Construction projects, Files, Plots – A brief Analysis of Real Estate Investment Options

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In this article, we will explore whether construction projects in Pakistan hold up against the investment in plots and files. If one desires success, one must follow in the footsteps of those who have already achieved it. Unfortunately, Pakistan has fewer than ten billionaires, whereas New York City alone has 118 billionaires, and California has a staggering 165. This raises concerns about the business practices in our country, which are not only outdated but also ineffective. Today, as we discuss real estate investment in construction projects, plots, and files, we will address what we are doing wrong and why we need to change our perspective.

Why do we need to change our approach?

Real estate has always been a crucial player in any country’s economy, and Pakistan is no exception. However, we have been engaged in speculative trading of plots and files for decades, which hold no tangible value. Billions and trillions of dollars are locked up in lands that do not produce anything and can meet the housing demands of the wealthy for the next 30-40 years. Meanwhile, the poor are neglected, making it even harder for them to find a place to call home. Shockingly, only 4% of the land is owned by the poorest 33% of the population, while 9% is owned by the elite 1%.

The worst part is that no one is creating any wealth from these investments anymore. Recent research by our team shows that even with the latest hype in the real estate market, the actual gain in the plot sector in the last year has been approximately 20%, which only amounts to a 4% per annum return on investments in the last five years.

Therefore, in this article, we will critically compare investments in construction projects, plots, and files to see which one offers more benefits and fewer drawbacks. It is high time we embraced modern concepts of economy and investment to avoid accepting poverty as our fate.

Installment option

The majority of construction projects offer installment plans, whereas real estate investments in plots and files are typically one-time payments. Although some societies are now offering plots or files in installments, these options are generally priced much higher and do not offer significant returns. In some cases, DHA may offer plots or files in installments, but the number of available options is limited, and these plots and files are not usually balloted, which means they carry the risk of location balloting.

In the recent past, there are not many projects that offer plots on installment as we have not seen any significant society developer follow this path. This lack of options is a major drawback of investing in plots and files, whereas construction projects offer a wide range of options, price ranges, and variety for installment projects. Therefore, only construction projects can truly meet the needs of investors looking for variety and flexibility in their investments.

Liquidity

The topic of liquidity is often debated, and while it is an essential factor to consider, it comes with more risk, which we will discuss later in this article. Generally, files are considered to offer the most liquidity in almost all types of markets. However, liquidity in plots can be debatable, as, during the recession period between 2016-2020, it was challenging to sell a plot, except in mature areas. But during an upward-trending market, plots become much easier to sell.

In contrast, construction projects are usually intended for end-users and thus offer almost similar liquidity during recession periods or otherwise. Investing in a construction project can be compared to selling a house, which takes some time but is evergreen.

Therefore, files undoubtedly offer high liquidity, whereas plots offer moderate liquidity. Construction projects have the least liquidity but are comparable to plots, considering they sell in all types of trending markets. Although liquidity is a crucial factor, it’s important to note that it comes with more risk, which should be weighed carefully before making investment decisions.

Trading

The strength of files lies in their ability to be traded swiftly, which can result in significant savings for an astute investor within a short period. Conversely, plots may exhibit strong performance in a market that is trending upward but may experience lower returns during extended periods of recession.

In Pakistan, construction projects provide investors with attractive trading prospects, particularly during their initial launch phases. To capitalize on such opportunities, however, investors must have access to a competent sales team. Later on, construction projects offer secure and stable trading opportunities but may require extended holding periods before resale.

USD factor

The value of USD has become a crucial aspect of our real estate market due to the constant depreciation of PKR against the American currency. In order to benefit from the appreciation of USD, investing in installment projects is the only viable option. Investing in projects that offer rental income post-completion provides even more stability against future USD appreciation.

Lumpsum investments are the norm for files and plots, requiring a complete upfront payment. It is challenging to find reliable societies like DHA, which offer plots and files in installments with good value for money.

Stability

Stability is a crucial factor to consider in any investment, and the real estate sector is no exception. While files may offer high potential returns in a short time frame, they are vulnerable to market volatility and lack stability in the long run. On the other hand, plots, particularly those located in mature areas, generally offer more stability than files. However, plots in underdeveloped or underperforming areas are highly volatile and can be a risky investment option

In contrast, construction projects typically offer a more stable growth trajectory, with steady appreciation from the launch of the project to its completion. As the end-users are the primary buyers of construction projects, they provide a greater sense of stability that is not commonly found in other areas of real estate. The value of the property increases with each development stage, from the completion of basements to the possession of grey structures

Risk

When it comes to investment risks, files are considered the riskiest due to their price volatility and the uncertainty of location ballots. Societies like DHA offer low risk, but there have been instances where issues such as time delays in ballots and uncertain plot locations have made files a highly risky investment option, especially in non-DHA societies.

On the other hand, developed and under-possession plots are considered highly secure investments, especially in DHA. However, during the development phase, the risks increase, and legal problems in certain areas can lead to a delay in possession. Although such occurrences are limited and DHA usually accommodates investors, many private societies do not offer such assurances.

Construction projects in Pakistan also have their share of risks, mainly related to delays. While investors may be more tolerant of delays in plots or files, they may lose patience with construction projects rather quickly. However, with clear land allocation and exact unit numbers, construction projects are considered much less risky than files and can be on par with plots in terms of risk.

Timelines

Files and plots are investments that are linked to entire societies and their maturity takes a much longer period of time. The time required for larger societies to reach their full maturity can even exceed two decades. For instance, Phase 9 Prism has been around for almost 1.6 decades, but we have not seen possession yet. Similarly, DHA Multan has been around for almost a decade and we only have partial possession. To address this issue, new developers such as Lahore Smart City are trying to acquire land before launching the project to offer early possession, which can potentially reduce the two-decade time frame to 1.5 decades.

In contrast, projects have a much shorter time frame and typically take 4 to 7 years to mature. This is one of the reasons why they outperform plots and lands in long-term trading. Plots and files are more susceptible to recessionary cycles during the 20 to 25-year time frame required for society maturity, whereas construction projects generally do not experience such recessions and offer stable price appreciation throughout.

Capital Gains

When it comes to real estate investments, plots, and files typically provide moderate to high capital gains, respectively. However, achieving success in speculative trading is essential if you want to maximize your returns. On the other hand, long-term capital gains in plots and files are typically quite low and are often offset by inflation and dollar appreciation. Furthermore, investing in files can be risky due to potential downside risks, and not all investments in files will be successful.

In contrast, construction projects in Pakistan offer a different type of investment opportunity, with slow but stable capital growth. By utilizing installment plans, investors can achieve even greater returns without having to worry about long periods of economic recession.

Rental Income

Construction projects have a clear advantage when it comes to providing rental properties, making plots and files unable to compete in this regard.

Generating rental income is a crucial factor to consider when building a real estate portfolio as it provides a steady stream of cash flow. In fact, our blog discusses how rental income has the potential to double your returns compared to gains from plots and files.

Fraud

Among all the factors mentioned earlier, this is perhaps one of the most misconstrued. While the risks, delays, and developer-related issues exist in both plots and construction projects, the latter is less likely to be involved in fraudulent activities than the former.

According to the Lahore Development Authority (LDA), more than 500 societies in Lahore are illegal, and 45 are fake, meaning that they do not exist in reality. The unregulated real estate infrastructure is to blame for the problems associated with society’s development. Developers often sell more files than the land they have acquired to generate cash flows, which is one of the most common fraudulent practices. However, DHA files should not be confused with these files because they are only issued after the acquisition of land. Although the government has imposed stricter laws to prevent such malpractices, a clear procedure to establish this is still lacking.

Construction projects in Pakistan have well-defined land and better regulations, which protect them from such scandals. Similarly, the element of fraud is significantly reduced when you have allocated plots.

Where to Invest?

One size doesn’t fit all and at the end of the day, it will depend on which suits you the best. In addition, you will have to carry out your own analysis of each type of file, plot, and construction project in Pakistan to analyze its potential in the future. These are not the only factors that will determine where you should invest. The most crucial element at the end of the day is which investment can give you maximum returns as early as possible while keeping your investment completely safe. However, if everything else ticks besides the factors mentioned above you can select and make a choice depending on your priorities. If you require liquidity and risk is not an issue files will be a great option. However,f you want more stability, you can look at both plots and construction projects. Finally, if you want to generate cash flows and rental income, your only option is construction projects.