KARACHI: Real estate is one of the most lucrative avenues of investment. Yet it has also been the pumping force behind financial bubbles in recent history. This calls for a theoretical, logical investigation and analysis of pros and cons of this investment tool.
Kevin Spacey, in the famous movie Superman Returns, remembers and reproduces a precious piece of advice from his father. His father told him that land is a perpetually scare resource, you can print more money but land is limited. How true is this observation I leave to the judgment of the readers.
It is from this perpetual scarcity that land or real estate generates its value. I believe this dialogue of Spacey became the brain tattoo of Elon Musk and motivated him to follow his obsession of settling man on Mars in his lifetime. Since it has been established that land is a scarce resource and with the ballooning world population, demand will continue to rise and it will become more valuable over time.
Hence, real estate truly has the potential to provide exorbitant returns. These returns especially in our city over the last twenty years or so have been mind boggling. Keeping this perpetual scarcity in view let’s examine the merits of real estate as an investment option
The idea behind this analysis emanated from a couple of conversations which I had with two very smart people. While meandering through the streets of a posh locality (which is currently semi-occupied) with a veteran banker with a lifelong experience in evaluating business models, I was stunned at a fleeting remark passed by him. He said, “These are not plots, they are gold mines.” I realised that if we keep the returns of real estate in mind for the last twenty years in Karachi, these returns can only be compared with the returns of a gold mine.
I remember having a similar conversation with a seasoned entrepreneur regarding this subject. He presented a logical proposition that instead of establishing a textile factory twenty years ago, which generated employment for almost 2,000 people and also brought amazing exports, had he invested the same amount in real estate, he would have been financially better off.
Both the above mentioned conversations are enough for establishing strong merits of real estate investment. But this picture has another angle. Although the merits of real estate as a valuable avenue of investment are established beyond doubt, its demerits are visible in the passive nature of real estate investments. A businessman who has taken so many risks, created so many jobs and has brought extremely valuable foreign exchange to the country accepts that the return from all this is lesser than the passive real estate investment.
The point to ponder herein is this; if entrepreneurs are thinking like this than they are lured to shut down the factories and pour in the liquidity in real estate. Following this logical sequence, a wave of unemployment would sweep the economy. Furthermore, since a lucrative yet passive real estate investment is apparently worth more than 20 years of risk-taking and employment generation, it is also creating a disincentive to work.
My conversation further deepened and he remarked that although we were financially not well off by putting our eggs in the business basket (and not investing in real estate), we are intellectually better off. To rephrase the same one would suggest that passive investment like real estate might generate returns for the investors, but since this form of investment seldom uses the gray matter in our heads after the investment is done, it makes the mind rusty. On the other hand, if an entrepreneur is running a business, he should be on top of his game every day. Otherwise he loses.
So real estate investment doesn’t produce additional jobs and doesn’t aid in increasing GDP and furthermore, it makes talent intellectually bankrupt. Therefore, it can be classified as a graveyard of growth.
To conclude, I must say that there are no sides to take in this debate. I believe real estate represents a gold mine as it is a perpetually scarce resource. Yet if investment in this avenue is overdone it can become a graveyard of growth as well. Now it is up to the economic managers to keep the real estate investment incentives in check so that the red line between the gold mine and the graveyard of growth is never crossed.
The writer is a corporate banker and teachers economics
Published in The Express Tribune, July 2nd, 2018.
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