Is Bahria Town Karachi a good investment?

Bahria Town

I have already written a very detailed post about Malik Riaz and his shenanigans at Bahria Town. I have also tweeted about it a lot. However, I keep getting inquiries from friends and colleagues asking me if it is a good investment.

How do you analyze if anything is a good investment? When you ask what will you get in return for what you are paying for. So for Bahria Town, we will be paying Rs.15,000 (5,000 registration fees plus 10,000 credit towards first installment). What will you be getting in return? No one knows. The location of the project, size of the project, sizes of plots, price of the plot, number of installments etc is all guess work. Rather guess work is limited to location of the project. With respect to the rest of the information, no one has a fking clue.

So it is pretty hard to tell if it will be a good investment.

But what do we know about it. We know that we will be paying Rs. 15,000 per application. People are submitting 2 to 3 applications each and investing from all over the world. So I estimate that there will be 100,000 applications which I think is pretty conservative considering the hype surrounding it.

I did some back of the envelope calculation.

  1. At 15,000 per application, that is Rs.1.5 Billion for 100,000 applications.
  2. Lets assume that processing and booking and balloting and allotment etc takes a while. Can take up to 6 months but conservatively assume it will take 3 months
  3. Assuming he has negotiated a rate of 8% interest, Rs. 1.5 Billion in the bank will earn him Rs.30M in 3 months
  4. Add to it, Rs.5000 per application that he will not be returning and that is another Rs.500M
  5. So that makes a total of Rs.530M
  6. Deducting around 50-75M that he spent on advertisement, and that leaves him with Rs.455M
  7. Not a lot of money for him but still a handsome amount as it comes with no strings attached.
  8. If we add money he will be getting from other two projects and probably he might be able to get upto Rs.600M of money absolutely free.

I don’t know about the investors but for Malik Riaz and Bahria Town entity, this is pretty good investment. Against an advertisement campaign of Rs. 75M (ok lets make it Rs.100M by including future expenses), he will be getting Rs.600M. That is a 600% return in 6 months.

Only illegal Ponzi or gambling schemes guarantee such returns. And yet Malik Riaz gets it all legally.

Whats next after DP World scare? National Bank of Kuwait

I have done my share of Dubai bashing last year. When financial companies were crashing world over, Dubai was trying to hold its own by false proclamations from none other than ruler of Dubai and false reports by investment banks which were keen to remain in good books of Dubai authorities. Some people are just delusional assuming that if they close their eyes, the danger would just fade away. However, with the scare of Nakheel debt default in early December, it seemed that reality had finally reached this part of the world and last man standing of Middle East had finally fallen.

Actually NO. There is one other financial behemoth and it has been deluding auditors, credit rating agencies as well as financial press. The amazing thing is that despite signs visible every where, nobody has raised an eyebrow. This is the elephant in the room that no one wants to talk about. I am talking about National Bank of Kuwait more commonly known as NBK which has been awarded one of the safest banks in the world.

When financial institutions world over including middle east were taking provisions on their investment and real estate portfolio, coming out of closet and declaring losses on their derivative transactions, NBK was conspicuous with record profits and minimum losses. When all investment sectors were declining in value, how could NBK remain immune to the losses unless it was shorting securities which NBK being a commercial bank is not allowed to do.

So what gives? I would not need to tell anyone if people who are paid to do this job i.e., regulators, research analysts and credit rating agencies asked a simple question: when the whole region was growing based on real estate didn’t NBK finance this growth being one of the largest institutions? It seems the people were not doing their job diligently because the answer to this question is a resounding YES!!!

NBK has provided Al Kharafi Group (construction arm that is a contractor as well as major supplier of cranes in Dubai) financing by a conservative estimate to the tune of KD600 million (other estimates put the value at KD 1Billion). This puts NBK exposure to Al Kharafi from USD 2 Billion to USD 3.5 Billion which is not a small amount if no provision had been taken so far which my sources claim that none has been taken.

Recently there was a lot of activity in the local stock markets wherein Kharafi was trying to offload its strategic stake in Zain but the deal could not go through. The sole reason that Kharafi wanted to sell its stake was it wanted to settle its liabilities with NBK. I am not aware what accounting logic NBK is using to avoid taking a provision against such a huge exposure to a single counter party.

And there is more. People in Kuwait tell me that two tallest towers in Kuwait (one under construction Al Hamra Tower and the other recently completed Al Raya II) were financed by NBK. However, the developers are unable to payoff the loan and as such NBK has shifted / will shift its staff from rented premises to these towers which they will occupy rent free (non-payment of rental to be considered repayment by developer through some twisted accounting logic). NBK is currently occupying around 20 floors in Al Raya II and will be occupying equal number of floors in Al Hamra Tower once its completed.

Though NBK is a well capitalized bank and losses to the tune of USD 4 to 5 billion might not affect its footing significantly, however, I am flabbergasted that the bank would hide such huge amount of losses for so long.

Gold : A bubble about to burst?

Everybody asks me why is the gold price rising and is it a good time to invest in gold. I myself want to invest in the commodity but based on my past experience and gut-feel I think it is a wrong time to do so. I have two reasons for it.

Reason 1:

I have seen that when everybody i.e., friends, colleagues, neighbours, house maid and even the driver starts talking about investing in something, its a signal that smart money is about to get out of investment and they are looking for simple fools like my acquaintances to leave holding the parcel when the music stops.

Well, this time even the kasai who came to slaughter our goats on eid was talking about buying and storing gold.

Reason 2:

I have a track record of investing at the peak or near the peak. At this moment, I have a great urge to invest in gold listening to people around me and I am fighting it just on the basis of my past track record.

The investments that I have made earlier at the peak have been property in dubai, stocks in Pakistan in 2005 just before the crash and little investment in NASDAQ stock before the 2001 IT bubble burst.

One of these days I will buy a gold coin or at max a gold biscuit. However, people tell me that to really make a buck out of it,  or fight against inflation, I should buy a brick.

Rest assured that whenever I do buy a coin or biscuit, it will be the straw that breaks the camel’s back, bursting the gold bubble.

Academically I understand that gold has zero utility value as it has minimum  industrial use. Its value is derived from ornamental use. In Karachi, it does not even have ornamental value as you become a walking target for thieves and robbers. Most of the people wear imitation jewelry and keep the gold jewelry in lockers. One rarely wears original jewelery unless one is the bride on her wedding.

People talking about US deficits, unemployment rates, and dollar soon losing its value suggest that gold is best store of value at the moment. Even the financial press is full of news about research in gold, funds that are being launch to invest  in gold, gold indexes etc.

If one is in Pakistan, my gut is that one should start investing in farmland or staple foods such as rice, wheat and water if possible and build stockpiles at home since the rumors have it that we will have bigger food crises in the coming years.

Disclaimer: I have no license to dispense investment advice. Neither this post nor this blog should ever be considered as dispensing recommendations or advice.