Steamy, noisy and overpopulated, Karachi is – at least to those with unfair preconceptions of Pakistan – the epitome of a dysfunctional South Asian conurbation.
Although it is known as one of the most liberal cities the country, and is a long-term hub for trade and commerce, the third most populous metropolis on the planet and home to over 23 million souls is not exactly the most obvious bet for investment in real estate.
It is beset by chronic air pollution; the streets are often blocked due to choked sewerage lines and observance of traffic rules on the teeming roads is sketchy at best. Despite these issues, however, the city by the Arabian Sea has become one of the shining lights of a housing boom that has seen Pakistan serve notice of its status as a key potential market for international developers.
There are numerous reasons why analysts are tipping developers to beat a path to Pakistan’s door – not least initiation of work on the USD46 billion China-Pakistan Economic Corridor. According to property web portal Zameen.com, average land prices in Karachi rose 23.4 percent in 2016. In Lahore, meanwhile, land prices increased 13.6 percent in the same year.
Indeed, confirmation of the country’s status as a rising star came in May 2017 when Morgan Stanley Capital International (MSCI) announced the upgrade of its classification to the emerging market (EM) from the frontier market (FM) in its semi-annual review. The reclassification is set to result in greater inflows of funds from global investors who now have access to a huge EM pool of USD1.5-USD1.7 trillion.
Considering the improving security situation in Pakistan, institutions like the World Bank, the IMF, Moody’s and S&P have also upgraded the country’s status.
“Local investors who were previously investing in markets like Dubai are now willing to invest instead in Pakistan,” says Hammad Rana, associate director of sales and investment advisory for Colliers Pakistan. “If the security situation continues to improve we foresee demand increasing across the board. All this bodes well for the market and for any potential foreign investors or developers looking to enter.”
Pakistan is far from the only nation in the region that carries the promise of significant returns for intrepid developers and investors willing to brave the inherent risks of entering relatively virgin territory.
International developers often need to consider the possibility that a prospective goldmine can just as easily become a veritable minefield
In South Asia, Sri Lanka and Bangladesh are both picking up a head of steam. Elsewhere countries such as Mongolia, Myanmar and even Cambodia – despite a troublesome glut of supply in the capital Phnom Penh – present significant allure due to their untapped potential.
Yet with glittering opportunities come significant pitfalls. Collectively the less developed real estate markets in the region can blithely be grouped in the “up and coming” bracket. However, each one presents its own political, legislative and macro-economic challenges, from opaque governance and lax controls to arcane policies that protect the status quo. Therefore, international developers often need to consider the possibility that a prospective goldmine can just as easily become a veritable minefield.
When it comes to the simplicity of doing business as an international developer, certain markets score better than others. Mongolia, for instance, is widely known for the foreigner-friendly regulations of its real estate market.
More: Mongolia’s former pro-wrestler president could save its property sector
“Put simply, Mongolia has some of the most conducive real estate investment laws in Asia,” says Oliver Nicoll of Asia Pacific Investment Partners (APIP), a frontiers market specialist agency.
“Capital gains and stamp duty for purchasers is set at zero. Income tax rates are notably low and there is no distinction between locals and foreigners in terms of ownership of immoveable property. Combined with latent demand for housing, investors and developers benefit from a supportive environment when developing in the country.”
Indeed, experts have long identified the landlocked nation as a star among Asia’s emerging markets due to the vast mineral wealth – estimated at as much as USD2.5 trillion – that lies beneath its endless grassy steppes.
Although the economy in the country has been battered in recent times due to the worldwide crash in commodities, analysts believe that the nation’s long-term wealth (and, therefore, the growth potential for real estate supply in the capital Ulaanbaatar) is assured.
“Taking a long view, it seems likely Mongolia will benefit from the kind of wealth and investment experienced by other commodity rich nations,” adds Nicoll.
Not every nation is fortunate enough to be sitting on a goldmine like Mongolia is, but other emerging markets around Asia have their own trump cards to play.
Myanmar has opened itself up for Foreign Direct Investment (FDI) after being closed to the outside world by the former military dictatorship. Sri Lanka offers 1,600 kilometres of pristine coastline and an ever-improving infrastructure. Cambodia, meanwhile, has become known for its stability under strongman leader Hun Sen, its consistent economic growth of around 7 percent annually and for its expanding middle class – especially in the capital Phnom Penh.
Stable governance and relaxed regulations make Cambodia’s capital Phnom Penh a favourite among Asia’s emerging real estate markets
Stable governance and relaxed regulations make Cambodia’s capital Phnom Penh a favourite among Asia’s emerging real estate markets
Linking all these nations – as well as other, more developed, markets in the region is China’s One Belt, One Road initiative, with its multi-trillion dollar bid to reshape the world through a new network of maritime and landside links.
Even better for international developers is the fact that, in many of these nations, a lack of experience and chops on the part of local developers opens up some serious opportunities.
Nevertheless, the process of entering an unfamiliar market – with its myriad regulations, cultural sensitivities and quirks – is rarely plain sailing.
In Pakistan, the arrival of big international developers including Emaar, Meinhardt and Al-Ghurair was greeted with much fanfare. Local investors believed that foreign companies would deliver better quality and deliver on time. That has not been the case.
For example, Crescent Bay, Emaar’s showpiece project in Karachi was launched in 2008 with the promise of delivery of the first two apartment towers by 2011. As of December 2017, not a single apartment has been delivered.
Foreign developers elsewhere have achieved better results. Despite its huge potential, Myanmar is regarded as one of the more difficult markets in Asia. There are numerous disadvantages to doing real estate business in the huge nation – the largest in mainland Southeast Asia – according to experts. These include a lack of middle class, limited availability of capital for buyers, little access to quality materials and no allowance for international developers.
More: The rise of Southeast Asia’s sleepiest capital
These barriers, however, failed to deter Singaporean developer Keppel Land, which marks 25 years of doing business in Myanmar next year after entering the country in 1993. The firm currently has a 40 percent stake (alongside Myanmar conglomerate Shwe Taung Group) in Junction City Tower, a 23-storey office tower that is part of Junction City, a mixed-use development which will also comprise the five-star Pan Pacific Hotel, a shopping centre and residential towers. It also has a 40 percent stake (again with Shwe Taung Group) in phase two of the Junction City project, which will offer a gross floor area of around 50,000 square metres via premium serviced residences and offices.
“Through the years, we have been steadfast and have since developed keen market insights, understanding of the local culture as well as forged strong relationships with local partners, contractors and the local government,” says Sam Moon Thong, President Regional Investments for Keppel Land of its strategy for success in Myanmar. “This puts us in good stead to participate in Myanmar’s growth in the years to come.”
In Sri Lanka, meanwhile, the biggest noise in terms of foreign developer activity has been from China. CHEC Port City Colombo, a subsidiary of state owned China Communications Construction Company is investing USD1.5 billion in reclaiming 270 hectares of new development land adjacent to Colombo Port for a new city within a city – the biggest and most controversial infrastructure project in Sri Lanka’s history due to its informal association with the One Belt, One Road initiative.
Chinese developer Avic International, meanwhile, is behind Astoria, a large four-tower residential project in Colombo. It’s not just Chinese firms looking to get a slice of the action in the booming island nation though. Indian developer Indocean, Japanese firm Belluna and Singaporean company Silverneedle Group are all involved – either individually or as part of a joint venture – in projects in Colombo.
Although there has been controversy about the extent of Chinese influence, projects such as the reworking of Colombo’s port area are indicative of the growing status of Sri Lanka as a property player
Although there has been controversy about the extent of Chinese influence, projects such as the reworking of Colombo’s port area are indicative of the growing status of Sri Lanka as a property player
Although some analysts contend that the Colombo market – especially at the highest end – is nearing the point of saturation, there is a feeling that Sri Lanka’s growing geo-political significance and its potential for tourism could make it a major player in years to come.
“Sri Lanka poses a whole raft of challenges for new-to-the-country real estate developers,” says Steven Mayes, managing director of JLL Sri Lanka. “These include a very conservative government lacking in transparency and consistency and somewhat arcane policies that protect, rather than challenge the status quo. Other challenges include high interest rates, a lack of skilled labour and the need to import the bulk of construction materials.”
On the other hand, Sri Lanka is rapidly gaining in geo political significance as China invests heavily and as regional investors jockey for prominence, opening-up vast tracts of the country with new infrastructure, there are tremendous opportunities for the more adventurous developers, particularly in the hospitality sector.”
Indeed, this push and pull between extreme negative and outstandingly positive conditions encapsulate the gameplay in Asia’s emerging nations. From Lahore to Ulaanbaatar, Kandy to Karachi, property development is a high-stakes hand. Numerous elements ranging from security concerns to labyrinthine regulations mean there’s always a risk of folding. But, for those who play their cards cannily, the prize pots can be vast.
This article originally appeared in Issue No. 146 of PropertyGuru Property Report Magazine:
http://property-report.com/detail/-/blogs/what-you-need-to-know-about-asia-s-final-frontie-4