Development real estate — housing, retailing, construction, commercial rental spaces — is the top investment pick among all asset classes for the majority of Pakistanis. It is considered an attractive investment that offers passive income, large returns, tax advantages and the opportunity to build wealth.
However, as with other types of investments, development real estate investing can be risky, and the property owners may lose their hard-earned money or see their investments depreciate. There are risks that are inherent to the nature of the real estate or property business: the probability of loss, the probability of investors not receiving the expected rate of return and the variance or volatility in returns from expectations.
Such risks are always at their highest in the early stages of procurement of land and regulatory permissions, and construction, of any scheme and decrease as it progresses to its completion. Therefore, early investors have an opportunity to reap maximum profits.
But in Pakistan, real estate investors also face additional risks associated with widespread fraud and malpractices in this business. Chances are that you, or someone from your social circle, might have bought a piece of real estate to later discover that the project you had invested your hard-earned money in was illegal.
Chances are that you, or someone from your social circle, has bought a piece of real estate to later discover that it was illegal — but property technology is increasing transparency in the industry
The developer may not have acquired the land or oversold it. Or they may not have obtained the regulatory approvals for structural and architectural designs or other permissions. In a worst-case scenario, the project could simply turn out to be a Ponzi scheme.
Pakistan’s real estate market is fraught with fraud, and millions of unsuspecting aspiring homeowners have lost their life savings and their dreams of ever owning a house.
The schemes launched by Eden Housing & Developers in Lahore are a classic example of how such frauds are carried out. Nearly 12,000 low-middle-income families have lost everything to the well-connected, powerful developers, who are alleged to have siphoned off loads of stolen money outside the country over the years while the affected investors wait for justice.
Recently, the 43 families owning apartments in Nasla Tower in Karachi found themselves homeless after the multi-storey building was demolished on the Supreme Court’s orders for encroaching upon the road.
The inherent risks associated with the development of real estate business and chances of fraud with investors heighten because the developers, marketing companies, agents or middlemen and others usually keep information on a project like whether the land is purchased and the developer has all regulatory approvals, how the project is progressing, and if the construction timelines are being followed from the buyers.
There exists a huge lack of transparency when evaluating the actual cost of any project due to misleading sales figures, invisible development progress, and big chunks of profit wanted by the developers, middlemen and others. Such information is crucial for investors to mitigate investment risks and avoid fraud by making informed decisions.
The opaqueness in the market prevents predictions regarding when a project will be complete, stabilize and start giving back returns on investment. The fraudulent practices scare the average investors from the market.
The real estate business in Pakistan has always been a go-to investment and is estimated by some to be worth over $3.5 billion, with the potential to drive the nation’s economy due to housing shortages estimated by the World Bank at 10 milion and Pakistan Credit Rating Agency (Pacra) at nearly 35m units based on the current and projected population.
This sector contributed around 5.4 per cent of the GDP in 2021, according to Pacra, underlining the huge demand for real estate investment, but high barriers to entry, low liquidity, tedious title transfer process, and opaqueness make it difficult for many to invest in it.
The untapped economic and tax potential of this business is hard to realize without the digitization of real estate and mitigation of investment risks and frauds by bringing transparency to the projects. The emergence of proptech is now offering solutions to these issues.
“Traditionally, the real estate sector drives business activity in over 70 other industries. This shows an impact on this sector results in massive losses to the numerous other industries that feed off it,” says Jawad Nayyar, chief vision officer at DAO PropTech, an online platform backed by blockchain technology, data and use-case-driven approach that facilitates developers, builders, investors and homeowners.
So how exactly does proptech help mitigate the inherent business risks to investments in the development of real estate and prevent fraud?
“PropTechs eradicate existing, inherent problems stemming from opaque practices and information asymmetry from the real estate sector. Our proprietary, end-to-end digital platform allows our users to view the true costs of all projects on our platform transparently. Our scientific pricing ensures you’re not paying undue premiums.
“Our use of distributed ledgers for record-keeping protects against price manipulation, overselling, data breach or fraud. In addition, every buyer stays up-to-date with the pace of development and keeps developers accountable,” contends Mr Nayyar.
“We are working to eliminate uncertainties, ensuring transparency on all the projects listed on our digital platform. Giving the investor power to make a calculated investment decision is a unique proposition,” he says.
“We’ve on-boarded Rs20bn worth of real estate projects so far across an array of real estate asset classes. We’ve disrupted the country’s developmental real estate value chain through our end-to-end digital journey, low-budget entry and complete transparency of costs, pricing, sales figures and construction progress, and online sharing of regulatory approvals and all legal documents.
“The use of technology in this business will shift the value generated from real estate from a ‘few’ to ‘many’. Inclusive, transparent and asset-backed growth will ultimately propel the country towards positive economic growth.”
Published in Dawn, The Business and Finance Weekly, November 14th, 2022