After Pakistan’s first Development Real Estate Investment Trust (REIT) starts issuing units for subscription on the Pakistan Stock Exchange (PSX) this week, a significant shift in the country’s real estate sector is anticipated.
Muhammed Ejaz, the CEO of Arif Habib Dolmen REIT Management Limited (AHDRML), the REIT’s public offering on Wednesday will effectively herald the start of the end of real estate speculation. In addition, he predicted that within the next five years the entire industry will switch to the REIT model.
Difficulties and problem-solving
The CEO stated that although Pakistan’s real estate industry has long been regarded as profitable, access to it is limited to major investors, and liquidity is a significant problem. Property ownership can be split into manageable portions with REIT.
“You can’t just take it out if you buy a plot for Rs. 50 million and need Rs. 1 million. The real estate market was out of the reach of the typical individual due to its size and lack of liquidity. This issue was resolved by switching to REITs,” he said.
The CEO added that because there is more transparency, responsibility, and discipline while operating in the REIT mode, financiers are more at ease. The choice of an escrow arrangement and the fact that assets are managed by a trustee like the Central Depository Company (CDC), which also performs comprehensive oversight, put investors at ease.
Recognizing that the REIT sector is fundamentally a real estate investment business is crucial. The regulatory environment is evolving, so it’s important to strike a balance that permits REIT operations while also offering a robust structure for upholding discipline, responsibility, and transparency, according to the top executive.
The product selection will only get better when REIT’s experienced management and resources are accessible. According to him, compared to products created and distributed by formal/REIT arrangements, the quality of goods produced by the informal sector would suffer.
Through PSX, the forthcoming Development REIT will assist in bringing public funding to real estate projects. Exposure to foreign direct investments is also included.
“Foreign investors looking to participate in Pakistani real estate need a financing option that guarantees internal transparency and remits earnings; REIT offers both. I can confidently state that we were successful in this area because a well-known Saudi investor joined us in funding initiatives through our recently launched Sapphire Bay Islamic Development REIT,” the official stated.
Ejaz highlighted that the informal sector dominates Pakistan’s real estate market and that, because it is mainly unregulated, it would always present a challenge to the legal sector. The REIT model, on the other hand, is too transparent and requires complete disclosure. Every piece of information, including price, source of funding, contractor payments, and so forth, is fully accessible to both the investor and the regulator.
REITs to Return to Normal in the Next 5 Years?
In essence, REITs have developed into a means of formalizing and documenting the nation’s real estate market. Because it is not documented, the sector’s size is unknown.
“Only one REIT was introduced between 2015 and 2020. However, 12–13 REITs were released last year after the regulators examined and modified the regulation. According to this perspective, all real estate enterprises across the nation will switch to the REIT model within the next five years if all drawbacks/complications are resolved in this way.
Real Estate Speculation Put to Rest at Last?
“By using REITs to do business, we can reduce speculation. This is because every project under this model would have a primary business plan that, before it was offered to investors, would need clearance from everyone (the developer, the REIT management company, the trustee, the SECP, the PSX, the underwriter, and the rating agencies), according to Ejaz.
He noted that, until 2020, it seemed that the only profitable activity was investing in real estate, namely in new constructions and plot speculation rather than the stock offerings of the time’s REITs. The narrative has changed since then.
According to the CEO, this paperwork will enable the so-called silliness of the real estate sector (such as plot valuation) to be removed, which will lessen speculation.
The general subscription for Globe Residency REIT (GRR), Pakistan’s first development REIT to be listed on the PSX, will take place on December 14 and 15. A total of 14 million units, or 10% of the total units in the REIT Scheme, have been made available to the general public by Javedan Corporation Limited for Rs. 10 per unit. JCL stockholders will receive 85% of the units provided by this REIT plan, and real estate consultants would receive the remaining 5%.
Because most risks (clear title, possession, approvals, sale, contracts, and construction) have already been taken care of, market participants who regularly invest would have paid more to bid on the GRR if there had been a book building.
The smaller investor who often avoids market investments but hopes to own a home stated, “We’ve done something unusual by presenting a level-playing field to investors of all classes to come forward and participate in a properly documented real estate firm.”