Biggest Risks for Real Estate Investors in Pakistan

Let’s be real, real estate investment in Pakistan is actually very risky. But, the plus point is that it’s not rocket science! Just be prepared, but do not be afraid.

Real estate remains the single largest sector in Pakistan which receives the highest number of investments every year. Several reasons and statistics support this fact, as the estimated projected value of real estate in Pakistan for the year 2024 stands at a whooping USD 1.98 trillion(Statista). The common reasons are the ‘popularity’ and cultural or social values attached to real estate assets, its long-term benefits, or the growing population and ultimate need for residential, and commercial projects.

Whether those investments get desirable returns or not, that’s another debate. However, the point of concern now is that despite being one of the most investible sectors in the country, it has been facing distrust from investors, be it local or overseas, which has ultimately led to a dramatic decline in investments in Pakistan’s real estate sector. Several risky factors have fueled this distrust and resulted in such a drastic downfall.

This article shall help you navigate through the top 7 risks for real estate investors in Pakistan. You must keep this in mind, at all costs, before making any real estate investment in Pakistan, to save yourself from any undesirable circumstances.

Top 7 Risks for Real Estate Investors in Pakistan

As for the last 3 years, here are the top reasons that have made the real estate investment in Pakistan considerably risky, less investible, and ultimately impacted the overall market and economic conditions badly.

Lack of Accountability and The Transparency Trap

That’s undoubtedly the first and foremost reason that makes real estate investment in Pakistan risky. The fact that every year thousands of investors or end-users get scammed in the wake of real estate investments and the lack of any reliable accountability measures discourages investors from making any investment in the future. Also, the lack of any responsibility from the accountability institutions makes it even worse.

Unfortunately, the government, rather than taking steps to increase the accountability and transparency of real estate transactions, makes them even worse by passing laws like the recent restoration of the NAB amendments. This made it even harder for the affected to get justice, as the minimum number of complaints to initiate any investigation was raised to 100, and also that property cases with corruption of less than 500 million shall not be investigated by the country’s largest accountability institution. Weird, no?

The High Cost of Property Tax Laws

Another risk for real estate investors in Pakistan is the never-ending saga of property tax laws. From Capital Gain Tax of flat 15% to Advance Property Tax of 3% (for filers; on property worth 50 Million), the tax on property in Pakistan has risen very high. With that, the probability of earning desirable profits on selling or buying property has decreased drastically.

And unfortunately, almost every new regime change, rather than reducing this risk, adds even more % of these property taxes. Also, the uncertainty attached to these tax laws reduces the real estate investors’ confidence, which then leads to low investment rates, low demand, and ultimately low returns on investment.

Unreliable Property Dealers

Well, most of the property investments done in Pakistan are through property dealing companies. And ironically, that’s where the largest risk lies. Because this brokerage system is filled with hundreds, if not thousands, of corrupt networks or groups of individuals, who operate on behalf of society developers, but never connect the end user with the real asset or their desired property even after receiving the investment.

As per the report by the Securities & Exchange Commission of Pakistan, SECP, 2023, there are approximately more than 500 unauthorized companies in the market, functioning on behalf of societies, advertising the respective projects, receiving investments, scamming and just running away. This creates an unbridgeable gap between the actual management of the project and the end users, resulting in low investments, and ultimately decline in values.

Regulatory Loopholes

Some of the risks for real estate investors in Pakistan also lie with the regulatory bodies or the development authorities of the country. Even some of the renowned and major development authorities, mainly at provincial levels, have reportedly been accused of granting false approvals to several residential as well as commercial projects.

This means that there exist certain loopholes that do not allow these so-called development or regulatory authorities to provide the desired and considerable oversight or, they may be intentionally involved in keeping the end users from knowing the truth. Who knows!

Developmental and Structural Issues

Another risk that has eagerly contributed to the risks of investment in the real estate sector of Pakistan, is the developmental and structural issues. To be honest, it is very rare to find developed projects, either at the governmental level or at the private level, to get the fate of being ‘completed’.

As, most of them get launched, advertised, and then found as nowhere to be seen! Probably become the fate of the ‘black hole’, huh? Whatever the reason, this is also one of the top risks of investment in real estate in Pakistan. Because obviously what’s the point of investing in real estate in Pakistan, when there is no result? Also land litigation issues, and structural issues such as poorly created master plans, natural disasters, labor shortages, and even safety hazards are on the list.

Unpredictably High Interest RatesIssues

Yes, the rates of interest offered by the banks in Pakistan are also the reason that adds to the risks of real estate investment. Because banks offering higher interest rates, which currently stand at 17.5% (State Bank of Pakistan, SBP), encourage investors or even the general public to deposit their amount or surplus in banks, rather than investing in real estate assets. Which is also vulnerable to economic, social as well as politically uncertain conditions. This risk is also fuelled by the continuous devaluation of the Pakistani rupee over the last 3 years.

Next time when making your investment in real estate, pray for low interest rates!

Economic and Political Uncertainties

Last but not least, among all the above-mentioned real estate investment risks, the uncertain economic and messed up political landscape of the country is also one of them. Given the dying economy of Pakistan, the cost of living has increased whereas the purchasing power has reduced to a very large extent.

This then leads to ‘survival mode’ where as per the natural perception the rate of investments decreases because the money left is for survival only! Also, this is fuelled by the political fallacies which donot seem to end anytime soon.

Is Real Estate Investment in Pakistan That Risky? Yes, But Who Cares?

Now you must be wondering, given all the above-stated risks, should you invest in Pakistan’s real estate sector in 2024 or not? Well, the answer is YES, remember, ‘Be prepared, but donot be afraid’?

Because ultimately high risk grant greater returns as well! So one should be sound enough to consider all these reasons before making any investment. If that too is hard for you then just involving authorized representatives, brokers, or property management companies to deal with. This will help you mitigate these risks and help you earn returns when others get fooled!

Conclusion

In this blog, we articulated the top 7 risks in the real estate sector of Pakistan or the ones that are usually faced by real estate investors, along with the answer to “what to do now”.

In a nutshell, undoubtedly, the real estate investment in Pakistan can be very risky. As for now, the rate of real estate investment profits might be low, however, still it remains the top investible and profitable sector because the real estate market conditions never remain stagnant for a longer period.

But given the risks, you just need to be SMART about your investment decision or even a simple awareness about the current trends in the market conditions can help your investment rise to handsome returns.