It is not a measure of the value of land. The workings of District Price Committees are as secret as those of a Masonic Order while other “market rates” do not take into account byelaws or restrictive use legislation. It is inconceivable that a kanal of land in the old city can go under the hammer for ten million rupees when there is no provision for automobile parking in the area. Alternatively, if developers constructing high-rises in the city ever provided adequate car parking spaces, the cost of this provision alone would throw off the financial estimates they planned their projects on. In any event, the sort of commercial activity that can reap rich dividends (services, retail) doesn’t find an easy home in the old and congested parts of our cities. So the price assessed is often not a representation of its real value.
The real estate market is in slowdown. There are billions of rupees tied up in it. The future homes of hundreds upon hundreds of thousands rest upon this industry’s good health and the hands of those at the helm. At the moment, those hands need a good wash. It’s about time people sat down and began to impose quality controls. As a first step, I would recommend a qualification system. Of course, nothing like this can, or should, be imposed in haste. Any doable plan would have to foresee 3-5 years into the future. In the meanwhile, the industry can boost investor confidence by announcing its intention to do so.
Source: The News, 8/9/2008