REAL ESTATE SECTOR
Taking A Breather
By AMANULLAH BASHAR
Feb 20 - 26, 2006
Performance of the national economy during the current financial (2005-06) year seems to be on the weaker side which is reflected in the tapered off GDP from 7 percent to either 6 or 6.5 percent in 2005-06 as compared to the remarkable 8.4 percent in the previous fiscal 2004-05.
Apparently, growth in large scale manufacturing sector has decelerated sharply indicating a downward trend in the real estate and the construction industry, the most sensitive indicator of the economy.
The output of the infrastructure industries closely allied to the real estate sector including power, natural gas, cement and basic metal have also shown an aggregate decline of 0.9 percent during first quarter of the current financial year. This decline is contrary to the massive rise of 9.8 percent during the corresponding period of the previous financial year.
According to official figures growth in power sector has declined from 5.4 percent in 2005 to 09 percent in the financial year 2006, natural gas 20.7 to 2.7 percent and cement from 17.2 to 14.6 percent in the current year.
Experts in the real estate business were of the opinion that one of the major reasons for decline in the infrastructure industries, besides a large number of downstream industries, was the slowdown in the real estate sector. Actually, it is the brisk movement in the real estate and the construction activity, which supplements demand growth in the sub sectors.
In fact, there was a boom like situation in the real estate if the price factor is taken as a sign of growth in any sector. It was the low interest rates which generated a lot of interest among the investors who created a buying spree in the real estate, in fact they were not the genuine investors rather they were buying properties in the hope of making huge profits by involving bank finances available at 6-7 percent.
These speculators suffered heavily last year when the State Bank of Pakistan decided to increase interest rates, which took a quantum jump from 7 to approximately 14 percent at present. Resultantly, the sharp movement, which was persisting on the back of easy access to cheap finances, faced a steep decline across the country, however, Karachi was on top as compared to rest of the urban centers. It is said that in some cases, price of a plot in Defense Housing Society and Clifton areas came down even by 40-50 percent.
Raising the interest, as a part of strict financial discipline and an effective monetary policy, was focused to rising inflation in the country. However, it was not the low interest rates alone which can be held responsible for unleashing inflationary pressures, in fact the abnormal fuel prices which had a widespread impact on general prices was major reason for increasing inflation in the country. The low interest rates of the banking sector may have its role to contribute in inflationary pressures, however, access to low rate financing had ignited a spark all around in generating economic activity in the country.
It is surprising to note that the demand for private sector was not subsided even after increasing the interest rates. In fact the net credit to the private sector has increased by Rs185.8 billion in the first five months of the fiscal from July-November 2005. The demand for credit from private sector was increased from 164.7 billion in the corresponding period of the last year. This growth in demand for credit by the private sector despite higher interest rates is feared to increase the infected portfolio of the banking sector. The financial managers have already warned the private sector to be extra cautious and careful while taking advances from the banking system.
Another reason, which had always been discouraging the economic movement on a fast track especially in the real estate and the construction industry in Pakistan, is the lack of coordination among various government organizations primarily responsible for development of towns and major cities. Going through the complexities of utility services was another major hurdle in the way of rapid growth of the real estate business in Pakistan. Identifying the problem, the new elected City Nazim Syed Mustafa Kamal has however taken initiative to streamline working of the utilities.
He has issued instructions that Sui Southern Gas Company, Karachi Electric Supply Corporation and Water & Sewerage Board and all other utility service-related organizations should sit together to develop an integrated standard and facilities of the utility services for the good of the people and speed up the pace of growth in the country.
The Nazim foresees that a long term partnership between SSGC and CDGK is immensely needed for the betterment of the citizens of Karachi.
In this respect, the SSGC is discussing with KESC on Geographic Information System (GIS) and would be happy to offer services to the Water Board as well.
SSGC's Geographic Information System (GIS) serves to develop detailed mapping of the company's pipeline network, its maintenance and future expansion. The Nazim believes that it could provide a strong basis to "develop integrated mapping of all utility services in Karachi, which could eventually be incorporated in the Karachi Master Plan.
Geographic Information System (GIS) is among the recent IT initiatives taken at SSGC.
It is one of the most advanced technologies used by major oil and gas companies and utility services in the more developed countries of the world today. For oil and gas companies, the system enables the development of pipeline routing, maintenance, risk assessment and effective implementation of their emergency response system.
With inflation likely to go up on the back of fuel and food prices having an upward tendency, the interest rates may also witness an upward revision. The higher government expenditures, borrowings and increased money supply (following inflows from abroad) are the factors call for more financial discipline.
The resurgence in inflation after a weakening trend in the previous few months apparently resulted by rising food and fuel prices in Pakistan. The situation calls for a strong follow up of monetary tightening policy by the financial managers to review unrelenting consumer spending.
Inflation as depicted by the Consumer Price Index (CPI) firmed up in January 2006 compared to the previous month on the back of higher food prices especially abnormal increase in sugar prices which have a widespread impact on general food items.
The CPI in January rose 8.76% on year, compared with an 8.51% rise in December 2005. Prices rose 1.20% from the previous month.
The housing rent and transport and communication components of the CPI posted declines. On the other hand, the fuel and lighting component sharply increased. In the first seven months of the fiscal year that began July 1, consumer prices have rose an average 8.48%. The government's inflation target for FY06 is at 8%. According to market analysis, the heavily weighted food and beverages component of the consumer price index rose 8.17% on year in January, up from an 8.10% rise in December. That component has weighting of more than 40% in the index. Earlier, the food inflation had slowed due to administrative measures taken by the government to improve supply. In July, the government allowed duty-free imports of essential items like wheat and sugar. The latest in this regard is sugar, whose prices have rocketed on severe supply shortages. Higher food prices may continue to have a spiraling effect on the inflationary numbers in the coming months.
During January 2006, the fuel and lighting component of the CPI soared by 12.32% as against 7.06% in the preceding month. This is attributable to the surge in the prices of deregulated energy products during the past few months as well as the gradual impact of the earlier successive hikes in domestic petroleum prices. Oil inflation has a chain effect on most economic sub-sectors as it effectively raises the aggregate cost of industrial production.
Despite having enormous potential to attract investment, the real estate has failed to take off to the desired level. According to analysts, Pakistan needed at least 400,000 new housing units every year besides a back of 4 million housing units piled up due to shortfall in the construction activity. Now is the time to come forward to weed out all ills from inefficiency to rampant corruption and lack of coordination prevailing in different organizations where the people sitting at the helm of affairs using their position for personal gains at the cost of national growth. Having a home is the fundamental right and the dream of the millions in Pakistan and the governments of the past; present and future are duty bound to play a role as required in a civil society.