What are the risks involving real estate investments in Pakistan?

The risks involved in real estate investing are largely unknown to the average Pakistani investor. The issue arises when most of these risks are not disclosed to the average investor or a first-time buyer because these play in favor of the already established players in the market, the marketing companies, and the middlemen.

However, understanding the different variables affecting real estate and managing your risk appetite can help you make profitable investment decisions. This article will highlight key information that will help you to minimize uncertainties, remain safe from scams, and make informed real estate investment decisions.

1 General market risk

Inflation, interest rates, and overall market direction (bear vs bullish) impact all investments, not just real estate. The market is also influenced by current trends and the country's socio-political status. These risks exist in almost every market, hence it is advised to assess the market and know your own risk appetite before investing.

2 Asset liquidity

Liquidity risk relates to the quality of an asset to be 'cashed out' whenever the need arises. Real estate is a high-ticket item, which often requires more money than a majority of other investments (like stocks etc., where a company is fractionalized into stocks, so it's easier to buy and sell). This high-ticket price makes real estate hard to sell since the pricing grade shrinks the potential buyer list. Sure, your plot or apartment or mansion will sell on the market, but it takes its sweet time, making real estate a not-so-great investment if you're looking for easy liquidity.

3 The economic health of the country

The general economic health of a country makes a huge impact on its real estate value. Several economic indicators, such as the country's GDP, inflation rate, employment rate, and manufacturing activity, etc., are added to the valuation. Currently, since Pakistan’s economy is heading towards instability and high inflation, it is the right time to buy real estate and hold.

4 Overselling

Overselling is among the most common forms of deception in Pakistan's real estate industry. Here, property developers would advertise their project indiscriminately, selling more than the actual units being planned or granted approval of. While the developer gets their costs covered, the buyer is usually left to fight the tedious and convoluted system to get their hard-earned money back.

5 Fraudulent schemes

Despite being a highly profitable avenue, the current status quo of Pakistan's real estate market is marred with shady and fraudulent practices. Sadly, there have been numerous incidents and scandals that have raised fears among investors. These ponzi schemes have not only destroyed the trust of the investor community but have also led to artificial price escalations and poor market stability.

6 Slow pace of development

Over-promising remains a leading cause of distrust in Pakistan's real estate industry. Here, developers over-promise the buyers with unrealistic delivery dates that they simply cannot meet. Consequently, the property remains unstable and does not fetch the market value expected by the owner in the given time.

7 Lack of data on real estate projects

Since there aren't any reliable sources to fetch data or the moral sense of fiduciary responsibility, project developers and marketing agencies get a free hand at what they charge. Dishonest property developers purposely withhold this information from investors to hide the actual land possession and impose hidden charges during later stages of development.

8 Pump and dump

'Pump and dump' is another form of real estate fraud that involves collectively inflating the price of owned files, units or plots through false and misleading statements. In a pump and dump scheme, people who control the market by virtue of controlling a large inventory typically spread false or misleading information to create a buying frenzy that will “pump” up the price of an asset and then “dump” the land or project by selling their own units at the inflated price.This leaves the buyers with an asset that they’ve purchased at a much higher rate than it’s value, eating into not just their current profits but also their future ones.

9 Qabza Mafia

Qabza Mafias are land-grabbing syndicates that acquire real estate through illegal means. In Pakistan, land grabbing is unfortunately not a new phenomenon. While the numbers of these groups have been significantly reduced, thanks to efforts of lawmakers and public at-large, several of them still exist and continue to prey on small investors. The easiest targets are overseas Pakistanis who aren’t on-location to protect their property, or the new entrants who are unaware of the real estate market and lack the legal and financial muscle to protect their property.

10 Agent adds ‘top’

Agent top is one of the most venal types of scams. Sadly, Pakistan's real estate market is plagued with this practice which claims the honest living of countless real estate owners and investors. The term 'top' is derived from the unjust profit gained on top of the agent/broker's commission from the sale of the property. The ‘top’ happens when a broker acquires a high-yielding property from the seller with the help of a hidden partner. Since the seller is not aware of this secret deal, the broker immediately oversells it at an insane price point to an investor. This crafty process not only deprives the owner of a fair profit but also rips off the buyer who pays extra for the property.

The answer: Innovation & empowerment

While the real estate sector brims with profitable opportunities, it is also riddled with ponzi schemes and shady practices. It is, therefore, crucial to take the many risks into account before committing any sum of money to real estate investment.

DAO PropTech was formed with the very vision of eradicating these problems from Pakistan's real estate sector. Our proprietary, end-to-end digital platform allows you to view the costs of all the projects transparently and purchase property without the fear of being cheated by an agent.

DAO PropTech's scientific pricing make s sure you’re not paying any undue premiums. Our use of distributed ledgers and blockchain for record-keeping ensures there’s no price manipulation, overselling, breach of data, or any form of fraud. In addition, our team pioneered regular construction milestone updates, so every buyer stays up-to-date with the pace of development, and keeps developers accountable. Click here to learn more about our platform.

Mirza Irfan Baig

Senior Content Creator