Real Estate Outperforms Stocks and Gold during Political Uncertainties in Pakistan

Uncertainties have become the fact of investor’s life, so amplified market volatilities along with subpar financial instrument’s performance have led investors to search for alternative assets that do not belong to the traditional asset class of stocks and bonds, have differing features and lower or no correlations with traditional assets, so that they can generate more diversification benefits for a portfolio.

Real assets; the tangible assets that provide possession of the store of value, like precious metals and real estate etc. Initially attracted institutional investors, but fluctuations in financial markets, economic conditions and political uncertainties have compelled individual investors as well to consider these as an alternative investment option. Since last decade, institutional investors have enjoyed greater returns from real assets than traditional investments, because these are found to behave differently than traditional assets in varying economic and market conditions, thus individual investors could also cope with surprises through incorporation of some real assets in their portfolio.

Despite increasing popularity of alternative investments among investors of developed nations like UK and US, investors in emerging economies like Pakistan who face uncertainties more frequently, are still unaware of the diversification benefits of such assets.

Political Instability of Pakistan

Uncertainties surround all economies, and same is the case with Pakistan. Its long history provides evidence of various uncertainties hitting it severely, including economic and political uncertainties among the dominating ones that significantly influence the investment behaviours in Pakistan.

Pakistan is one of the most politically unstable countries in the world, ranked 189th among 195 countries at a global ranking for 1996-2019 by World Bank. Although it is going to be an emerging market through its economic developments during recent years but still unsuccessful to be stable politically.

The following figure indicates that Pakistan’s political stability index is constantly at a negative level since the last decade, hence indicating that Pakistani investors face political uncertainties more frequently.
An overview of Pakistan’s political instability is as follows:

Pakistan’s Political Stability Index and Global Ranking 2019 (-2.5 weak; 2.5 strong)

(Source: The World Bank)

So, there is a dire need to explore some safe investment options for Pakistani investors to cope with market and political uncertainties, and real estate is found to be a safe haven for Pakistani investors.

Real Estate; a Safe Haven in Pakistan

Real estate, as a source of income as well as its appreciation potential, has made it to be considered as a value-added investment. Making more tangible asset investments, like real estate, is an emerging trend among investors now days.

Real estate has become an emerging sector in Pakistan, currently spending USD 5.2 billion in construction hence indicating a significant growth onwards. But current growth patterns are still insufficient to fill the deficiency of required primary living facilities so require further growth in real estate market.

Although recent poor economic policies by government has declined the real GDP and purchasing power of local man due to ever increasing inflation, but still real estate market has potential buyers like businessmen, professionals and Pakistani expatriates. Moreover, a 75 days lock-down due to COVID-19 has also a significant impact on the overall economy of Pakistan, but businesses are also found to be revived after lockdown. Same is the case with real estate market in Pakistan which is gaining momentum in current year (2021) because investments in real estate projects are continuously expanding. So Pakistan’s real estate market has the potential to attract diligent investors.

Performance of Real estate as compared to Stocks and Gold

Graphical representation of the behavior of real estate returns in relation to gold and stock market in Pakistan is as follows:

Behavior of Real Estate, Gold and KSE 100 index

Above graph indicates the behavior of return series of real estate, gold and KSE 100 index in Pakistan for a time span of 2011 to 2019. It is indicated that although real estate returns also indicate fluctuations but gold and KSE 100 index exhibit more volatile behavior as compared to real estate. It is also indicated that in contrast to two other assets, real estate rarely indicates negative returns, hence behaving differently than the two other assets so it could provide diversification benefits.  During an academic research, the behavior of return series of real estate, gold and KSE 100 index are investigated in comparison to the political instability index of Pakistan (2011-2019) to unveil the fact that which of these assets stayed strong against political instability, and it is founded that among these three assets, real estate is the safest one, because KSE 100 index indicates the influence of political instability and gold although does not indicate the influence of political instability but it exhibits relationship with KSE 100 index to some extent, so any factors influencing stock market would also have some influence on gold. These relationships are shown by the following correlation matrix:

Correlation Matrix of Real estate, Gold, KSE100 index and Political Instability of Pakistan

Real estate not only exhibits negative correlation with political instability but also with gold. Stock market indicates that real estate does not move with any of these assets rather it moves in opposite direction. As it is stated that an asset having lower or no correlation with other assets could provide better diversification in portfolios, so real estate qualifies the criteria for being a good diversifier for investment portfolios of Pakistani investors, especially to cope with the risk of political uncertainties.

Hence, it is suggested that Pakistani investors must consider real estate as an alternative investment for diversification purpose because Pakistan’s stock exchange is highly influential for economic and political uncertainties, so Pakistani investors must incorporate real estate in their portfolios because it provides better protection even more than gold.