After the country’s first Development Real Estate Investment Trust (REIT) begins offering units for subscription on the Pakistan Stock Exchange (PSX) this week, a significant shift in the country’s real estate market is expected. Muhammed Ejaz, CEO of Arif Habib Dolmen REIT Management Limited (AHDRML), informed to a renowned media house that the REIT’s public offering on Wednesday will essentially mark the beginning of the end of speculation in the real estate industry. He also predicted that the entire industry would transition to the REIT model within the next five years.
Problem Solving and Challenges
According to the CEO, Pakistan’s real estate business has always been considered profitable, but it is only limited/accessible to large investors, and liquidity is a major issue. Property ownership can be divided into small units with REIT.
“You can’t just take out a Rs. 50 million plot if you need Rs. 1 million.” The real estate market was inaccessible to the average person due to a lack of liquidity and size. “This problem was solved by converting to REITs,” he explained.
The executive explained that because of the increased transparency, accountability, and discipline, financiers who operate in the REIT mode are more at ease. The escrow arrangement option and the fact that assets are controlled by a trustee, such as the Central Depository Company (CDC), which also provides extensive oversight, put investors at ease.
“It is critical to understand that the REIT industry is, at its core, a real estate investment business.” The regulatory landscape is shifting, and there is a need to strike a balance that allows REITs to operate while also providing a strong system for maintaining discipline, accountability, and transparency, according to the top executive.
The product offering will only improve once REIT’s professional management and resources are available. He added that the quality of products offered by the informal sector would deteriorate when compared to those developed and brought to market by formal/REIT setups.
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Foreign Direct Investment
Through PSX, the upcoming Development REIT will help bring public money into real estate projects. Foreign Direct Investment exposure is also included.
“Foreign investors interested in investing in Pakistan’s real estate require a financing vehicle that ensures internal transparency and remits profits, which REIT provides.” “We have succeeded in this regard because a prominent Saudi investor has joined us in financing projects through our brand-new Sapphire Bay Islamic Development REIT,” the executive said.
Ejaz emphasized that the informal sector dominates the Pakistani real estate market and will always pose a challenge to the formal sector due to its lack of regulation. The REIT model, on the other hand, is excessively transparent; you must disclose everything. Both the investor and the regulator have full access to all data, including cost, expenditure source, contractor payments, and so on.
REITs to Level Off in the Next 5 Years?
REITs are essentially a vehicle for documenting and formalizing the country’s real estate market. The sector’s size is unknown because it is not documented.
“Only one REIT was introduced between 2015 and 2020.” However, 12-13 REITs were released last year after regulators addressed and amended the rulebook. According to this viewpoint, removing all disadvantages/complications in this manner will result in the entire country’s real estate businesses converting to the REIT model within the next five years,” he explained.
“In my opinion, real estate is the largest investment segment in the country.” Under the REIT model, its documentation, formalization, and normalization would aid developers in convincing them that the system is viable,” he said.
Is Real Estate Speculation Finally Dead?
“By doing business through REITs, we can reduce speculation.” This is because, under this model, every project would have a primary business plan that would require approvals from everyone (developer, REIT management company, trustee, SECP, PSX, underwriter, and rating agencies) before it was presented to investors,” explained Ejaz.
He recalled that, up until 2020, the only profitable activity appeared to be investing in real estate, primarily in plot speculation and new developments, rather than stock offerings of the then-REITs. Today’s story is quite different.
According to the CEO, the so-called absurdity of the real estate sector (e.g., plot worth) can be eliminated as a result of this documentation, and thus speculation will be reduced.
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Globe Residency REIT (GRR), Pakistan’s first listed developmental REIT, will hold a general subscription on December 14 and 15. Javedan Corporation Limited has made 14 million units available to the general public at a cost of Rs. 10 per unit, accounting for 10% of the total units in the REIT Scheme. JCL shareholders will receive 85% of the REIT scheme units, while real estate consultants will receive the remaining 5%.
Regular market investors would have paid a premium to bid on the GRR if a book building was involved because the majority of risks (clear title, possession, approvals, sale, contracts, construction) have already been addressed.
“We’ve done something different by providing a level playing field for investors of all classes to come forward and invest in a fully documented real estate business, particularly the smaller investor who typically avoids market investments, but aspires to be a property owner,” he said.
Ejaz added that if everything goes as planned, the 10% offer will encourage small savers to invest in the sector and earn good returns in the long run (30% expected return).