True blue investments never go out of style

Is this the right time to invest in Real Estate?

Valuemag investigates by talking to some influential public figures from diverse business back grounds and finds things are not as bleak as painted by the economic pundits!

By Marian Sharaf and Aarzoo Naeem

Inflation during July-April 2007-08

Pakistan is in a state of confusion – last year around June economic outlook looked good; investors confidence was at an all time high, Pakistan recorded real GDP growth at an average rate of 7.0 percent per annum during the period of 2003-07, and over 7.5 percent in four years running 2004-07. (See inset).

INSET:

According to the government figures released in June 2007 by Islamabad, “with economic growth at 7.0 percent in 2006-07, Pakistan’s real GDP grew at an average rate of 7.0 percent per annum during the past five years (2003-07), and over 7.5 percent in four years running (2004-07). Compared with other emerging economies in Asia, this put Pakistan as one of the fastest growing economies in the region, along with China, India and Vietnam.

This growth was mainly driven by strong domestic demand, with investment taking lead over consumption for the first time in last three years; owing to a growing middle class and favorable demographics. The real per capita GDP grew by 5.2 percent and maintained an average growth of 5.5 percent per annum over last four years; Per capita income in current dollar-term was up by 11.0 percent, to $925 from $833 of last year. A strong recovery in overall agricultural growth at 5.0 percent and major crops at 7.6 percent; highest production of wheat (23.52 million tons) in the country’s history; an impressive 22.6 percent increase in sugarcane production (54.7 million tons) – second highest production level in the history, large-scale manufacturing continued to grow robustly at 8.8 percent, albeit at a somewhat less torrid pace than last year. The overall services sector continued to maintain solid pace of expansion at 8.0 percent. A sharp pickup in overall investment, reaching a new height of 23 percent of GDP and, most notably, private investment remained buoyant owing to the persistence of strong consumer demand.

Despite monetary policy tightening the credit to private sector continued to grow strongly (12.2 percent) on the back of improving investment climate. Public debt declined from 56.9 percent to 53.4 percent of GDP and external debt and liabilities declined from 29.4 percent to 27.1 percent. Workers’ remittances totaled $4.5 billion in the first ten months (July-April) of the fiscal year as against $3.6 billion in the same period of last year, depicting an increase of 22.6 percent. Highest foreign investment flows at around $6 billion in ten months (July-April), and the year is expected to end with $6.5 billion. Exchange rate continued to remain stable despite widening of trade and current account deficits, clearly indicating strong inflows of external resources. The successful launch of a new $75.0 million 10 – year sovereign bond in international debt capital market with seven times over-subscription has been the defining moment in Pakistan’s history as it reflected a strong vote of confidence by global investors on Pakistan’s current economic prospects and future economic outlook.” June 9, 2007 – Courtesy of Business Recorder

Now, according to the figures released by Ministry of finance, Government of Pakistan on May 15^th (2008), “the overall CPI based inflation registered a sharp pick up in April 2008 to 17.2 percent on year-on-year-basis – the highest increase in the last several decades.

Rising food prices continue to be the largest contributor to headline inflation, with year-on-year price increases in this sector hitting 25.4 percent in April compared with 20.6 percent in March and 9.4 percent in April 2007. The headline inflation was 17.2 percent in April 2008 as against 14.1 percent in March 2008 and 6.9 percent in the corresponding month of last year (April 2007). Inflation for the current fiscal year was targeted at 6.5 percent.

However, global food and fuel crises have impacted Pakistan heavily, resulting in massive surge in inflation in general and food inflation in particular. Higher food prices, expansionary fiscal policy, extra-ordinary increase in government borrowing from the Central Bank, upward revision in local energy and wheat prices, and unanticipated increase in international commodity prices are responsible for the sharp pick up in prices in Pakistan. Non-food inflation also surged in the month of April 2008 to 11.2 percent as against 9.4 percent in March 2008 and 5.2 percent in April 2007. The sharp pick up in non-food inflation owes heavily to house rent (11.4%), transport (17.9%), fuel and lighting (8.5%) and cleaning/laundry (15.8%) etc Fuel & lighting and transport sub-indices have surged mainly on account of the release of higher international oil prices to domestic consumers. During the first ten months (July- April) of the FY08, the average CPI-based inflation stood at 10.3 percent as against 7.9 percent in the same period last year. Food inflation moved to 15.0 percent in the first ten months of the current fiscal year as against 10.2 percent in the same period last year. Non-food inflation is also trending upward as second round of food inflation is building pressure on non-food inflation. For July-April 2008, non-food inflation increased to 6.8 percent as against 6.2 percent of last year.” See table.

Double digit inflation means higher costs for essential commodities that don’t translate well from the consumer’s point of view. Prices have gone up for construction materials like cement, steel, sanitary ceramics, cables etc. Labor and transportation costs have gone up too. People who were building houses are facing severe cash flow problems and delays in completing their projects. Economic pundits are painting bleak and dismal pictures of the economy and current political instability. The past few months brought some hope. Rumors had it that investment in Real Estate would be favorable once the new government is sworn in, 2007 was the most politically chaotic year for Pakistan; the judicial drama, knock down of Lal Masjid, security harassment by suicide bombers and to further deepen the misery of Pakistanis the assassination of Benazir Bhutto that intensified insecurity.

Almost eight years back in the aftermath of 9/11, President Musharraf’s alliance with the USA attracted innumerable movers and shakers to invest in various private sectors, for example, Emaar, Bahria Town and Al Ghurair Giga, Pvt Ltd launched land development schemes successfully in the property sector. The early few years of 9/11 boosted Real Estate business in Pakistan. Those deported from abroad and others who found Real Estate in Pakistan a secure source to save their investment played a vital role in boosting the property business. But all that glitters is not gold. What seemed to be a perfect jackpot has become an unproductive gamble.

“During elections, there was a great deal of investment in Real Estate and properties because people expected business to flourish. However, since the elections it has gone down again and people think it is risky to invest in the present unstable conditions,” believes Nadeem Shahzad, Chief Executive Xinhua Mall. Nadeem Shahzad is one of the influential entrepreneurs of Lahore with large scale commercial assets in shopping malls, hotels and resorts that he thinks yield better returns on investments. Investors like the Xinhua Mall CEO seem reluctant yet; business activity in Real Estate is continuing business as usual. Naeem Sharif Chaudhry, Head of Department Real Estate Warid believes, “In my opinion, the Real Estate Industry at this moment is ripe for investment because big financiers are investing abroad. They are doing it on purpose to bring down the price of Real Estate in Pakistan and they will reinvest here when the prices are down to their standards.”

Real Estate business is profitable, safe and easily retrievable if we see the historical trends of Real Estate against FOREX or even gold, we can see investment in Real Estate is far ahead but does that mean Real Estate is a better investment than the Stock market? “Some investors believe Real Estate and Stock market has a relation. Well, yes but if you ask my opinion I’d say Stock market should be made stronger than the Real Estate sector. Any investor adding in the Stock market is generating revenue for himself and boosting the country’s economy, consequently attracting big investors from abroad. However, anyone investing in Real Estate is only making an asset for himself. So, it depends on what your intentions are,” says Mohsin Syed, Managing Director Hybrid Technics (PVT) Ltd.

“Real Estate is creating jobs, regardless of the state of Pakistan economy. Whether it is safe or not I can’t say since it’s not my main interest. However, the point is that we must encourage whatever is helping us boost the country’s economy. We must think on these parameters. You can’t say property investment is unsafe. There are always ups and downs in the economy and so there will be in Real Estate too,” declares Mian Yousuf Sallahudin, a prominent public figure.

Real Estate is a money making business and usually a safe investment. Unlike investments in Stock market, there are less chances of losing out when conditions aren’t favorable. The fact of the matter is that unstable economy is a green signal for big and small investors to go ahead in property dealing. The only downside is the prices shoot up when the demand for land and housing schemes goes up but one thing is for sure, Real Estate investments are like blue chip stocks – long term they always pan out, probably the reason why investing in Real Estate can never go out of style. ■

Magazine layout by M. Asif - Photos by GM Shah, Valuemag, issue 3, July 2008

This article was originally published in the print edition of Valuemag, issue 3, July 2008