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Real Estate Investment Trusts (REITs) have emerged as a popular investment avenue for individuals seeking exposure to real estate without the complexities of property ownership and management.

While publicly-traded REITs are accessible to a wide range of investors, there exists a private market for REITs that caters to select groups of accredited investors. In this article, we will delve into the concept of the private market for REITs, its mechanics, and its potential implications for real estate investment in Pakistan.

What is the private market for REITs?

The private market for REITs refers to the buying and selling of shares in a REIT through a market that is not open to the general public. Unlike publicly-traded REITs, which can be purchased by anyone with a brokerage account, the private market is exclusive to accredited investors.

These investors typically include institutions, private equity firms, and high net worth individuals.

Mechanics of the private market for REITs

The private market for REITs provides a unique opportunity for investors to gain access to real estate assets that are not yet publicly traded. Investors can participate in the private market through private placement offerings or secondary market transactions.

Private placement offerings involve the REIT offering shares to a select group of accredited investors. These offerings can be structured in various ways, such as limited partnerships or joint ventures.

Investors commit to investing a specific amount for a defined period, and in return, they receive shares in the REIT. The funds raised through private placement offerings are used by the REIT to acquire or develop real estate assets.

Secondary market transactions, on the other hand, involve the buying and selling of existing shares of a REIT that have already been issued through private placement offerings. Investors can engage in these transactions through brokers or intermediaries specializing in private market transactions.

The price of shares in the private market is typically determined by supply and demand dynamics, influenced by factors like asset performance, interest rates, and the overall economy.

Advantages of the private market for REITs

The private market for REITs offers several advantages that make it an attractive option for certain investors. Firstly, it provides greater flexibility in investment terms and structures. Private REITs can be structured in various ways, allowing for customization of investment size, structure, and duration.

Moreover, private REITs often offer potentially higher returns compared to publicly-traded REITs. This is attributed to less regulation and greater leverage available to private REITs. However, it’s important to note that private REITs generally charge higher fees compared to their publicly-traded counterparts.

Additionally, the establishment of a well-documented and regulated private market for REITs in Pakistan has the potential to attract significant foreign investment into the country’s real estate sector.

Foreign investors often seek transparent and secure investment opportunities, and a robust private market for REITs can provide the necessary framework to meet their requirements. By fostering trust and confidence among international investors, Pakistan can tap into a broader pool of capital and expertise, further stimulating economic growth and development in the real estate industry.

Disadvantages of the private market for REITs

While the private market for REITs presents advantages, it also comes with certain drawbacks. One significant disadvantage is reduced liquidity. Unlike publicly-traded REITs that can be bought and sold on public exchanges, private REITs lack the same level of liquidity.

This limited liquidity can make it more challenging for investors to manage their portfolios and may result in higher transaction costs when buying or selling shares.

Additionally, private REITs often have higher fees compared to publicly-traded REITs. Investors should carefully evaluate these fees and consider their impact on overall returns before making investment decisions.

Prospects for the private market in REITs in Pakistan

Establishing a private market for REITs in Pakistan holds promising prospects for the country’s real estate investment landscape. However, certain considerations need to be addressed to ensure success.

Firstly, regulatory compliance is crucial. Businesses looking to set up a private market for REITs must comply with regulations set by the Securities and Exchange Commission of Pakistan (SECP). Adhering to these regulations ensures a legal and ethical operation, emphasizing transparency, disclosure, and reporting requirements.

Secondly, the availability of suitable real estate assets plays a vital role. A successful REIT requires a sufficient supply of high-quality real estate assets capable of generating stable cash flows. Conducting thorough due diligence on Pakistan’s real estate market is essential to identify properties that meet the REIT’s investment criteria.

Thirdly, understanding the preferences and availability of investors is crucial. The success of a REIT heavily relies on attracting and retaining interested investors. Recognizing investor preferences and tailoring the REIT’s offering to meet their needs is key to building a strong investor base.

Lastly, establishing a private market for REITs requires significant resources, including capital, expertise, and time. A well-structured business plan that considers costs, risks, and potential returns is essential for long-term success.

Despite the challenges, several positive factors make the private market for REITs an appealing prospect in Pakistan. The country’s real estate market has demonstrated growth and resilience, offering potential for further expansion. Additionally, the SECP’s commitment to supporting the REITs sector provides a favorable regulatory environment, encouraging investor confidence and participation.

Conclusion

The private market for REITs presents investors with an alternative avenue for real estate investment. While it offers advantages like flexibility and potentially higher returns, it also poses challenges such as reduced liquidity and higher fees. Prospective investors must carefully evaluate these factors and consult with financial advisors before engaging in private REITs.

Furthermore, to bolster the development of the private market for REITs in Pakistan, businesses should consider exploring opportunities within the SECP Sandbox and Cohort programmes. These initiatives offer a regulated environment to test innovative concepts, ensuring compliance and fostering growth.

By navigating the private market for REITs in a responsible and forward-thinking manner, Pakistan can create a conducive environment for real estate investment, attracting both domestic and international investors and contributing to the growth and stability of the country’s economy.

Copyright Business Recorder, 2023

Sanie Khan

The writer is the CEO of Securities Exchange Management Suite and a former general manager of Pakistan Stock [email protected]

Comments

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Adnan Rizvi May 31, 2023 02:58pm
Dear Sanie bhai, Private REITs are nothing but non-Listed REITs. SECP had allowed creation of REITs without going into Listing at inception. However, it is important to understand why Listing was made compulsory for REITs -> the objective was broadening of Capital Markets and allowing small savers and investors access to returns from real estate. Capital Markets is the gateway for such returns. Best Regards, Adnan Rizvi
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Rebirth Jun 01, 2023 02:09am
Such mutual investment funds are now needed for mega, large-scale infrastructure projects. Instead of using our infrastructure as collateral for foreign loans, it would be better to have people invest in it or finance it right from the beginning. The government can pay them a return in the form of a levy that it will never collect from the vast majority of N-league supporters in the markets of Central Punjab.
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