Pakistan’s Property Market: A Crisis Waiting to Happen

Pakistan’s commercial real estate sector is on life support, and its prospects of recovery are bleak. The industry has been in a downward spiral for the past two years, with values of immovable properties plummeting by over 50%. The Pakistan’s Property Market Crisis is so dire that experts predict a recovery is unlikely before 2030.

The root cause of this crisis lies in poor government policies and a lack of vision for the sector. The strengthening work-from-home trend, high central bank interest rates, and zero attempts to promote policies that help move cash from the informal property market into banks have all contributed to the decline.

Regional investors, including doctors, judges, and land mafias, are struggling with tightening credit conditions and higher interest rates. Land files and plots have lost value by over 50%, and losses incurred by overseas Pakistanis have stifled further investments in the sector.

The commercial real estate industry has been under stress since the country’s regional banking sector started facing turmoil. The rising distressed commercial real-estate assets are adding to concerns that a crisis may be brewing in the sector.

Inflation is on its way back to the State Bank of Pakistan’s target, but the central bank is unlikely to cut rates anytime soon. The ongoing commercial real estate crisis will force the State Bank to finally chain the property market, but it still won’t help the black cash holders in the sector put their money in banks.

The new government’s policies have sparked fears of a crisis among Pakistan’s real estate agencies. Agents have either started pulling investments or discouraged buy-ins at a premium in expectations of the real estate scene getting much worse after the new budget.

The period between 2018 and 2021 witnessed a fervent surge in real estate investment, involving various stakeholders from overseas investors to local corporations and individuals across major cities. However, the once-booming sector is now grappling with widespread commercial real estate challenges, indicative of a broader systemic issue that appears to be ignored by the State Bank of Pakistan.

Despite initial expectations for rate cuts, recent delays in implementation underscore the cautious approach taken by the State Bank since July 2023, maintaining a 22% monetary policy under the premise of inflation control.

The property squeeze reflects the impact of high inflation and poor policymaking, which is expected to change shape and impact after July 2024, as well as the country’s weak growth and an unsupervised tax net. Looking at the real disposable income of an average Pakistani on a five-year average basis, the most recent period is the worst since current records began less than 20 years back.

What Can Be Done?

To mitigate the situation, the government needs to take immediate action to address the systemic issues plaguing the real estate sector. This includes promoting policies that encourage the formal property market, cutting interest rates to stimulate growth, and addressing the root causes of the crisis. Only then can the commercial real estate industry in Pakistan hope to recover from its current slump.

The government must also take steps to increase transparency and accountability in the sector, crack down on illegal activities, and provide incentives for investors to put their money in banks. The State Bank of Pakistan must also play its role in regulating the sector and providing guidance to investors.

The Pakistan’s Property Market Crisis situation is dire, but with the right policies and actions, it is possible to turn things around. However, if the government fails to act, the consequences will be severe, and the commercial real estate sector in Pakistan may never recover.