Rental value: Investing in Karachi’s posh DHA, think again

By Kazim Alam, The Express Tribune

KARACHI: Three years ago, if someone asked whether investing in real estate of Karachi’s posh Defence Housing Authority (DHA) area would be safe, the answer would’ve been a confident ‘yes.’ Not so anymore.

According to real estate dealers working in and around DHA, property rates remained flat or, in some cases, decreased during 2011. The ‘slump’ continued for the third consecutive year in 2011, they said.

“A commercial bank’s branch on main Khayaban-e-Ittehad recently renegotiated its agreement with the property owner. Instead of the monthly rent of Rs300,000 it paid during 2011, it will now pay Rs250,000 a month in 2012. The property owner knew he had few other options, so he agreed,” said Niaz Estate CEO Niaz Farooq, a property consultancy company, which has been dealing in real estate in DHA for over two decades.

Similarly, the monthly rent of a typical 1,650 sq ft property on either the first or the second floor of a building located on a main road in the commercial area of DHA is down to roughly Rs70,000 from Rs100,000 – a decrease of 30% in three years.

Unlike commercial property, the rental value of residential property in DHA has not decreased. However, Farooq says, only a handful of people in DHA are following the standard practice of increasing the residential property rent by 10% annually. Hence, a modest house of 500 sq yd in DHA can still be leased at about Rs75,000 a month – a rate that has more or less remained the same over the last couple of years.

Real estate agents say that the rental value of residential property in DHA has remained stable as compared to the rental value of commercial property mainly because the area is less prone to ethnic and political violence than most areas of the city.

Although new construction is taking place in DHA, real estate agents say its pace is slow in comparison with the rapid development that took place during General Musharraf’s regime. The rising cost of construction – such as the hike in the price of a 50-kilogramme bag of cement from Rs320 in February last year to Rs410 in September 2011 – has led to a lack of enthusiasm on the part of property developers.

The average market price of a newly built, first-floor apartment of 900 sq ft in DHA’s commercial area is between Rs3.8 million and Rs4.2 million. A relatively old apartment of similar size, however, costs around Rs2.6 million.

Interestingly, the going rate of Rs2,900 per sq ft for relatively old apartment blocks in DHA is too low when compared with rates in newly constructed apartment blocks in middle-class neighbourhoods of Karachi. According to Arif Siddik, vice chairman of the Association of Builders and Developers of Pakistan, the rate for newly built apartments in middle-class areas like Surjani Town and North Karachi is Rs2,500 per sq ft.

“A business recently moved into a building in DHA Phase II right above a KFC outlet. It’s paying Rs65,000 a month. It paid Rs100,000 a month to its previous landlord in DHA, even though that place was of the same size and on a main location like this one. This shows the slump is still continuing,” Farooq said.

Published in The Express Tribune, January 5, 2012.

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