By Babur Rafiq
Growth in real estate costs is not an unusual phenomenon. Costs of prime commercial real estate in New York exceed US100 per sq ft and have grown exponentially since 9/11. Similarly real estate in major metropolitan areas globally has seen quantum increases since 2001. Pakistan has also has experienced some dizzying gains. However in Pakistan some sort of reckoning appears to be on the horizon as the real estate boom has hit a rock wall after a spectacular explosion!
The hard fact is the new levels are way out of control. Propelled by a combination of focus by worker remittances and speculation, the new levels have attained an imbalance between value and revenue return. Reality is that revenue return on all Real Estate hovers nearer the 1percent range than the 10 percent area accepted as an international standard over a 10 year period. Both residential real estate and commercial real estate (office and retail) are all challenged to earn their keep. New retail acquisition cost dynamics make it prohibitive to sit on the property without developing, and once developed, need to be disposed off rather than to be managed because of low returns. The end result is that properties are sold off to mostly smaller investors. Most of these investors in turn sit on these properties expecting a capital gain. Fragmented ownership creates maintenance issues. The return on rental is deemed to be too complicated both in terms of legal control and possession or uninteresting rental prospects. Results are partially completed structures, or completed but mostly empty retail. In either case unproductive white elephants are created to whet the appetite for a new sucker who is born every day.
Retail drives almost all components of both developing and developed economies, setting the pace to drive demand, services, manufacturing and jobs from retail. In Pakistan, retail is fragmented and populated by individuals aka trader aka living outside the regulated part of the economy. Much of this is driven by the low level of attention paid to this portion of the economy.
In Pakistan, retail does not even have its own indicator; measurements are lumped in with wholesale. Retail planning, zoning and infrastructure in terms of quality has regressed over the last 30 years. Old commercial areas like Bori bazaar and Anarkali, have a better infrastructure and size to facilitate footfall, than the newer commercial zones who can neither accommodate vehicles nor pedestrians. Lack of mobility in retail makes the consumer experience highly unpleasant and inefficient. The result is that the consumer, rather than enjoying the gratification of shopping wants to spend as little time in the markets as possible, lowering the financial prospects of the retailer. Worse, many affluent consumers want to go out of the country to shop.
Till recently the status quo seemed to have no end in sight, but a growing realization that we are not going to out- manufacture China anytime soon, we must begin to wonder if we should pull up our retail service capability, if not to compete then, at least to justify the price levels of real estate. Key areas of focus have to be: to arrest the fragmentation of real estate in the retail sector, i.e. no more five to ten Marla, or 500 sq feet commercial areas which duplicate infrastructure, e.g. everyone has a four feet stair case which no one wants to climb! Consolidate the common areas, like parking, movement of levels, air-conditioning, safety etc. Allow movement of pedestrians to be safe and unhindered! Secondly adopt modern retail financial and management techniques and practices, i.e. no more 2 year advances and 1 year security or astronomical pagris (leave them for the grooms please!). Focus on common management charges for maintenance and security, parking etc. Malls like Forum, Park Towers and Dolmen in Karachi represent a local success and benchmark. Collection and management of footfall is critical. Last but not least, a focus on productivity and measures which provide the retail returns which justify the capital outlay are a must. Space management to maximize, retain and sustain consumer spending is essential. Longer term capabilities which focus on data collection, mining and developing an environment for talent and careers in retail are critical. The first area has to be driven by policy makers who legislate, zone and tax, the areas of retail productivity must come from within the retail sector. It will come from those who have the muscle to invest in a strategic direction. The partnership between the government and retail is critical to deliver against a retail vision.
If the retail does not evolve at a minimum level, we will have a sustained imbalance which will neither provide the return on investment nor allow retail to become the engine it deserves to be like manufacturing or agriculture.
Babur Rafiq, is the Country Manager Retail Levi’s and Dockers San Francisco, Lahore.
Here’s a question for the builders and planners of commercial and retail space – how come you don’t plan public restrooms and emergency exits? Editor
This article was originally published in the print edition of Valuemag, May 2008, issue 1.