QUALITATIVE RISK ASSESSMENT OF REAL

ESTATE SECTOR IN KARACHI

 A BRIEF OVERVIEW

The real estate sector plays an important role in boosting a nation’s economy. The volume of the real estate
market makes it an attractive and lucrative sector for many investors.

Pakistan with the total population of around 200 million is amongst the most populous
countries in the world where quite a number of people are still living without fundamental
necessities which includes basic accommodation. In Pakistan, the real estate sector is
unorganized, disrupted and unbalanced. The reason being the lack of proper
implementation of accountability system and laws; insufficient bank financing; fluctuation
and volatility in interest rates; collusion; fraud and bribery; and lack of digitalizing of data.
The paper comprises a background review of few risks associated with the real estate
sector, followed by their analysis and interpretation of the data collected from the
newsletters, reports and articles.
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 RISKS IN REAL ESTATE
SECTOR

DEVELOPMENT INVESTMENT
RSIKS RISKS

• Time Risk • Policy Risk

• Cost Risk • Interest Rate Risk

• Financing Risk • Inflation Risk

• Site Risk • Liquidity risk

• Approval Risk • Natural Risks

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 METHODOLOGY

Literature Problem Research

Review Definition Objectives

Collection of data Data Analysis Cause and

from reports and
articles & Review Effect Diagram

Reporting

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 REAL ESTATE SECTOR
OF KARACHI

Karachi is the largest city of Pakistan and seventh largest metropolitan of the world. It is
known as the city of lights because of its legacy of active night life. It serves as the hub for
people coming from all over Pakistan who migrate in search of employment opportunities
and better living standards. As a result, the population of Karachi has reached over 16
Million. Hence, the real estate in Karachi is developing and growing significantly to cater
the needs of increasing population. Many builders are constructing their projects in short
spans of time to overcome the market demand.
The real estate of Karachi also encounter almost all the risks that are common around the
globe in this sector. The frequent change in regulations, fluctuation in interest rates and
inflation have widely affected the real estate of Karachi.

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 REAL ESTATE SECTOR
OF KARACHI

POLICY RISK

• It is well-known fact that in Pakistan real estate business the ill-gotten and black money
is densely used. The Government of Pakistan is rigorously working to implement the
key reforms to bring the real estate sector in tax net.

• The Government of Pakistan banned the non-filers of income tax returns from
purchasing immovable properties above PKR. 5 Million since July 1, 2018 through
Finance Act 2018. This resulted in decline in real estate sector activities. It is widely
known that the remittance from overseas Pakistanis is in the real estate sector and
properties which play vital role in the development of real estate sector. Therefore,
lately the ban has been lifted and the non-filers are allowed to purchase the properties
again. This step is being considered as a concession to overseas Pakistanis. However,
tax has been increased to almost 06% for the non-filers of income tax returns.

• Despite above necessary policy changes by the government, permitting foreign

investments are required which can further increase the investment in the sector. It can
be predicted that the foreign investment may further strengthen the real estate market.

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 REAL ESTATE SECTOR
OF KARACHI

INFLATION AND TAXATION RISK

• Pakistan’s high inflation makes it appear that house prices are rising strongly. But it’s an
illusion. The Pakistani currency is devalued to 23% from PKR. 121 to $ 1 last year to PKR.
154.
• Since inflation results in devaluation of the returns produced by the investments, the
decline of 25% in the value of properties is observed.
• As discussed, it is widely known that the real estate sector in Karachi is considered to be
the hub of black money. Investors usually buy the property to white their black money. They
generate huge profits through property dealing without paying the due taxes. Therefore, the
government is trying to enhance the tax revenue by extending the tax net and increasing
the number of tax-filers.

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 REAL ESTATE SECTOR
OF KARACHI

INTEREST RATE RISK

• The sharp rise in the interest rate to 12.5 percent by the State Bank of Pakistan has
elevated the cost of credit that may add into the factors that put off the forthcoming private
investors from initiating and increasing the magnitude of businesses.

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 REAL ESTATE SECTOR
OF KARACHI

LEGAL RISKS

• The best example of legal risk is of Bahria Town Karachi, where massive irregularities were
observed in the way the land was acquired. Thus in May 2018, the court barred the buying
and selling of property in BTK.
• However, this year the matters were settling for BTK. Their legal issues made
improvements and this resulted in the increase in the price index of the project. The
demand of the property was also increased. But again as the legal hearings moved on, the
decline in the market of BTK was observed. All in all, we can say that the BTK market will
flourish again once all the legal issues are sorted.
• Another legal issue is being faced by almost 170 societies of Karachi that have been
enlisted by the Anti-corruption Establishment. Quite a number of these societies are in
Scheme 33 which obviously raised a question mark on investors’ future there. Since then,
the investors are not very much willing to opt for Scheme 33.

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 REAL ESTATE SECTOR
OF KARACHI
FINANCIAL RISK

• Getting financing is very difficult especially for the small investors. However the big
developers don’t usually face this situation. The big developers procure a piece of land and
launch a scheme on it.
• After getting the necessary approvals, they start with the preliminary works such as
boundary wall, entrance gate, and some infrastructure works, get the utility connections
and then market their project.
• With this they start getting investors or allottees and the builders start getting partial receipt
as advances by selling plots, houses, apartments, offices etc. and with this they develop
the remaining project.
• In quite a number of cases in Karachi, it has been seen that the number of developers have
gone bankrupt or didn’t fulfil their promises of developing the scheme as per their initial
plans.
• This resulted in the huge loss of investors. Therefore, there is a need for a Federal Real
Estate Authority to protect the rights of investors.
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REAL ESTATE SECTOR
OF KARACHI

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 CONCLUSION &
RECOMMENDATIONS
The real estate market of Karachi has a lot of potentials due to the growing population.
However, the market is declining due to the current economic conditions of the state. In
Karachi, house prices averaged PKR 13,158 per sq. ft in Quarter1 2019, up 4.25% from the
previous year, but down 4.62% when adjusted for inflation. These risks need to be addressed.
For this the risk assessment techniques should be used. However, a technique that might be
applicable in one country might not give the desired impact in another country owning to the
difference in market structure. There is therefore a need for such technique that are based on
the quantitative statistical data of Karachi.
In the light of above, it is recommended to examine the possible causes of risks in real estate
sector by taking the perceptions of the real estate professionals, both developers and
investors, towards the risks associated in real estate development as well as the investment
in order to formulate an adequate risk assessment technique for Karachi.

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THANK YOU