Real estate remains one of the most preferred investment sectors in Pakistan. The current policy focus as well as investor preference has grown it into the biggest investment class that trumps the stocks and gold investment market altogether.
The total value of real estate sector is estimated at 3x of the country’s GDP i.e. around USD 900 billion. The construction output alone accounts for 2% of Pakistan’s GDP. However, this data is still not independently verifiable since under-declared valuations and non-regulated investments may not be accurately reflected in this.
Promising as it may be, investment in real estate comes with its fair share of challenges in Pakistan. Putting your money in real estate without due researchand due diligence can easily spiral into a costly catastrophe. The market has seen a huge influx of these ponzi “get rich quick” schemes, which have not only destroyed investors’ trust but also contributed to artificial price escalations and a poor market trustworthiness. For most investors, these are ‘once in a lifetime’ transactions where they invest the entirety of their life savings, putting their future at stake.
Unlike other transactions like grocery where users have a fair idea of the value, movement of price and its future forecasted value, real estate transactions are less frequent. This means most people have little knowledge of the industry they are trusting with their life savings. In absence of robust research data, concrete regulations, concept of fiduciary duties and an unforgotten moral compass, the players in the industry have a free hand at what they charge against their services (going up to sales costs being as high as 50 percent of the initial down-payment in some cases).
From unrealistic promises to a lack of legal proof to inflated pricing and development frauds, shady practices regarding real estate in Pakistan have become the norm. Repeated incidents and scandals have also raised fears of financial fraud.
This article is going to highlight key information that investors should understand to better sift through these scams and make informed real estate investment decisions
Understanding the process
The risks involved in real estate development are largely unknown to the average investor, who is usually kept in the dark on purpose. However, knowing your risk appetite and use-case can better equip you to make an informed investment decision. Understanding the different stages of a project and associated risks will further help you in this regard. From land procurement and development, all the way to legal clearances and project marketing here is a representation of risk variation throughout the development of a real estate project:
Earlier project stages bear higher risks, but can also pay the best potential returns. As the project moves forward, the level of risk continues to decrease. As the project moves towards the construction, leasing and maturity stages, returns decrease and so do the risks; in favourable economic conditions, returns may still be as high as 10-15%.
The grave mistake by investors is that they end up paying for a product during the early stages while it is little more than a promise, and where the risk of the promise failing (the developmental risk) is not factored in. Hence, the valuations are grossly overstated with fruits of the development going to sales agents and developers and the risk of development primarily parked with the asset purchaser.
Which development phase do most investors get trapped and scammed in? Let’s find out.
The lucky draw pot!
Billboards promoting several real estate projects have been popping up all across the country, most of them featuring the words “ballot” or “file”. This is one of the most common traps an average investor can fall for in Pakistan. Once you submit your information on a “Webform” or Social Media handle, you are bombarded with emails, WhatsApp messages, and calls with an urgency to invest. Remember, if the scheme is that exclusive or lucrative, the developers won’t be begging for your money and push their agents into your lives, rather you will be the ones searching for them. Nonetheless, these agents will ask you to submit an initial amount to purchase a ‘file’ by your name and to await the draw that is yet to happen. These initial amounts usually run in hundreds of thousands of rupees. Moreover, purchasing a file does not guarantee any sort of possession whatsoever.
The not-so-real facilitators
Trust is a rare commodity these days. Placing it on unknown players is even riskier. In the Pakistani real estate market, it is common for people to coax you into buying something that’s usually ‘stuck’ or not easily sellable. Consequently, it is extremely important that you do your homework before reaching out to any facilitator. Whether it’s you visiting their office or having second opinions from peers, it is essential to remember that the prices quoted to you might include a hefty commission on top of their regular service charges. This is usually done when the different prices are quoted to the buyer and seller and difference is pocketed by the person facilitating the deal. This adds an increased burden on the investor in addition to the already high market price. Your research on current and historical market prices and trends will help you avoid getting conned by these agents.
Solution?
Ask questions on project costing, cashflow requirements, visibility of books/spending, total inventory available and sold, historical prices/valuations and expected rental yield vs. current rates.
When you have decided on your investment, buy and hold your purchase for a long duration, do not frequently trade real estate as it is generally not for the benefit of the common man.
Archaic investing practices coupled with the above-mentioned issues plaguing the industry, advancement in technology has made the real estate sector ripe for disruption. This amalgamation falls under the ambit of Proptech which is more than a mere amalgamation of the words property and technology.
Proptech aims to provide apt real estate valuations, historical data and eliminate the information asymmetry while ensuring realistic valuations. This brings much-needed transparency and accessibility to real estate transactions.
How exactly is Proptech changing the real estate investment game?
With the help of data and technology, Proptech is bringing efficiency to the real estate space in Pakistan by helping investors and businesses to sell, purchase, manage, and research investment opportunities. These platforms aim to contribute their technical expertise to minimize the gap between an investor and a developer while providing market data and analytical capabilities to make calculated and informed decisions.
One of these firms, DAO PropTech, is an online platform that facilitates both the developer and the investor. They aim to bridge the gap that has existed for decades, providing accessibility to thousands of investors with flexible investment options as well as new developers who are looking for direct access to investors. This provides a faster and more efficient method of helping investors secure their dream investments via the use of data backed by a digital ledger and a valuation-based pricing system, two things that are not known to many investors in Pakistan yet.
In an interview, Muneeb Khan, Chief Growth & Strategy Officer at DAO PropTech, said:
“The last two years of the pandemic have brought about revolutionary changes to the digital space and it has accelerated the adoption of technology in the real estate market as well. People have become more tech-savvy and reliant on digital transactions. While the real estate industry has been slow to leverage technology, we see real estate investors and owners becoming more data-driven in their approach. Proptechs aim to bridge this gap by capturing, sorting, and leveraging data to help people make informed real estate decisions, disintermediating the property sale and purchase process while facilitating real estate transactions remotely. We at DAO PropTech have developed a proprietary platform where developers and users can make decisions based on historical trends, realistic prices, and invest according to their risk appetite. Our multipoint project selection & due diligence tool utilizes use-case data to disrupt how real estate properties are planned, designed and constructed. Proptech in Pakistan is still in its infancy where the users are getting accustomed to the idea while at the same time looking towards the regulators to formulate rules and regulations regarding the industry. Our organization not only aims to change the way business is done in the sector but is also focusing on educating the end user and investors to ask the right questions and make more informed decisions. Acceptability of our model has come from different strata of the society where we see people becoming more aware about the industry. It gives us hope in the future which looks bright, secure, and inclusive.”
With multiple startups and companies now entering the Proptech space, it is hoped that like progressive economies, we will soon see more people embracing the intersection of real estate and technology and start to make more secure and informed investments.
Note: To learn more about DAO PropTech and their offerings, please visit daoproptech.com
