As an asset class, commercial real estate is often viewed with scepticism as it has a higher risk potential compared to residential real estate. Investing in the commercial real estate sector holds numerous benefits. Although most people place a higher value on investing in residential plots and housing projects, commercial real estate can achieve higher profits and better returns on investment over a shorter period of time. That is mainly due to the high demand for commercial and office space in Pakistan.
Commercial Real Estate of Pakistan
Pakistan has come a long way in improving its business environment for local and foreign companies. Many foreign businesses in the automotive and hospitality sector have recently started operations in Pakistan. The country is also experiencing a surge in its technology exports and a significant number of youth are investing in startups. All this activity generates demand for commercial real estate as businesses rely on offices, warehouses, and commercial shops for their activities. There has also been an increase in commercial real estate investments owing to the improved security situation of the country. Better security in the region led to increased stability in the real estate market that led to increasing foreign and domestic investments in the sector. In recent years, Pakistan has experienced an exponential increase in the development of commercial projects. The changing consumer lifestyles and increase in the overall standard of living in society are shaping the present and future of the commercial real estate sector of Pakistan.
Increasing Investor Confidence in the Commercial Real Estate Sector
As mentioned earlier, residential properties are considered a safer investment option as opposed to commercial estate due to the higher risk potential attached to them. In Pakistan, the risk of investing in commercial real estate has declined over the past few years because of the improving security situation, better regulatory policies, and increase in government support for local and foreign businesses. As a result, Pakistan’s commercial real estate stock is fast becoming a booming part of the property market. According to an online property portal, there has been a 78% increase in the total number of commercial property searches conducted on the platform in a single year. Most of these searches were reported in the city of Karachi, Lahore, and Islamabad. The figure shows that commercial property investment is of high interest to a large variety of real estate investors.
Increasing Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) have also gained popularity in the real estate investment sector of Pakistan. REITs are mutual funds that focus on investments in real estate properties and derive income from such investments for its unitholders or investors. The introduction of REITs in Pakistan played a significant role in boosting investor confidence in commercial property as an asset class. Besides protecting unit holders or investors from potential risks, REIT assets have a higher liquidity ratio compared to shares of a company and are more affordable.
Increase in Shopping Complex and Plazas
Being a consumer-centric market, there has been an increase in shopping malls, plazas, arcades, and commercial areas in major cities of Pakistan. Experts in the real estate sector believe that Pakistan is ready for the western style of retailing. An increasing focus on customer shopping experience in supermarkets and malls have led to the creation of a diverse range of commercial centres. In addition, the stable security situation has also increased investor confidence of multiple international retailers and brands, which indicates room for plenty of growth for the commercial real estate sector.
Co-working and the future of offices
The demand for co-working spaces increased dramatically during the two years of the pandemic and is expected to remain the same in the long run. A co-working space is an arrangement in which employees from different companies share their office space. Sharing allows companies to save on costs from infrastructure, equipment, stationaries, utilities, and custodial services. In the wake of the pandemic, millions of workers were forced to work from home. Companies and organisations started to adopt more flexible working options which would not only cut costs but also provide a flexible workspace to their employees. Globally, co-working spaces are likely to double shortly. The Jones Lang LaSalle (JLL) predicts that 30% of all existing office spaces will be converted into flexible or co-working spaces. In addition, a study on the global co-working growth estimated that by 2024, almost 5 million people will be working from co-working spaces.
In Pakistan, the trend of coworking spaces is on the rise. As of 2016, there were 30 co-working spaces available for rent across the country. In 2020, the number increased to 200 coworking spaces. In addition, the co-working spaces continue to be the first choice for freelancers, business owners, and start-ups alike.
Investments in the commercial real estate sector have increased in the past few years. With improvements in the security situation and increasing investor confidence, there has been considerable growth in the commercial real estate sector of Pakistan. Increasing commercial investment options has also increased investors’ motivation to invest in the sector. The increasing number of REITs and expanding shopping and commercial areas are also leading to an uptick in commercial real estate investments. In the post-pandemic world, the idea of shared workplaces gained increasing popularity amongst businesses and start-ups3 wishing to cut costs and provide flexible work options to their employees.