The economic impact of the real estate business
THE Real Estate business in Pakistan is enjoying government’s patronage.Whenever government is questioned about steps for promotion of employment and growth, the government argues; “We have promoted real estate, which supports forty industries.
” In fact, the argument for promotion of forty industries is a very weak argument.Every small and large product has a forward and backward value chain.
Suppose you only grow potatoes whose commercial production needs only a few thousand rupees, it will have its value chain.
The beneficiaries of this micro-business may include tractor owners, fertilizer dealers, farm labourers, chips, fritters and samosas makers, hotel owners and employees, etc.
So, is it necessary to invest in the most expensive business due to the existence of a value chain?
Despite government patronage, no attention has been paid to the production of raw material required for real estate.
If you go to Rawalpindi Saddar Market to buy tiles, in 90% of shops you will not find made-in-Pakistan tiles, despite the fact that the Master Tiles, a made-in-Pakistan brand is considered as international quality product.
You will find the doors made-in-Malaysia, ceramics made in China and the plywood made in Malaysia or Thailand.
The made-in-Pakistan fans are considered as good quality, yet you will find the market full of imported fans.
If real estate was to be made the official business, then there was the need to ensure preparation of whole value chain in the country.With current policy, real estate has become a major contributor to the current trade deficit.
In real estate, 90% of investment is made only in plots or files without any construction activity; only land is bought and kept for a few months to sell at a profit of several hundred percent.
Plots business is such a capital-intensive business that no job is generated from the businesses of millions.
If you ‘invest’ in a plot of 100 million, it is possible to get 100% profit in one year, but in the meanwhile your plot business has not been able to provide employment to any single person.
If the same amount of investment is made in agriculture, hundreds of people can be employed.
Take a look at your close relatives, you will find many having invested hundreds of millions in plots.
If the same capital was invested in industry or agriculture, it would be a source of employment for hundreds.
Perhaps by promoting real estate, the Prime Minister wanted to make it easier for people to get access to affordable housing, but in fact, this business is the biggest obstacle to the affordable housing.
Pakistan receives $30 billion (PKR 5000 billion) as remittances and bout 70-75% of this goes to real estate.
Due to this huge investment, artificial demand in this sector has increased so much that access to the property has become extremely difficult.
Those who earn up to two million annually, they may be counted in to 15% of the population but they are unable to purchase a plot on a reasonable location in big cities.
The number of people who have easy access to property does not exceed top few percent of the population.
The rampant spread of real estate is also engulfing agricultural lands, and it is also being patronized by the government, a recent example is the Ravi Urban Development Project.
High-rise buildings have a number of advantages including reduction in construction cost, saving of land, reduction of heating and cooling costs, easy access to facilities.
But on contrary, the Bungalow culture is seen a status symbol and this trend has led to rising land prices, chaotic spreads and numerous other problems.
The Prime Minister had spoken a few times about the promotion of high-rise buildings, but these views couldn’t be transformed into policy.
Even today, most of the cities in Pakistan don’t have clear policies or laws regarding multi-storey residential buildings.
The current government has to do much to improve the legislation on multi-storey buildings.
Real estate is considered as the safest investment in Pakistan, but the history of the world shows that real estate is most common cause of economic crisis in the world.
The economic crisis of 2007-08, for example, began primarily with the real estate crisis.
Unnecessary investment in real estate usually leads to real estate bubble that leads to economic crisis.
Therefore, proper planning is required to avoid any such crisis, but no action in this regard has been taken so far.The attraction of real estate business reduces the interest in industry and agriculture.
If you spend 20 million to set up an industry, you will have to work 15 hours a day to run a business; but if you invest the same money in real estate, you will probably earn more than the industry.
But you didn’t employ anyone on these earnings.When real estate is so attractive, who will go to invest in the industry?
With regard to the depreciation of the currency, it is often argued that if the rupee depreciates, the local industry gets benefits as their products become cheaper for the outside world.
But 80% of Pakistan’s industrial production is spent within the country.The depreciation of the rupee makes raw material, machinery and transport more expensive for industries, while real estate benefits from this devaluation.
Depreciation in the value of rupee increases the value of remittance in terms of local currency and more investment becomes available to real estate.
In fact, Prime Minister is surrounded on all sides by property dealers.These dealers have brain-washed the Prime Minister for the patronage of real estate, and under the influence of this briefing, the Prime Minister has completely ignored the negative consequences of the business and is serving as brand ambassador of the real estate business in the country.
—The writer is Director, Kashmir Institute of Economics, Azad Jammu and Kashmir University.