You Can Now Invest in Pakistan’s Real Estate With As Little as Rs. 10

A major shift in Pakistan’s real estate market is expected after the country’s first Development Real Estate Investment Trust (REIT) starts offering units for subscription on the Pakistan Stock Exchange (PSX) this week.

The Chief Executive Officer (CEO) of Arif Habib Dolmen REIT Management Limited (AHDRML) Muhammed Ejaz told ProPakistani that Wednesday’s public offering of the REIT will essentially mark the beginning of the end of speculation in the real estate industry. He also estimated that the entire sector will convert to the REIT model within the next five years.

Challenges, and Problem Solving

The CEO noted that Pakistan’s real estate business has always been considered a business that is profitable but is only limited/accessible to large investors and liquidity is a big issue. With REIT, property ownership can be divided into small units.

“If you buy a plot worth Rs. 50 million and need Rs. 1 million, you can’t just take it out. The lack of liquidity and size made the real estate market inaccessible to the average person. The conversion to REITs was used to solve this problem,” he stated.

The executive explained that financiers who operate in the REIT mode are more at ease because of the increased transparency, accountability, and discipline. Investors are at ease with the escrow arrangement option and the fact that assets are controlled by a trustee like the Central Depository Company (CDC) which also provides extensive oversight.

“It is critical to recognize that the REIT industry is essentially a real estate investment business. The regulatory regime is changing, 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”, the top executive said.

When REIT’s professional management and resources are available, the product offering will only improve. The quality of the products offered by the informal sector would deteriorate in comparison to those developed and brought to market by formal/REIT setups, he added.

Foreign Investment

The upcoming Development REIT will help bring public money into real estate projects through PSX. This also includes exposure to Foreign Direct Investments.

“Foreign investors wanting to invest in Pakistan’s real estate require a financing vehicle that ensures internal transparency and remits profits; both are provided by REIT. In this regard, I can say that we have succeeded because a prominent Saudi investor has joined us in financing projects through our brand-new Sapphire Bay Islamic Development REIT,” the executive said.

Ejaz highlighted that the informal sector dominates Pakistan’s real estate market, and it will always pose a challenge to the formal sector as it is largely unregulated. On the other hand, the REIT model is overly transparent; you must disclose everything. Both the investor and the regulator have full access to all data, including cost, source of expenditure, contractor payments, and so on.

REITs to Normalize in the Next 5 Years?

REITs have essentially evolved into a vehicle for documentation and formalization of the country’s real estate market. The size of the sector is unknown because it is not documented.

“Between 2015 and 2020, only one REIT was introduced. But after the regulators addressed and amended the rulebook, 12-13 REITs were released last year. Per this viewpoint, if all disadvantages/complications are removed in this manner, the entire country’s real estate businesses will convert to the REIT model within the next five years,” he explained.

“Real estate is, in my opinion, the largest investment segment in the country. Its documentation, formalization, and normalization under the REIT model would aid developers in convincing them that the system is viable,” he said.

Real Estate Speculation Finally Laid to Rest?

“We can reduce speculation by doing business through REITs. This is due to the fact that every project under this model 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,” said Ejaz.

He recalled that up until 2020, the only lucrative activity appeared to be investing in real estate and that mostly in plot speculation and new developments rather than the stock offerings of the then REITs. Today, the story is different.

The CEO said that as a result of this documentation, the so-called absurdity of the real estate sector (e.g., plot worth) can be eliminated, and thus speculation will be reduced.

Upcoming Offering

Globe Residency REIT (GRR), Pakistan’s first developmental REIT to be listed on the PSX, will hold a general subscription on December 14 and 15. Javedan Corporation Limited has offered 14 million units to the General Public at a price of Rs. 10 per unit, accounting for 10 percent of the total units in the REIT Scheme. JCL shareholders will be offered 85 percent of these REIT scheme units, while real estate consultants will be offered the remaining 5 percent (consultants).

Those who are regular investors in the market would have paid a premium to bid on the GRR if there was a book building involved because most risks (clear title, possession, approvals, sale, contracts, construction) have already been addressed.

“We’ve done something different by offering a level-playing field to investors of all classes to come forward and invest in a fully documented real estate business, especially the smaller investor who usually shies away from investments in the market but aspires to be a property owner,” he said.

Ejaz added that if all goes according to plan, the 10 percent offer will help small savers invest in the sector and earn good returns in the long run (~30% expected return).