This week, for the first time in Pakistan, a developmental REIT—called Globe Residency REIT (GRR)—is being listed on the Pakistan Stock Exchange (PSX) offering “units” to the general public. This is the second REIT listing in the country, the first of which was a rental REIT. The GRR is a real estate project consisting of nine apartment complexes that will be built inside the Naya Nazimabad housing project. BR Research spoke to Muhammad Ejaz, the CEO of Arif Habib Dolmen REIT Management (AHDRML), a joint venture between Arif Habib Group and the Dolmen Group, ahead of the listing to discuss the prospects of such a project in Pakistan, the current appetite and what this means for the real estate market.

Muhammad Ejaz is the founding Chief Executive of the company and has successfully helped the company launch South Asia’s first listed REIT fund. He has been associated with the Arif Habib Group since 2008 and sits on the board of several group companies.

Prior to joining the Arif Habib Group, Ejaz served in senior positions at both local and international banks. He was the Treasurer of Emirates NBD Bank in Pakistan as the Regional Head of the Corporate Banking group. He also served Silk bank as Head of the Corporate and Investment Banking Group. Ejaz holds a graduation degree in Computer Science from FAST ICS and an MBA in Banking and Finance from IBA, Karachi, where he also serves as a visiting faculty member.

Quick explainer: A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing real estate. The REIT model is structured like a traditional closed-end mutual fund, but instead of stocks and bonds, a REIT investor owns real estate-backed “units” that sell like any other units/listed security, enabling the unit holder to invest directly in real estate without having to buy, manage or build real estate themselves. Specifically, a rental REIT is a scheme that invests in residential or commercial properties for the purpose of generating rental income. Meanwhile, a developmental REIT involves the development, construction, and refurbishment of real estate for residential, commercial, and industrial purposes (or even a combination of these). It has a limited life — usually, the time it takes to develop, build, market, and sell a real estate project.

Following are excerpts from the interview:

BRR: The Securities and Exchange Commission of Pakistan (SECP) introduced regulations to register REIT schemes in 2015 under the Real Estate Investment Trust Regulations, 2015. But it seems these were not enough. What has happened in the past year or so, for so many new REIT licenses issued by the SECP. A lot of them will be listed on the PSX over the next few years.

Muhammad Ejaz: Since last year, in June of 2021, there have been several developments in terms of regulatory frameworks that have supported the introduction and formation of REITs. For instance, provincial governments have rationalized duties and taxes for the transfer of property. The State Bank of Pakistan has facilitated bank investments. In addition, the SECP has made regulations more conducive, while the Federal Board of Revenue (FBR) has eliminated a number of tax anomalies. These steps have facilitated the formation of 11 REITs in the country. Arif Habib Dolmen REIT Management Limited has formed 9 REITs since these improvements came into effect. We are launching projects in Lahore and Islamabad under the REIT structure. Evidently, the REIT regime is now active. The investors as well as the regulators are realizing that it is more efficient to mobilize real estate activities through REITs.

The new regulations by SECP have also expanded the scope of REITs allowing agriculture REITs, mobile tower projects, and renewable energy projects. In addition, they are also allowing general-purpose investment funds where funds can be raised and invested into real estate projects.

BRR: What are the risks involved in introducing a developmental REIT?

M. Ejaz: There are a number of risks involved in real estate development, especially in the form of a developmental REIT. First and foremost, land acquisition and clarity of title. We have to make sure that the land titles are clear and we have possession. Secondly, in order to kickstart the project, we have to attain a number of approvals from different government departments. And then, ensuring the sale of units for which collections have been made lastly, the construction of the on-ground project— which can be residential or commercial. These risks exist but they are well-rewarded. This is why there are so many developers and builders in the market. In the current real estate ecosystem however, the public does not have the opportunity to participate in the business of development.

The GRR we are listing on the PSX has all these risks already addressed. The land acquisition with clear titles is acquired, approvals are in place, a major portion of the project has already been sold, and collections are positive and growing. In addition, of the 9 towers, Meezan Bank has joined us in a partnership for 3 towers. This not only endorses our project and our business plan but also assists in liquidity availability. Meezan Bank plans on creating an Islamic financing structure and offering it to the public.

BRR: Tell us about the project. What are the financial modalities and structure of the development. Give us some numbers.

M. Ejaz: We are building 9 towers within the Naya Nazimabad community, the plots cover a combined area of 40,500 sq. yd. with a built-up area of 3 million sq.ft., of which 1.9 million sq. ft. is saleable. The total project cost is Rs20 billion, of which Rs3.2 billion is the land cost while the rest is construction and other costs. The capital structure is such that the land belongs to the builder—i.e., bought by the builder—while the construction costs are covered through customer advances. Within the cost of land, Rs1.4 billion is the equity and Rs1.4 billion in debt, while the rest (Rs400m) is deferred payment to the land owner.

The towers will constitute 1344 apartments, of which 408 will be developed under the Musharakahmode in collaboration with Meezan Bank. Of the 936 apartments left, about 750 apartments have already been sold. The remaining will be sold on an ongoing basis and we can gradually raise prices as well. For example, at the time of the launch, a 2-bedroom apartment was priced at Rs10,000 sq. ft. (Rs12.5m). Gradually, this has been raised to Rs12,500 sq. ft. (Rs15.4m). Similarly, a 3-bedroom apartment was priced at Rs17.5 million; now increased to Rs 20.5 million. Every month, we are booking 35-50 new units.

The entire equity is owned by Javedan Corporation and is disposing of it under a simple mechanism where we are offering 10 percent (of Rs1.4 billion) to the general public. This translated to Rs140 million; or 14 million units for Rs10/each. In addition, we are offering 5 percent to real estate consultants—who are brokers that are involved in selling and marketing the units at Naya Nazimabad. The remaining 85 percent is being offered to shareholders of Javedan Corporation.

The buyer of the unit has become a partner for us in the project, and they will get a return on any profits the project makes. The project in this case is 1344 apartments. Once development ends in 48 months, the REIT ends. Our expected return is 30-40 percent.

BRR: Is the market familiar or prepared for this listing. What kind of response do you foresee?

M. Ejaz: We are hopeful for a good response as the initial risks have all been well-managed, and the reward is more attractive than anything else in the market. But even so, as I told you earlier, we are offering only 10 percent of the REIT to the public so small investors interested in the real estate business can familiarize themselves with the concept of REIT and be more confident about their participation.

BRR: What is the target market for the apartment complexes? Who is your typical buyer?

M. Ejaz: I would say mid-income households earnings anywhere between Rs 150,000 to Rs 200,000 per month. We believe middle-class families have savings in place, and we facilitate our buyers on payments spreading them over the 3–4-year construction period. In addition, there is a mortgage available by banks but that share would be very small. As for the aforementioned apartments being constructed in collaboration with Meezan Bank, the bank would prefer buyers that will take out mortgages with them. This opportunity will potentially be availed by buyers that are short of liquidity and may not be able to cover the entire cost with cash installments.

BRR: Construction costs are rising dramatically. Have you priced this in?

M. Ejaz: Yes, our model has a cost contingency of about 20 percent. Our costs of construction right now are Rs4400 sq. ft. on the built-up area and we are selling at Rs12,500 sq. ft.

BRR: The economic environment is so chaotic, real estate activity is down, and consumers are facing record-high inflation numbers. Is this a good time for this launch?

M. Ejaz: It is an interesting question and this is a phenomenon that I have been observing for a while—the growing and stark divergence between the macro and micro economic environment in Pakistan right now. The macroeconomic statistics in the country are scary; there are no financial projections that would make sense. However, the microeconomic environment is showing tremendous strength. It is very possible that our informal or shadow economy may be larger than 50-60 percent of the formal economy—an estimation that has been made by academics and researchers.

Big-ticket items in the real estate market have not stopped selling. New projects are announced and people are buying. Major projects like Emaar are selling and collecting new units. Market survey suggests that activity slowed down for two months during the floods and has since rebooted once again. People have not stopped buying real estate assets which mean the demand is still strong, despite the macro numbers.

Specific to our asset, it is local and on a micro-level. We foresee huge demand. Our collections are already at 90 percent and growing. Over the past two months, we have made sales worth Rs2 billion, and this is without any major marketing efforts. I don't think we can reconcile this with the macroeconomic outlook.