JS Investments jumps into the REIT business

Real estate in Pakistan: do we even have to explain further? As this magazine has discussed in a previous cover story, Pakistanis invest too much in real estate, and there is a dire need for both individuals (and the country) to diversify towards other asset classes. But one can see the appeal: the price of real estate has climbed faster than the rate of inflation, making it a safe and popular bet.

The real dilemma, that despite it being a safe bet, it is also exceedingly cumbersome to buy (assuming you have enough money) and manage real estate, particularly in Pakistan. What if there was a way to mimic the good aspects of real estate investments, without any of the cons? What is there a way to earn dividends from the investments in real estate, but not have to buy or manage the actual property, or properties, itself?

Enter the REIT, or real estate investment trust. Simply speaking, it is a company that owns, operates, or finances income-generating real estate, and it does so by pooling the capital of many investors. And it is the asset management company JS Investments, which has seen an opportunity in this space. In a notice posted to the PSX website on July 30, the company disclosed that the Securities Exchange Commission of Pakistan (SECP) had granted the company a license to carry out REIT services, effective from July 28. 

Now, first some historical context. REITs were created in the 1960s in the US, but only really began to catch on around the world in the 2000s, with many global south countries and also countries in East Asia only adopting it in the 2010s. Pakistan was actually wildly early in introducing the REIT Regulations in 2008. However, this was considered a ‘failure’, because it was not very attractive, and only led to five funds being established. 

So the SECP went back to the drawing board, and came up with the REIT Regulations 2015, which were designed to be a little more friendly to ordinary buyers. 

In Pakistan, there are three kinds of REIT schemes: developmental, rental, and hybrid. Developmental refers to the development of properties for sale, while rental refers to the acquisition and construction of properties for renting. Hybrid, as the name suggests, combines the two. Currently Pakistan has only one publicly listed REIT scheme: Dolmen City, which owns Dolmen Mall and the Harbor Front office building in Karachi. This is a Shariah compliant, rental scheme that offers investors a way to become unit holders of the mall itself – without of course, actually buying the mall. 

As material from the SECP explains, these are the benefits of REITS over actually owning property. First, a REIT is highly liquid, unlike traditional real estate. If you want cash, you can just sell your shares in the REIT based on however much you need, unlike an actual property where you have to sell the whole thing to get even a small portion of the cash value.

Secondly, REITs enable sharing in non-residential properties as well, such as hotels, or shopping malls like Dolmen. Third, there is a very low minimum investment requirement with REITs, as units of REIT can be bought for as little as Rs10.

So where does JS investments – the asset management company (AMC) that has existed since 1995, has 22 funds, and manages assets over Rs 15.1 billion as of 2018 – fit into this? 

According to Muhammad Danish, senior manager for investor relations at JS investments: “Being a developing country, Pakistan has immense potential for development of Real Estate projects including housing schemes, commercial buildings, shopping malls and apartment buildings. REITs have been witnessing increasing attention as they offer the following advantages to both retail and institutional investors: diversification, liquidity, transparency, tax efficiency and affordability.”

Explaining the company’s rationale, Danish further added: “As we are all aware, real estate is the primary destination for investment capital in Pakistan, with this addition to the portfolio, JSIL will be able to provide more investment and saving products to its investors, which given the distinct characteristics of the underlying assets are stable and predictable. JSIL also wishes to leverage its long track record and deep industry knowledge to structure and launch REIT products which would enable both its retail and institutional investor base to gain exposure to high grade real estate projects in Pakistan.”

That may be, but the timing of the announcement also helps. The federal government announced a construction package in April 2020, which will lead to a boost in real estate projects. In addition, the central bank has asked commercial banks to allocate 5% of their total lending to the construction sector, which will hopefully improve lending in general. As is, banks’ current exposure to the sector is only at 1% of overall advances.

The new SECP regulations, and the activity in the real estate sector, have analysts looking at this development of REITs positively. According to Sami Tariq, Head of Research at Arif Habib Ltd, “As the government intends to encourage documented activity in the real estate sector, we believe REITs should be encouraged. And tax incentives should be given to them to make them comparable with mutual funds.”

And more specifically, Arsalan Soomro, Managing Director at KASB Securities says: “I reckon JSIL is going to utilise the expertise of the group's real estate business and end up converting some projects into REITs for onward listing on the PSX. There is huge potential in the REIT development and recently, the government enacted regulatory changes that help the listing process taxation wise.”