Real Estate -Inflated Prices & Credit Circulation

Nov 12 - 18, 2007

Presently banks are looking for diverse lending opportunities and developing asset-based consumer products. Housing finance provides an attractive opportunity as both profit margins and recovery rates on average are higher for mortgage finance than project and corporate lending. On the demand side, marketing efforts by banks are creating responsiveness amongst general public for early home ownership through housing finance. The level of interest rates and favorable tax treatment are acting as catalyst for encouraging early home ownership as mortgage payments are becoming affordable vis-a-vis monthly rentals. At the same time, billions of investment is locked-up in the existing stock of residential properties and investors are unlocking a part of their investments in real estate through leveraging and resultantly utilizing the unlocked cash for consumption and other investment purposes.

During the last three years, favorable developments at the market place are facilitating origination of housing loans in the primary mortgage market. On the supply side, banks are flushed with liquidity due to reduced borrowing from government, depolarization of the economy and rising inflows of remittances. Mortgage financing and auto financing are the key elements of private consumption and these modes not only provide strong forward and backward linkages to industrial and services sectors but also enhance the overall level of private consumption. In Pakistan private consumption is the largest single component of GDP, accounting for 80 percent of the total GDP. Thus it is obvious that any move to boost private consumption will have a much larger impact on the GDP growth than any other measure.

The unrestrained proliferation of financing facilities and indiscriminate credit circulation at all levels has led to a drastic shoot up in the prices of property thereby making the access virtually impossible for small investor and genuine purchaser. Inflow of foreign remittances after 9/11 has also contributed towards lifting the real estate value. Total remittances inflows since 2001 -02 and until 2006-07 have amounted almost $ 24 B or Rs.1413 B. Such a massive inflow of remittances eased the liquidity constraints of their recipients allowing them to increase consumption on activities like stock markets and real estate. The increase in remittance inflow and the return of Pakistanis from the US and Europe were not the only factors in skyrocketing the property prices. As economy improved and macro-economic indicators stabilized, the central bank eased the monetary policy to encourage investment in productive sectors. Interest rates dropped to an all-time average of 3-4 per cent from as high as 22 per cent or more. There was a splurge in private sector credit and personal finance. Investors, who also included industrialists and exporters, poured money into real estate as it promised quicker and higher margins on their investment.

Some independent sources are of the view that a large part of cheap export refinance disbursed by the banks during and after 2002 found its way into speculative investment in real estate. This happened due to absence of strict regulations to channelise the flow of money. Banks began financing in real estate and in one instance Crescent Standard Investment Bank Limited invested heavily in property and in some cases in files, too.

The entry of industrialists and banks into this arena was the single factor in bringing a boom in property business before it began to slide down - from the mid-2005 to the present level. As a matter of fact the decrease in return on bank savings also propelled the savers to opt for better margins such as in property and stock exchange. However this boom mostly remained confined to major urban cities. This phenomenal rise was mostly confined to Lahore followed by Rawalpindi, Sialkot, Faisalabad and some other urban centers of Punjab. Although, the rates went up in other parts of Punjab, but were far below than the levels in Lahore and major urban areas. It was because most of the new housing schemes were launched in Lahore or Rawalpindi. There were few schemes coming up in other areas.

The current deployment of funds in real estate was carrying a very large proportion of speculative investment. The debt market was not sufficiently developed to absorb any significant amount of available liquidity. The bubble exploded in the middle of 2005 when banks stopped plot financing and hiked interest rates in line with the central bank's policy to curb speculative investments and inflation triggered by the splurge in credit and spending, higher food prices, and surging international oil prices. As interest rates went up, industrialists and big investors began pulling out their investments from real estate which created panic thus easing the prices by around 40-50 per cent in the developed housing societies, while the rates nose-dived in schemes without infrastructure and development the bubble had to burst because of over supply of the properties through developers like the DHA and the absence of any check on the sale and purchase of files. Some issued more files than the number of available plots and re-bought and re-sold, thus artificially fuelling the market and encouraging speculative investment.

There is always a limit to investment. When the supply was increased against the shrinking demand, the market was apt to crash. Furthermore, the government, instead of channelising investment scared the investors from the market. Factors like increased interest rates too played their part.

Most developers and dealers are unanimous that the price of plots and files has dipped by 40-50 per cent in societies like the DHA. The fall in other areas was also steep. Some people have lost all their investment because there are little chances that those societies will ever be developed. Even if sponsors are sincere, it will take years before they could give possession to allottees. The business of files is over except in the DHA. During last one year the activity in real estate has slowed down as transactions are far and few. There are no buyers or sellers. Property rates have declined substantially but are still far above their pre-9/11 levels. There is no chance of prices ever dipping to pre-9/11 level. Property dealers goad one into investing in real estate as according to them the prices are at their lowest and are unlikely to fall further.

Today banks are greatly facilitated by the State Bank of Pakistan to enhance their mortgage based portfolio and explore new avenues for undertaking these ventures. The housing sector is expected to have Rs. 950 billion investment by private and public sectors to construct about 3 million housing units during the next five years. The investment envisaged in Mid Term Development Framework (MTDF) for the development of housing includes Rs. 920 billion by the private sector and Rs. 30 billion in the public sector. Unfortunately all these factors have been proved destructive for the industry as a whole and very little has been contributed towards the improvement in housing facilities. At the policy level, lack of direction has been one of the major impediments in institution of a market based housing finance system. There exists no rationalizing of stamp duties, registration fee and property taxes, and enforcement of Recovery Procedure in case of default by mortgagors. Banks are selective in their approach and at present focusing on Outright Purchase and Renovation loans mainly to upper income groups for unlocking their equity investments in housing properties. This trend may continue for some time, but as banks develop expertise in origination, underwriting, appraising and monitoring housing loans then construction finance for middle-income groups should be the major focus of the banks. Presently, banks are funding their housing portfolio through Demand and Time Liabilities, thus running an asset-liability mismatch on their balance sheets by borrowing short and lending long. However The Provincial Governments, district governments and local government authorities have a major role to play. All these factors are exacerbating the difference between intrinsic value of properties and the nominal prices.

Allocation of land for genuine and approved new housing schemes along with clean title deeds, developer financing, provisioning of infrastructure and individual mortgage financing have to become available in an integrated fashion. Boards of Revenue of the Provincial Governments have to adopt a more progressive attitude towards the utilization of land and use it as an income enhancing and growth stimulating tool for the people of their provinces particularly the middle and lower classes rather than sit tightly on the state land or allow it to be taken up surreptitiously by land mafia for illegal encroachment.

Housing developer industry is a major group of stakeholders in housing sector. This group has a significant role to play for improvements in the industry. There prevails a large hurdle in Pakistan as developers are largely in informal sector running their businesses as sole proprietorships and partnerships. Most of the developers have not yet organized themselves in form of public limited companies or private limited companies with proper accounting and good governance practices. This has stifled their growth and even well respected developers have suffered because of the entry of some unscrupulous individuals and groups into their ranks. It is high time that the developers should allow themselves to be rated by independent credit agencies to assess their financial strength and operational capability. Credit rating will sift out genuine and honest companies and individuals from corrupt and bestow an element of respectability to this line of business. Banks will be in a better position to provide credit to developers on the basis of these ratings and thus avoid high-risk exposure to the industry as they have suffered losses in the past and added superficial price hike in spurious sites.

According to Economic Survey of Pakistan 2006-07 there is a shortage of about 6.0 million houses in the country. It is interesting to note that nearly 40 industries are linked with the construction activities. Therefore increased housing can not only reduce the housing shortage but also give a boost to 40 allied industries linked with construction and housing and increase fairly dispersed employment and income opportunities. Development of industry and elimination of underlying causes responsible for distortion and fluctuation of values can curtail abandonment of precious money in worthless areas of the sector.


Virtual Real Estate Boom in Pakistan

Nov 12 - 18, 2007

Karachi, Lahore and Islamabad are latest cities in Pakistan to sell for real money as members race to accumulate cities at Weblo.com. The new virtual mayors purchased these cities at Weblo.com. The mayors earn real money from virtual property sales and internet advertising within their virtual cities.

Weblo is a parallel universe that is the only virtual world based on the real world. Members own and manage websites that are virtual replicas of real cities, states, properties, domains and celebrities. Members earn real money via hits, Internet ads and by selling or auctioning assets for a profit. Members enhance their online portfolios by claiming popular social networking profiles, blogs, emails and videos in Weblo's Calculate Your Internet Worth section.

"It's like Monopoly on steroids. Every property, city and state from the real world is for sale at Weblo.com," says Rafaqat Mirza, CEO and co-founder of Weblo.com. "This is social networking with commerce, where members finally get paid for their popularity. Before Weblo.com only website founders and shareholders profited."

Weblo.com is the only parallel universe based on real properties, cities and states.

Weblo has sparked a virtual real estate boom around the world with over 10,000 cities selling for real money.


Members flip virtual properties for profit just like in the real world. The virtual mayor of Seattle sold his city for $2000 US dollars after buying it for $40. Las Vegas resold for $2300 US dollars, a $1930 profit for the previous owner. The virtual Empire State Building, originally purchased for one dollar re-sold for $250.

Members attract traffic to their Weblo sites with compelling content including photo galleries, forums, polls and videos. Members profit from hits and advertising revenue generated from their sites. City and State owners earn a percentage of all transactions within their territories.

Using a proprietary formula based on several online advertising networks, Weblo calculates the value of your videos, social networking profiles, blogs and email addresses, based on your "fans", how many friends you have, social networks you belong to, and other values. Then Weblo helps you cash in. After finding out how much your content is worth to Internet advertisers, Weblo gives you easy access to ads and you start making money.

This revolutionary approach to helping everyday internet users receive their rightful share of Internet profits is the latest offering from Weblo.com, which for the past year has been allowing members to profit by buying and selling virtual copies of real world cities, states, properties and domains.


Weblo.com was founded by Chief Executive Officer Rafaqat Mirza. Mr. Mirza is a Pakistani Canadian who has launched successful Internet ventures around the world. His companies all depend on his Islamabad development offices where highly skilled programmers and designers make Mr. Mirza's ideas come to life. To learn more, visit www.weblo.com.

Weblo.com is a registered trademark of Weblo.com Inc. Other product or service names mentioned herein may be the trademarks of their respective owners.