The World faced contagious Corona pandemic in 2019 and 2020, where markets and businesses were completely shut down as precautionary measure to avoid exposure by Governments. During the whole time period, there was a decrease in demand as well as supply of basic commodities of life with growth in real estate went downwards.
But in the post pandemic situation, when markets were allowed to open, there was a sky-rocketed rise in demand because people started consuming more and more on basic commodities. In the local and international news, we commonly heard the word “inflation” so we will try to understand what is inflation and how it affected real estate business.
Inflation
To understand the notion of Inflation in simple words, it is the rise of prices of goods and services during a particular time period. It usually prevails when the price of basic goods increases which is consumed by individuals in daily life. Like the flour, cooking oil, electricity, food items and fuel increases.
Prices increase due to differences in demand and supply of raw materials and energy products. Reasons like the Russian- Ukraine war and an incessant global commodity super cycle have pushed inflation to the highest levels worldwide, especially in developing countries like Pakistan. There are also several other factors like fiscal policy, corporate policy and manufacturing costs affecting the prices of goods and services.
Inflation in Pakistan
As Pakistan is a developing country, whenever there was crisis globally due to reasons like 2008 World economic crises, Covid-19 and now the Russian- Ukraine war. It will ultimately affect the economic conditions of Pakistan. Let me explain to you through an example of inflation, during 2021 Pakistan’s inflation rate was 9.7% but in 2022 it is 23.6%. From this example, we can effortlessly understand that if a price of commodity or service had a price of Rs. 9.7 in 2021 in 2022 it is 23.6.
Inflation in property value
When there is inflation in a country, every industry is being affected. Real estate is also being affected by inflation. During economic surge, the over-all cost of real estate properties whether residential or commercial amplified. But investors should not worry about rising inflation. It is more of an advantage of them as inflation increases the value of a property as well as a gradual increase in rents of the property.
In real estate, there are two types of people property owners and real estate investors. Not all property owners are real estate investors. For example, if you are a residential property owner and your property is not generating any cash flow, that makes your property a slow equity property. On the other hand, if you own a rental property that’s generating cash, then that property is an asset and you as the owner can be considered a real estate investor.
Overall during inflation, the price of estate property increases, especially for investors who purchase acres of lands like Bahria town and DHA does before the inflation. During the inflation, these real estate tycoons and investors sell residential and commercial plots according to market price.
Factors of inflation in real estate
Inflation in real estate also occurs when there is a rise and prosperity in middle income class group and comprehensive increase in population. This happens when country is prospering and people have a good standard of living and have good savings. People who are searching for new houses or want to approve their living standard by changing their living place.
When individuals seek good places to live and the demand increases of land, this automatically leads to the escalation in the price of the demanded land. For instance, if people want to invest in their house in DHA or any other famous society, then prices of plots increase due to higher demand and people are willing to pay money.
In Pakistan real estate is consider to be the best investment. Many people run their houses from income cause just by selling the files of plots due to a huge profit margin. When files pass through different hands, its prices increase with the passage of time, the profit margin of different people and inflation during that time.
Another reason is that investment companies and people opt for safe and more profit oriented opportunities. As we know that, gold prices are unstable with less profit margin and other reason is the ongoing volatile stock prices. So the only option left is to invest in estate business which remains stable for the past many years. Real estate is not only the most secure investment opportunity, but it also offers positive rates of return.
Other factor which makes real estate a safe investment is flexible regulation of government. In Pakistan, real estate sector is worth $300 to $400 billion and runs the almost 400 different industries domestically. In 2018 government of Imran Khan try to regulate and pose strict policies over real estate but after sometime government had to back off from this decision. As 400 industries start performing low because investment companies and people stop purchasing and investing in real estate. These things ultimately affect the GDP growth of Pakistan.
Things which causes problems during inflation in real estate is increase the cost of raw materials like bricks, steel, iron, aluminum, cement and labor used in the construction process. Although value of property increases but investors and people who want to construct commercial and residential plots hesitate to start any new project due to high cost.
Investment in real estate during inflation
Real estate is a popular choice because it became more useful, beneficial and popular store of value during economic surge while generating increased rental income and stable investment. Investment must be done to those properties who has some sort of cash flow like monthly rent of houses and commercial areas. I will elaborate this with an example:
If any investor purchases 1 kanal plot in Bahria town during inflation with claimed price of 5 crores, but then sell it to some other person after a month with price of 5 crores 50 lacs. This will give him profit of 50 lacs in just one month. Such investments will be justifiable during inflation.
If investor buy property during inflation who has said to be less profitable for commercial purpose or far from urban areas may give less profits to investor during short period or in long term when inflation is potentially reduce.
Although inflation effects the real estate but overall with wise strategies and investment mind, inflation gives more profit to real estate dealers, because not all real estate investment is profitable. In Pakistan real estate remains the stable and safe way of investment and only industry in which investor has not lost his single penny.
In current situation when every industry and corporation is facing problems due to inflation There are different firms now in market serving with the motto Quality over Quantity including Sapphire Builders and Associates, with other competent firm. Serving even in this inflation with the best project strategy, easy investment plans, top-notch raw materials and high-end architects.
