REITs to help draw investment

KARACHI: Real Estate Investment Trusts (REITs) would help broaden investment in Pakistan from local and Gulf-based investors and promote the country as a growth market, said Chairman of the AKD Group, Aqeel Karim Dhedhi. “It is expected to be launched soon,” he added.

Pakistan’s current real estate development was limited and lacked transparency, he said. Real estate market was plagued by a number of problems, which deterred an average Pakistani from investing. Lack of transparency in title verification, difficulty in accessing and comprehending land records, prolonged litigation on property matters, delays in project completion and interruptions in delivery of services kept investment at bay.It was expected that REITs would take care of these issues to a large extent.

“REITs will formalise the real estate sector and allow the general public to participate. It will also allow foreign investors to come to Pakistan knowing that the investment will be closely regulated,” said Dhedhi.

REIT is a developed product internationally and most of the real estate projects are funded through REITs. Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels in one specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market.

In Pakistan it will provide new avenues of investment for small investors. One can invest in REITs by purchasing shares directly on an open exchange or by investing in a mutual fund that specialises in public real estate.

Property deals are often “off the books” and participants tend to be from among an elite few. REITs would provide an opportunity to diversify the investor base in the sector through regulated, tradable investment.

The real estate sector is a potential growth market. However, Pakistan’s real estate sector has historically been plagued with accusations of corruption and high-profile scandals in the sector.

Once this product is launched, it will not only benefit public investment but will also fill the gap of housing schemes as there is a huge shortage of, and demand for, housing schemes in the country. Several projects are ready to be launched.

“We are just waiting for the Securities and Exchange Commission of Pakistan (SECP) to formulate the rules and regulations. Once this is done the product will be launched within weeks and soon many different projects will be launched,” said Dhedhi.

REITs will focus on social and low-cost housing to accommodate the country’s population. Additionally, there will be commercial and other luxury housing schemes to help pay off high returns.

Long-term returns over three to seven years are expected to be approximately 50 percent and on an average 25 to 30 percent returns are expected.

REITs have not been officially launched in Pakistan but the AKD Group is one of two business groups that have been awarded permission by the Securities and Exchange Commission of Pakistan to establish REIT in Pakistan. REIT would be available for local and foreign investors, he said.

While investors of Pakistani REITs may benefit from entering into documented real estate deals with “white money sources” that offer competitive returns, government incentives also make the trusts an appealing proposition for developers.

Dhedhi added that REITs would provide retail investors the opportunity to share the dividends from the robust real-estate sector. They would facilitate professional developers in undertaking mega construction projects without the traditional liquidity issues that property development companies were confronted with. Furthermore, they would maximise the efficiency of property utilisation by creating equilibrium between demand and supply of property and professionally managed properties.

REIT would operate as a listed closed-end fund and its units would be traded on the stock exchange. No less than 90 percent of the REIT income would be distributed among unit holders of a scheme as dividends in each financial year. The law also envisages valuation of the real estate included in the REIT scheme by qualified valuers on a quarterly basis. An SECP official said that the SECP had constituted a committee comprising leading professionals to review REITs law and suggest improvements. The committee would finalise its recommendations during the current financial year.

The REIT law, which provides the regulatory framework for investment in real estate in Pakistan, will accordingly be adjusted to facilitate growth and protect interests of the investors.

Improvement in the regulatory framework and the tax regime would provide necessary impetus for launch of REITs in Pakistan. REITs would in turn encourage transparency in deals and formalise price discovery mechanism in the real estate market, which would ultimately lead to increase in overall revenue of respective governments and land authorities, added the official.

Haji Ghani Usman Chairman of Haji Ghani Haji Usman Securities and one of the main stakeholders of Naya Nazimabad projects said that in the current scenario it was difficult to come up with new mega projects. There were joint ventures everywhere in the world as individuals did not have the capacity to start new businesses alone, he said. The public therefore became partners and their money was invested in businesses.

A product which focused exclusively on the real estate sector was the need of the hour, he said, given that there was a huge shortage of housing and other infrastructure facilities in the country.

It is therefore the right time to introduce a product like RIET which will help in developing new cities and will ensure attractive returns for investors.

“REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages,” said Atif Zafar, analyst at JS Research. He further said that REIT was a company that owned and managed property on behalf of shareholders. However, it will take some time for REIT to be launch in Pakistan.