Brief recordings

'Documentation of property can get economy on the right track' - Nasim Beg, Non-Executive Chairman, Arif Habib Dolmen REIT Management Company Limited
With over forty years of experience in the business world, Mr. Nasim Beg is ranked among the nation's most respected professionals and is a fellow member of the Institute of Chartered Accountants of Pakistan.
Besides serving as the Non-Executive Chairman of Arif Habib REIT Management Company Limited, his corporate responsibilities include MCB-Arif Habib Savings & Investments Limited as the Executive Vice Chairman and Arif Habib Consultancy (Pvt.) Limited as the Chief Executive. He is also serving on the board of directors of various organisations including Summit Bank, Pakarab Fertilizers and Aisha Steels, to name a few.
Moreover, while serving as the Deputy Chief Executive of NIT, the gentleman has also played an eminent role in the company's turnaround. Mr. Beg has also held senior level responsibilities in the automobile industry. His initiation to the financial services business was with the Abu Dubai Investment Company, UAE. He was also a member of the Prime Minister's Economic Advisory Council (EAC).
Following are edited excerpts from a recent interview in which Beg talked about the Pakistan's REIT industry in general, the significance of documenting our real estate economy and the upcoming launch of rental REIT by Arif Habib Group.
"REIT regulations were initially introduced in 2008, and it appeared that the regulations were written by the SECP under a fear syndrome", said Nasim Beg at the onset of a recent interview with BR Research. Shedding light on Pakistan's real estate sector, he highlighted that our real estate economy is largely undocumented, where the biggest fear for the regulator continues to be the precise valuation of real estate. "And with the fear of going wrong, the regulations turned out to extremely stringent and almost impractical for anyone to operate REITs", he highlighted further.
While elaborating on the setbacks laid down in the earlier regulations and why the REIT sector has not been able to evolve properly over time, Beg said, "The regulations tried to cover both the development REITs as well as the rental REITs. But it should be kept in mind that these two are diverse in nature, Beg said. "Rental REIT is basically an existing property that is already rented out where the normal commercial risk is related to the inability of the tenants to pay rents or the associated consequences of any economic downfall on occupancy of properties". He added that on the contrary, development REITs involve risks related to development, selling, and cost overheads and therefore bear a very different risk profile as opposed to rental REITs. "And hence, a single set of regulations for these two different classes wasn't meant to work", said Beg.
"Besides, increasing the minimum size made it difficult for small firms to enter this space, he said further. Though, he feels that the fear has somehow finally eased off because the SECP has started interacting with all the stakeholders in this area.
"There are entities like REIT management companies from the financial sector. In our case, we have brought in a partner Mr. Nadeem Riaz - the gentleman who has developed the Dolmen properties. He has a broader experience behind him and so we finally decided to have him as a 50% partner in our REIT management company. He brings the know-how related to property market; the running of successful malls, commercial properties, well-looked after commercial buildings etc. Thereby, SECP started feeling comfortable that on balance, there seems to be a grouping that is suitable in a sense that the developer, the property managers and the financial managers are also included", he elaborated.
"Followed by successive rounds of meetings and discussions that comforted the regulator's fears, a new set of regulations have now finally been issued", said the gentleman, adding that, "One has to give them full credit to the SECP for having done a good job". And while expressing his gratitude, he acclaimed that the regulator has gotten over that fear phase and feels more comfortable.
Despite the stringent regulations, Arif Habib was able to set up a REIT management company. "We were one of the first people to register a REIT management company under SECP under 2008 regulations. We had a core team and we met all the terms", the gentleman said with pride. "Within the Arif Habib Group, we have 20% stake in the Dolmen City property and this happened several years ago when the property was coming up and Mr. Riaz wanted a financial investor to put some money in. That's how the journey kicked off", he said.
When asked about the Dolmen property and the rentals associated with it, he said that the shopping mall and the harbour front building is all rented out. Dolmen city is owned by a private company at present, which is in the process of transferring the ownership to the trustees of the fund.
"Dolmen mall is a good property by any standards. We have all the resourcefulness here. This Dolmen property is the fourth in Dolmen mall series. Now for others, this can serve as the minimum standard. And all of this has happened without REITs. But as you go forward, this documentation of the economy and the real estate is one of the biggest drivers of REIT economy especially in an economy like Pakistan where average median age is around 22 years. Property development is an integral part and if that starts getting documented then I think we are on the right track", he stressed further.
Coming to the REIT itself, Beg informed that one-fourth of the value in units will be put up for sale while the rest will be retained by sponsors. In other words, out of Rs22bn, Rs5.5 billion is being issued. "Within that, we are planning a book building exercise option and market regulations allow 75 percent to be issued in the book building whereas 25% has to be offered to small retail investors. It's a closed-end perpetual life fund", he explained.
BR Research was curious to know if there lies a possibility of the property being sold and hence the realisation of capital gains. Beg settled the curiosity as he said, "Since it's a perpetual life closed-end fund and there is no plan of opening it up. The likelihood is that the trust will not sell the properties. Obviously, after 20-30 years, if times change significantly in terms of the viability of mall, it might compel the sale, but time will tell that. As for the time being, there is no intention!"
"Right now with a rental yield of more than 10 percent after excluding expenses involving the cost overheads of property maintenance, the dividend yield that we expect in the first year is just slightly above 9 percent on a Rs10 unit, after taking account the management fees", he elaborated.
"Having said that, all the tenants are high quality tenants and there is an escalation clause for an annual rental increase of around 10 percent. This way, the coupon will keep on growing, and hence the investors' earnings will rise more or less in line with the inflation. It's a wonderful investment for people who are retired or say running an endowment fund", he highlighted.
The risk of fluctuations in real estate investors might stave off small investors from investing in REITs. But Beg says that real estate volatility will not impact in this case. "Fluctuations in real estate prices or equity market or cyclical movements in the economy will have its ultimate impact in case the economy fails. In that scenario, the risk of tenants being unable to pay their rents will naturally stay there. Hence, volatility won't be here but the risk will be there", he said.
And there is no denying that as interest rates follow the downward trajectory, REITs are going to get even more attractive. BR Research also learnt that the said investment is fully Shariah Compliant as it involves no debt and has no existence of cinemas inside the property. Little wonder then, Islamic banks and other financial institutions would be more than happy to take exposure in this REIT.
When asked about Arif Habib REIT Management's plans for issuance of new REITs, Beg informed that Arif Habib itself is in discussions with few banks that they should put up their properties into rental REITs.
Beg also acknowledged government's attempt in keeping the transferred tax on REIT properties differently from others. "They have realised that this is all white money", stressed Beg.
Given its decent returns, small investors can have a chance of exposure in real estate. "More importantly, the government should document this economy as REITs keep rolling out, it should have a very significant impact", he said.
But the issuance of this rental REIT is just one step. Development REITs have not made its way to Pakistan as yet; it's rather complicated. Upon questioning about the current associated with development REITs, Beg said that new regulations have made the launch of development REITs relatively easier. "I actually suggested SECP to restrict development REITs to big-ticket investors only in its initial days. And then bring in small investors once it starts working so they are not affected by economic hiccups or recession phases. There should be some learning and experiencing phase for the regulator in this area", he pointed out.
"Possibly, we might see three to four funds coming in the industry over the next 12 months which may include development REITs as well; the work is already being done", informed Beg.