The real estate sector holds eminent status in Pakistan. From an investment viewpoint, it has offered lucrative returns primarily due to appreciation in land value, while rental yields remained subdued, mostly below the country’s risk-free rate. On the economic level, the sector is linked to a number of ancillary industries like steel, cement, brick, sanitary, timber, and marble and has a sizable share of national employment.

The demand for real estate has grown manifold, especially in urban centres like Karachi, Lahore, and Islamabad. This is partly due to a shortage of residential homes and apartments fueled by excessive rural-urban migration and a burgeoning population.

Besides, the living conditions in older localities have become deplorable, which makes citizens seek better options in recently developed communities. The other major chunk comes from investors who wish to benefit from capital appreciation.

However, despite being of such utmost significance, the sector continues to be largely informal, which results in a lack of transparency, price misinformation, and malpractices like illegal land occupation. Many people often fall prey to fraudulent schemes and end up losing their hard-earned wealth. Some further engage in lengthy litigation.

REITS can potentially help bring informal cash into the formal sector in the long run

The Real Estate Investment Trust (commonly known as REIT) can help in the formalisation of this sector in Pakistan. A REIT pools investors’ money and invests it in real estate projects. The company managing a REIT, REIT Management Company (RMC), charges a fee for managing it and passes on the remaining return to the investors.

There are different types of REITs in Pakistan. The scheme investing in an already-developed commercial or residential project to earn rental income is known as a Rental REIT, while the scheme investing in land to develop it for industrial, commercial, or residential use is called a Development REIT. A REIT could also be a combination of both, and such a scheme is called a Hybrid REIT.

REITs are regulated under REIT Regulations, which were last modified by the Securities and Exchange Commission of Pakistan (SECP) in 2022. The companies that wish to offer such a product seek an RMC license from SECP. In the next stage, any project conceived requires the commission’s consent and appointment of a trustee.

REIT provides ordinary investors the opportunity to get exposure to premium real estate projects without the need to purchase them entirely since it has to be listed on the stock exchange within three years of financial close (when all investment and financing arrangements have been made). This is a novelty in an otherwise capital-intensive property sector.

Similarly, the land or building has to be transferred in the trustee’s name within three months of the financial close, which brings about a high degree of transparency. Moreover, REIT schemes are required to engage independent auditors, valuers, lawyers, and accountants, which ensures multiple layers of control.

From an investor’s perspective, REIT operates under austere regulations and provides diversification benefits, professional property management, and tax exemption if it distributes at least 90 per cent of its profit as dividends to unitholders. On the flip side, an end-user is also comfortable purchasing a house, apartment, or office space in a project under a REIT scheme.

In spite of all these advantages, the REIT concept continues to be extremely underutilised in Pakistan. Dolmen City REIT and Globe Residency REIT are the only two REITs listed on the Pakistan Stock Exchange (PSX), while a handful of them registered with SECP are going to be listed soon.

It is critical for the stakeholders to realise that REITs can be a solution to many evils associated with the country’s infamous real estate sector and, hence, must be strongly advocated. They could potentially help in bringing informal cash into the formal sector in the long run.

Also, they provide a level-playing field where all investors, small or big, can buy units of a REIT scheme proportionate to their appetite and adhere to Louis Glickman’s suggestion, “The best investment on earth is earth.”

The writer is a finance professional and a graduate of IBA, Karachi

Published in Dawn, The Business and Finance Weekly, January 29th, 2024