Contrary to world real estate business booming in Pakistan

[Salman]

LAHORE: Contrary to the situation in globally-renowned Western cities like Amsterdam, Toronto, London, Munich, Stockholm, Vancouver, Hong Kong and Sydney, where housing markets are closest to a bubble, the $51.5 billion China Pakistan Economic Corridor (CPEC) is expected to provide an added boost to the otherwise promising Pakistani real estate sector.

Before we discuss the international real estate trends in Amsterdam, Toronto, London, Munich, Stockholm, Vancouver, Hong Kong and Sydney in the second half of this story, let us first view some details of the housing trends and prices in Pakistan and those across the fence in India:

Pakistan:

According to Pakistan’s Bureau of Statistics, the national construction output accounts for around two per cent of country’s Gross Domestic Product (GDP), with housing representing less than half that total.

Since innumerable residential and commercial properties are not documented at their current market values in Pakistan, it is hence an impossible undertaking to determine the worth of the real estate sector. However, a Federal Board of Revenue data released in 2015 had estimated that the national real estate industry is at least worth around $700 billion.

It is worth quoting here a report carried on its website by the largest Pakistani and Asian private real estate company, Messrs Bahria Town, which enjoys services of around 60,000 employees and has revenues of $10 billion (2015), besides having an asset base of $20 billion (2015).

On its website, the Bahria Town states: “Globally, the construction and engineering services industry is regarded as one of the largest and most fragmented industry accounting for 10-12 per cent of GDP in many countries. With a dearth of over 800,000 housing units per year in Pakistan and a total combined production capacity of the public and private sector estimated at 350,000 units per year, there is a piling of some 450,000 housing units that add into the next year’s backlog. The investment opportunity, for both the national and international observer, is therefore, better than ever.”

The Pakistani real estate giant, referred on October 6, 2011 by the Los Angeles Times as a “functioning state within a non-functioning one,” further opines on its website: “The construction sector has the potential to export services worth $1 billion per year to Saudi Arabia, Central Asian States and other Middle Eastern countries. Therefore the semi-skilled and the skilled man power is in ample supply for new development initiatives.”

According to the Pakistani Association of Builders and Developers (ABAD) which does not differ much with Bahria Town, there is currently a housing deficit of 800,000 units and this shortfall is increasing by 300,000 units each year.

According to the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), the national construction sector has grown by 9 per cent of late, which indicates its strength. However, the apex business body had observed that this robust sector needed help of the booming real-estate sector.

India:

According to the India Brand Equity Foundation, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade. The Indian real estate market is expected to touch $180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country's Gross Domestic Product. The private equity investments in real estate increased 26 per cent to a nine-year high of nearly Rs 40,000 crore ($ 6.01 billion) in 2016.

The real estate sector in India is expected to attract investments worth $7 billion in 2017, which will rise further to $10 billion by 2020.

India has been ranked fourth in developing Asia for Foreign Direct Investment inflows as per the World Investment Report 2016 by the United Nations Conference for Trade and Development.

According to data released by the Indian Department of Industrial Policy and Promotion, the construction development sector in India has received Foreign Direct Investment equity inflows to the tune of $ 24.29 billion in the period April 2000-March 2017.

In India, according to media reports in recent months, prices continued to grow steadily according to the April 2017 instalment of the Reserve Bank of India’s House Price Index.

In its June 6, 2017 story, the Economic Times had viewed: “Demand will remain robust but witness redistribution. Since risk on residential investments will be mitigated, it will hence be rewarding. This is why we will witness the incidence of high risk-high returns investors thinning down on the ground. Investors will also be low-key because they need to see increase in prices accompanying increase in sales - something they have not witnessed of late.”

The Economic Times report had further held: “The cost of land will go up within city limits as post-demonetization, there will be no leeway for diversion of surplus cash from other businesses towards purchase of land. On the positive side, end-user demand is stable and some recent reductions in home loan rates by banks will see that the trend continues. Overall, we anticipate a marginal upward increase in pricing for residential units in a market backed by genuine buyers and a lower yet predictable and good quality supply pipeline.”

First published in 1961, the Economic Times is an Indian English-language daily newspaper, which happens to be the world's second-most widely read English-language business newspaper, after the “Wall Street Journal.” It enjoys a readership of over 800,000.

Earlier, an April 3, 2017 report appearing in the Economic Times had stated: “While the overall index sequentially rose 2.2 per cent at the end of December 2016, almost seven of the 10 cities tracked by the Reserve Bank of India saw an increase in price last year.”

Global real estate trends and the latest UBS Global Real Estate Bubble Index:

According to the Business Insider, an American news website that also operates international editions in the UK, Australia, China, Germany, France, India, Italy, Indonesia, Japan, Malaysia, Netherlands, Nordics, Poland and Singapore, cities like Amsterdam, Toronto, London, Munich, Stockholm, Vancouver, Hong Kong and Sydney are facing the biggest risk worldwide of seeing their property values collapse.

In one of its recent editions, the Business Insider has gone on to carry the latest “UBS Global Real Estate Bubble Index,” which is designed to track the risk of housing bubbles in global financial centres.

The 161-year old UBS AG is a Swiss global financial services company, incorporated in the Canton of Zurich.

Having over 2.8 trillion Swiss Francs in invested assets, UBS is the biggest bank in Switzerland, operating in more than 50 countries with 59,387 employees around the world, as of 2016.

The UBS website states: “Home owners in Toronto face the biggest risk worldwide of seeing their property values collapse. That's according to UBS' latest annual Global Real Estate Bubble Index, which examines which housing markets have experienced unsustainable price increases.”

It quotes the latest UBS report: “Annual price-increase rates of 10 per cent correspond to a doubling of house prices every seven years, which is not sustainable. Nevertheless, the fear of missing out on further appreciation predominates among home buyers."

The Business Insider maintains: “Buyers are being egged on by easy financing conditions, growing wealth among the ultra rich, and a shortfall of building supply relative to demand, the report said. By over blowing the impact of these three factors, homebuyers have driven at least eight cities into bubble territory. Toronto and Amsterdam were the new additions this year to this cohort of cities where home prices have increased by more than 50 per cent since 2011.”

Following are brief excerpts from the latest UBS report, which are carried by the “Business Insider,” to discuss the fears, hopes and projections about eminent real estate markets around the world:

Amsterdam:

“Since 2015 real prices have increased by 30 per cent and the city has entered bubble-risk territory. The city's housing market sharply decoupled from the weak countrywide housing market. Deviations from market fundamentals in the capital are, however, not extreme."

Hong Kong:

"Residential market prices reached an all-time high in midyear. Thus the UBS Global Real Estate Bubble Index score for Hong has increased significantly. Prices — especially for smaller dwellings — surged in the last four quarters. In real terms they are close to three times higher than in 2003, having increased at an average annual growth rate of 10 per cent. Real rents rose in the same period by 3 per cent, while incomes were unchanged."

London:

"London's inflation-adjusted housing prices are almost 45 per cent higher than five years ago and 15 per cent higher than before the financial crisis a decade ago. But real income remains 10 per cent lower than in 2007. The rise in house prices, however, has been decelerating since the UK referendum in June 2016, and real prices are 2 per cent lower. The UBS Global Real Estate Bubble Index score for London dropped to 1.77, but remains in bubble-risk territory."

Sydney:

"All sub-indicators point unequivocally to elevated risk on the housing market. The dip in prices in 2015-16 proved short-lived. Real prices again shot up 12 per cent in the last four quarters and are now 60 per cent higher than in 2012. Incomes increased by a meagre 2 per cent in inflation-adjusted terms. Tax breaks and interest-only loans are whitewashing the worsening affordability for the time being."

Vancouver:

"Price growth peaked in the middle of last year when real prices soared 25 per cent year on year. In second quarter of 2017, the growth slowed to 7 per cent, falling below the country average. Income and rental growth were solid at 3 per cent and 5 per cent year on year respectively. So valuations were slightly dampened in recent quarters, but the market remains in the bubble-risk zone, harbouring substantial downside and elevated correction risk."

Munich:

"House prices remained on an explosive trajectory: in 2016 they again increased at double-digit rates against the backdrop of record-low vacancy. Real prices have risen 85% in the last 10 years and affordability continues to deteriorate. It takes a skilled service employee an all-time high of eight work years to buy a 650 square-foot flat.”

Stockholm:

"In the last 10 years, real prices have climbed by 60 per cent, more than twice as fast as incomes, chiefly due to favourable financing conditions. Price growth sputtered over the last four quarters to 5 per cent, below the national average, yet market imbalances increased further. Rising mortgage debt and building investments confirm overvaluing signals."

Toronto:

"House prices here are making up ground lost to Vancouver. Price growth accelerated last year and have reached an excessive 20 per cent year on year in the last quarter. Real prices have doubled in 13 years, while real rents have increased by only 5 per cent and real income by less than 10 per cent. A strengthening Canadian dollar and further interest rate hikes would end the party, in our view."