The Impact of Rupee Depreciation on Real Estate
Recently, the Pakistani Rupee depreciated 1.3% against the US Dollar, reaching Rs. 232 from 229 on Tuesday. This freefall of the rupee in the interbank and open market is linked with political uncertainty in Pakistan and the strengthening of the dollar against developed and emerging currency markets.
Before this hike in the dollar rate, the State Bank of Pakistan increased the policy rate by 125 basis points to tackle inflation, raising the interest rate from 13.75 percent to 15 percent. These two factors have caused an adverse effect on the economy. The business community has also voiced their concerns about the weakening currency as it will increase the cost of carrying out their operations.
These fluctuations are affecting various sectors and real estate is no different. Graana.com, Pakistan’s smartest property portal, provides a comprehensive analysis on the impact of rupee depreciation on real estate below.
Effects of Rupee Depreciation on Real Estate
The full impact of this rupee depreciation on real estate will be evident in the coming days as the cost of raw materials, labour and transportation will increase further. When we look at last year’s data, there were imports of around $56 billion.
Mineral fuels and oil accounted for approximately 27% of the total import bill. The country also imported various types of machinery worth $5.88 billion, and iron and steel for $4.59 billion. Considering these figures, the construction costs are likely to increase as well.
For instance, steel and iron are used in construction, and with the appreciation of the dollar, both will get expensive, and the cost of construction will consequently increase in the coming days.
The depreciation of the rupee will also make fuel expensive, resulting in an increase in transportation costs.
Affordable Investment Options for Overseas Pakistanis
With the dollar reaching Rs. 232, overseas investors have an advantage, especially real estate investors because all high-end properties will now be more affordable. Hence, now is the right time for them to invest in the real estate market.
The main problem for foreign or overseas real estate investors is finding the right property. Furthermore, the documentation and legal formalities involved in any deal make it difficult for them to invest in the country’s real estate.
If all these barriers are removed and the process is made easier for overseas or foreign investors, then the current value of the rupee makes real estate a lucrative investment option.
More Savings for Overseas Pakistanis
Overseas Pakistanis looking to invest in the country’s real estate market should not wait for a further decline in the value of the rupee as it can appreciate in the coming days. With the IMF loan deal on track, it is expected that the currency market will stabilise. This is why overseas Pakistanis should invest in real estate to generate a steady income flow.
Impact of Rupee Depreciation on Local Buyers
The slump in the value of PKR is beneficial for citizens living abroad and foreign investors. However, the locals get affected due to these fluctuations in the currency, especially first-time home buyers and investors. The purchasing power will get lower, meaning it would be hard for local buyers to purchase a property.
Hence, most people invest in hard assets like real estate in an inflationary environment as it yields better returns and provides financial stability in the longer run. Otherwise, money in the bank account will be worth less with further depreciation of the rupee.
Effects of Rupee Depreciation on Rental Market
There is a prevalent issue of higher interest rates that make home loans expensive for the common man. All these factors will push them to look for a rental property instead. With the increase in demand for rental properties, landlords can also increase the rent as potential tenants are ready to pay higher amounts in an inflationary environment.
Tips for New Investors
New investors (whether local or foreign) should be cautious to avoid investing in an overvalued property that can affect their returns on investment. Investors should keep the following in mind while devising their investment strategy:
- Investors should buy a property that has high rental prospects as it can create a steady flow of income.
- When a currency is depreciating, it is better to invest in a residential property instead of a commercial one as the risk involved is much lower compared to the latter.
- It is better to invest in an already constructed house or apartment as the cost of under-construction properties can fluctuate due to rupee depreciation.
It can be concluded that the effect of rupee depreciation against USD on real estate is actually positive as more people are looking for investment opportunities to grow their wealth. However, you need to be smart when investing in such circumstances as you want to invest in properties that can yield significant returns before the currency market stabilises.