Being a tangible asset composed of property and the land on which it sits, real estate has always been the go to investment avenue for Pakistanis. But like every other asset class, real estate is also subject to the rudimentary economic laws of supply and demand. However, despite its growing demand and immense business value, its supply remains highly superficial, impulsive, and swayed by developer biases.
In this article, we intend to inform you about the factors affecting the supply and demand of real estate in Pakistan. In that pursuit, we will also help you understand how data-backed evaluation techniques can fix these problems in the future.
Current economic uncertainty
The world economies are currently facing an infernal storm of global recession, and Pakistan is no exception. With the stock market at an all-time low and the inflation rate ripping the economy apart, the country is taking the brunt of its brutal effects on all levels.
As uncertainty increases, the people's faith in investment diminishes. In terms of economics, this gives rise to adverse spending patterns that consequently result in negative growth and overall contraction of the money supply.
Shortage of housing units
With its current growth rate, Pakistan is expected to become the fifth most populated country in the world by 2050. Sadly, this escalating rate, coupled with poor policy-making, has led to a stark gap between the supply and demand of housing units.
According to the state bank, the country experiences an urban housing demand of 350,000 units annually, of which only 150,000 are met. Unsurprisingly, more than 60 per cent of this demand comes from low-income strata, whereas the bulk of the supply is catered to the middle to upper-middle income groups. This vast disparity is a direct result of unregulated markets, lack of research, and strategic planning for future growth. Had Pakistan's real estate been built using a data-backed and use-case approach, we wouldn't have a plethora of empty buildings sitting in the center of major cities.
A survey by Pakistan Social and Living Measurement (PSAML)revealed that the country's current housing conditions are below basic living standards. Factors such as congestion/crowding, security of tenure, provision of civic amenities, structural quality and cultural adequacy are prevalent in dwellings all across Pakistan. It is also fair to mention that most of these issues pervade in rural areas, whereas majority modern housing initiatives emerge in urban areas. This has created an unnatural demand for housing and diminished the imperative of improving housing conditions - which in all spheres is the state's responsibility. Since there is very little data correspondence in the Real Estate sector, most housing projects emanate from inconsistencies that do not conform with the population's current per capita space, lifestyle needs and income levels.
Over the years, Pakistan's real estate industry has seen a steep rise in momentum investing. Developers and builders invest huge sums of money on commercial projects while ignoring the housing deficit the country inherently struggles with. Since commercial properties are high-yielding items and tend to fetch tremendous value quickly, most developers vest their interests in projects that have high turnover in shorter timelines. The situation is further convoluted by the minimum to no regulation in this sector, allowing real estate developers to make their way with the system with complete impunity. This is one of the biggest problems that are diminishing the residential housing supply.
Inefficient management of estate and poor utilization of government housing is a classic example of dead capital in Pakistan. A large part of this problem is the incorrect valuation of land, where market value and opportunity cost are repeatedly neglected. We see such errors apparent across all major cities of Pakistan. Taking Islamabad, for example, the state land issued to government employees in central areas such as G-6/1 occupies around 86 acres alone. Such single-storey housing holds immense potential for high-rise construction (vertical expansion) that can not only solve the prevailing housing deficit but also help in the country's economic growth. In a statement by the Former PM Imran Khan, the value of dead capital sitting in urban areas alone is worth around 300 billion.
No study on consumer behaviors
Consumer behavior studies are one of the cornerstones of real estate economics. Unfortunately, a vast majority of real estate projects in Pakistan are devoid of any real analytics concerning consumer utility, price and purchasing power. Many core factors such as basic investment appetites, subjective norms, lifestyle needs, living perceptions, and risk controls are largely ignored when developing a residential or a commercial project.
When these key indicators are left unattended, the welfare and quality of living take a nosedive. The housing crisis in Pakistan is a living example of this.
Lack of data
Since there aren't any reliable sources to fetch data, most residential and commercial projects are driven by intuitions and emotional decisions. And once these projects get started, developers and agencies attract investors using misleading statements and fallacious advertising. When there is no data to back the developer's claims, it becomes easy to deceive the population.
Barrier to entry
Real estate, by virtue, is a high-cost asset, which naturally involves several impediments to its ownership. However, it is also true that property in Pakistan is deliberately layered with barriers that forestall the common man from real estate ownership. The market is intensely dysregulated and overrun with realty agencies that hold a major stake in the pricing and supply of real land to the public.
No focus on merit goods
Moreover, these development corporations capitalize on high-end investors and design housing projects that solely focus on aspects of luxury more than the basic residential needs of the population. Apparently, most of these projects are designed for consumers who already own a house or have some property to their name. The situation is further aggravated by the dire imbalance that exists between commercial projects and public merit goods. From what we see in Pakistan today is a massive influx of resorts, hotels, restaurants and shopping malls but little to no focus on hospitals, schools, fitness centers, warehouses etc.
Middlemen manipulating the supply
Intermediaries such as brokers and marketing agencies vastly control and manipulate the price determination metrics in the market. A plot, for example, that should be valued at its fair price is indiscriminately inflated just so the broker can get a piece of the pie when selling it to the investor. Consequently, this practice collectively inflates the price of other similar properties, further constricting real estate supply to the population.
DAO PropTech’s solution, ‘The project selection matrix’
The project selection matrix is DAO PropTech's very own cutting-edge evaluation technique that ensures development projects conform to the current and future needs of the population. Leveraging the power of data, we conduct extensive research on industry records, cultural requirements, consumer behaviors, and market trends.
Using the results from this method, we determine the market needs and make institutionalized decisions when onboarding new projects. So as an investor looking toward setting your roots, generating rental income, or building wealth, your money remains secure as you make informed decisions based on data and your risk appetite.