Real estate development (housing, retail, construction, commercial rental space) is the top investment choice among all asset classes for most Pakistanis. It is considered an attractive investment that offers passive income, high returns, tax advantages, and the opportunity to build wealth.
However, as with other types of investments, developing real estate investment can be risky, and owners can lose their hard-earned money or see their investments depreciate. There are risks that are inherent in the nature of real estate or real estate business: the probability of loss, the probability that investors will not receive the expected rate of return, and variation or volatility in expected returns.
Such risks are always highest in the early land acquisition and regulatory permitting and construction stages of any scheme and decrease as it progresses to completion. Therefore, the first investors have the opportunity to obtain maximum profits.
But in Pakistan, real estate investors also face additional risks associated with widespread fraud and malpractice in this business. Chances are you, or someone in your social circle, bought real estate only to find out later that the project you had invested your hard-earned money in was illegal.
Chances are you, or someone in your social circle, bought real estate only to find out later that it was illegal, but real estate technology is increasing transparency in the industry.
The developer may not have acquired the land or oversold it. Or they may not have obtained regulatory approvals for structural and architectural designs or other permissions. In the worst case, the project could simply turn into a Ponzi scheme.
Pakistan’s real estate market is riddled with fraud, and millions of unsuspecting would-be homeowners have lost their life savings and dreams of owning a home.
The schemes launched by Eden Housing & Developers in Lahore are a classic example of how such fraud is carried out. Nearly 12,000 lower-middle income families have lost everything to powerful and well-connected developers, who have allegedly funneled mounds of stolen money out of the country over the years while affected investors await justice.
Recently, the 43 families who own apartments in Nasla Tower in Karachi found themselves homeless after the multi-storey building was demolished by Supreme Court order for encroaching on the highway.
The inherent risks associated with conducting the real estate business and the potential for investor fraud are increased because developers, marketing companies, brokers, and others generally maintain information about a project, such as whether the land was purchased and whether the developer has all the regulatory approvals, how the project is progressing, and whether the buyers are following the construction timelines.
There is a huge lack of transparency in assessing the true cost of any project due to misleading sales figures, unseen development progress, and large chunks of profit sought by developers, middlemen, and others. Such information is crucial for investors to mitigate investment risks and avoid fraud by making informed decisions.
The opacity of the market prevents predictions about when a project will be completed, stabilize and begin to return the return on investment. Fraudulent practices drive average investors away from the market.
The real estate business in Pakistan has always been a benchmark investment and is estimated by some to be worth over $3.5 billion, with the potential to boost the nation’s economy due to a housing shortage estimated by the World Bank at 10 million and Pakistan’s credit rating. Agency (Pacra) at nearly 35 million units based on current and projected population.
This sector contributed about 5.4 percent of GDP in 2021, according to Pacra, underlining the huge demand for real estate investment, but high barriers to entry, low liquidity, the tedious process of transferring titles and opacity make it difficult to that many invest in it.
The untapped economic and fiscal potential of this business is difficult to realize without digitizing real estate and mitigating investment risks and fraud by providing transparency to projects. The emergence of proptech now offers solutions to these problems.
“Traditionally, real estate drives business activity in more than 70 other industries. This shows an impact on this sector leading to massive losses for many other industries that feed off of it,” says Jawad Nayyar, Director of Vision at DAO PropTech, an online platform backed by blockchain technology, data and cloud-based approach. use cases that it facilitates for developers, builders, investors and homeowners.
So how exactly does proptech help mitigate the business risks inherent in real estate development investments and prevent fraud?
“PropTechs eradicates existing inherent problems derived from opaque practices and information asymmetry in the real estate sector. Our proprietary end-to-end digital platform allows our users to see the actual costs of all projects on our platform in a transparent manner. Our scientific prices guarantee that you will not pay undue premiums.
“Our use of distributed ledgers for record keeping protects against price gouging, overselling, data breaches or fraud. Also, each buyer keeps up with the pace of development and holds developers accountable,” says Mr. Nayyar.
“We are working to eliminate uncertainties, ensuring transparency in all the projects that appear on our digital platform. Giving the investor the power to make a calculated investment decision is a unique proposition,” he says.
“So far, we have listed real estate projects worth Rs 20,000 crore in a variety of real estate asset classes. We have revolutionized the nation’s real estate development value chain through our end-to-end digital journey, low-budget entry, and full transparency of costs, pricing, sales figures, and construction progress, and online sharing of approvals. regulations and all legal documents.
“The use of technology in this business will change the value generated by real estate from ‘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 14, 2022