With the country's current political and economic turmoil, uncertainty is attached to various dimensions of one's socio-economic well-being. While inflation and unemployment are becoming a reality in these times of global recession, it raises multiple questions regarding financial security in the times to come.
Real estate is the go-to investment avenue for most of Pakistan, and the industry's predictions have become a central point of economic concern for numerous investors. Find below a list of questions that experts at DAO PropTech have answered about the projections regarding the industry, do's and don'ts, and an outlook on the future.
What is the prediction for the overall change in home values during 2022?
In Pakistan, mature property growth averages around 12%. This year, we expect the properties to perform around the upper standard deviation of more than 15.75%. This may be attributed to several macroeconomic conditions, including high inflation rates, overrated demand, and favourable government policies for developmental real estate.
In some areas of high demand and growth, the value growth might be as high as 25%. We believe the current bullish trend would also translate into higher growth rates for the next year, increasing the values further by another 15%+. The market growth is expected to slow down towards the end of the year due to political uncertainty.
Is now the time to sell?
It is never a good idea to exit the asset market. Asset markets usually have a growth rate higher than the inflation rate over extended periods, so it is an excellent hedge against inflation over longer periods, even in adverse economic conditions. Only take out money from the asset markets to buy an alternate better asset, change your risk tolerance or decrease your leverage ratio. The cost of transaction in the real estate asset market averages over 6%, so an advantage of less than that is not tempting enough.
Since the market is growing at a higher rate, if you sell now, the returns in terms of fiat currency will minimize due to high inflation and money supply. The better strategy is to ride this wave of fast growth at least, while the best strategy is to hold it.
What if you own multiple properties?
Portfolio management and diversification are at the heart of real estate investing. Your portfolio on the efficient investment frontier depends on your risk appetite. If you own multiple properties, shift to the less risky alternatives, even if it means lesser returns, towards the second half of this year.
Real estate is not like the stock market. The transaction cost is higher in real estate. Your overall transaction costs will double if you sell one property and buy another. It is also vital that you hold properties with a better appreciation outlook.
How much does location matter?
Location is a significant factor in real estate, but it is widely misunderstood. It not only means the geographic location and visibility but also includes demographic, cultural, and macroeconomic factors. Location factors with the most significant impact on property valuations include:
Amenities in close vicinity
Population growth rate trends
The overall demographics of the area
In real estate investing, buy not only what currently boasts a premium location but also what is bound to become more crucial over time.
How can real estate help an individual/couple/family effectively build generational wealth today?
Generational wealth is built over time. When you buy something, look for the price and value difference. Price is what you pay, value is what you get. A property with a higher value than its current price will always yield better results in the longer run. The golden rule of investing is that profits are made while purchasing and only realized at sales.
In addition to looking for properties that offer better value for money, go for properties with a higher net operating income and a positive cash flow month on month. In Pakistan, a 5% or higher annual ROI coupled with a growth rate of 12% on average would compound into a great wealth aggregator over a couple of decades.
Generational wealth usually aims to achieve financial freedom over longer periods. An excellent way to do it through real estate investments is to have a positive cash flow resulting in your passive income exceeding your expenses and liability pay-outs.
The year 2022 has been no less than a roller coaster ride in terms of the socio-political conditions in Pakistan and the global market. With high inflation rates and overrated demand, it may be tempting to sell your real estate asset, but the returns will be minimized due to high inflation and excessive money supply. In the long run, real estate is a great hedge against inflation and if you play your card right, it may even lead to financial freedom and generational wealth.