bigLaunch of REITs: A rev­o­lu­tion­ary effort in Pak­istan

By Saeed Khan Baloch

The Secu­ri­ties and Exchange Com­mis­sion of Pak­istan (SECP) has finally launched reg­u­la­tory frame­work of Real Estate Invest­ment Trusts (REITs), which has been widely wel­comed by the pub­lic and pri­vate sec­tor stake-holders. The launch­ing of REITs is a pio­neer­ing effort. It is for the first time that an emerg­ing mar­ket has launched a mod­ern finan­cial prod­uct in a sec­tor, which so far was the undi­luted domain of the devel­oped coun­tries.

This has been done despite a num­ber of very promi­nent prop­erty scams and lack of trans­parency in Pak­istan. SECP held a wide-ranging con­sul­ta­tive process with crit­i­cal pub­lic and pri­vate stake­hold­ers before going for for­mal launch of REITs. Accord­ing to Dr Salman Shah, an impor­tant eco­nomic man­ager in Shaukat Aziz-led regime, “high qual­ity indi­vid­u­als and groups will be seek­ing to set up REITs and will set good stan­dards of cor­po­rate gov­er­nance. This process will negate the neg­a­tive per­cep­tions of the past,” he says.

REITs are two types of schemes pro­vid­ing oppor­tu­nity to the gen­eral pub­lic to pool funds for invest­ment in real estate sec­tor. REITs in Pak­istan are intro­duced in the form of a trust where the prop­erty itself will be invested in the name of the trustee and REIT Man­age­ment Com­pany (RMC) will look after the real estate on behalf of the unit hold­ers. RMC will have a min­i­mum 20 per­cent stake in the scheme and will receive a man­age­ment fee for pro­vid­ing ser­vices. Peo­ple will be allowed to invest through units of the REIT Scheme, which will be listed on the Stock Mar­ket as a closed end mutual fund. The REIT, in fact, will be a spe­cial­ized invest­ment vehi­cle, whose devel­op­ment in Pak­istan will ensure enabling fis­cal and legal envi­ron­ment con­ducive to reduc­tion in trans­ac­tion cost, sim­pli­fi­ca­tion of pro­ce­dure, trans­parency in real estate trans­ac­tions and tax incen­tives for all stake hold­ers and investors, spon­sors and real estate par­tic­i­pants.

“Since domes­tic investors usu­ally do not take a long-term view of the invest­ment in real estate and are by and large look­ing for short-term spec­u­la­tive gains, there­fore, suc­cess of REITs requires chang­ing the mind­set of local investors”

Under the reg­u­la­tions, REITs are fore­seen as Devel­op­ment and Rental: in a devel­op­ment REIT, the RMC will under­take a con­struc­tion project and after sell­ing the prop­erty the sale pro­ceeds will be dis­trib­uted among the unit hold­ers; in case of Rental REIT, the RMC will buy a port­fo­lio of prop­er­ties and rent it out, and the unit hold­ers will get returns through annual div­i­dend out of the rental income. As announced by the SECP, REITs will be ini­tially intro­duced in Islam­abad, Lahore, Karachi, Peshawar and Quetta and later their scope will be extended to other cities and towns.

big 2REITs, though new to Pak­istan, were intro­duced in other juris­dic­tions over four decades ago. Glob­ally REITs is a rapidly grow­ing asset class whose mar­ket cap­i­tal­iza­tion increased by 26 per­cent dur­ing the year 2007. Experts believe that total Real Estate owned by REITs glob­ally is USD 1.273 tril­lion. Now Asia has been widely regarded as the new REIT tiger in terms of high yields and stock pre­mi­ums. In the year 2007 the REIT mar­kets across the Asian region per­formed very well, par­tic­u­larly in stock prices, total returns and div­i­dend yields. The total num­ber of REITs in Asia has increased more than in any other region. The year 2007 also wit­nessed two coun­tries, namely UK and Turkey com­menc­ing REITs. Philip­pines and Ger­many have also recently adopted a REIT regime, whereas Italy is in the process of doing so.

Recently, India has issued the draft REITs Reg­u­la­tions for pub­lic com­ments. REITs are usu­ally con­sid­ered as trans­par­ent, tax effi­cient income pro­duc­ing, pro­fes­sion­ally man­aged col­lec­tive invest­ment schemes that make invest­ments in real estate ven­tures. Inter­na­tion­ally, REITs are viewed as excit­ing and attrac­tive invest­ment oppor­tu­ni­ties because of higher yield and lower volatil­ity. As an alter­nate asset class, REITs will pro­vide the peo­ple of Pak­istan in gen­eral and small and mid­dle class investors in par­tic­u­lar, an oppor­tu­nity to ben­e­fit from real estate advan­tages. REITs, undoubt­edly will broaden and diver­sify the sup­ply side of secu­ri­ties and will pro­vide depth to the cap­i­tal mar­kets.

The Fed­eral Board of Rev­enue (FBR), through amend­ments and reg­u­la­tions in Income Tax Ordi­nance, 2001, have pro­por­tion­ally pro­vided con­ces­sions and incen­tives required for the evo­lu­tion and suc­cess of REITs in Pak­istan. “REITs reg­u­la­tions are com­pre­hen­sively for­mu­lated to safe­guard the inter­ests of the gen­eral pub­lic on one hand and facil­i­tate the busi­ness com­mu­nity on the other,” says SECP Chair­man Razi– ur– Rehman Khan. For him, the two pronged strat­egy for imple­men­ta­tion of REITs serves to cre­ate an enabling envi­ron­ment for a robust growth in the sec­tor.

The prospects of REITs look good in Pak­istan due to avail­abil­ity of sig­nif­i­cant amount of untapped real estate in dif­fer­ent cities for scrutiny and chan­nel­ing bank funds, insur­ance and pen­sion funds in real estate. How­ever, since domes­tic investors usu­ally do not take a long-term view of the invest­ment in real estate and are by and large look­ing for short-term spec­u­la­tive gains, there­fore, suc­cess of REITs requires chang­ing the mind­set of local investors. As regards imped­i­ments in the way of suc­cess of REITs in Pak­istan, experts believe an enabling legal frame­work is the first and fore­most ele­ment for facil­i­tat­ing, deep­en­ing and broad­en­ing of hous­ing finance in Pak­istan. Thus, there is need to bring about reforms in the var­i­ous laws affect­ing trans­fer, ten­ancy, rent con­trol and acqui­si­tion of immov­able prop­er­ties so that the present uncer­tainty in the legal sys­tem could be removed for estab­lish­ing effi­cient real estate mar­ket in Pak­istan through greater pro­vi­sion of credit from the finan­cial sys­tem.

Ten­ancy laws cre­ate dif­fi­cul­ties in the hous­ing mar­ket and in Pak­istan there is no sin­gle statute that gov­erns land­lord and ten­ant rela­tion­ship. Like­wise, lack of trans­parency in local prop­erty mar­ket and high trans­ac­tion costs of prop­er­ties are other crit­i­cal imped­i­ments for the pro­mo­tion and devel­op­ment of REITs in Pak­istan as con­trary to the presently prac­ticed prop­erty devel­op­ment process, all the trans­ac­tions under a REITs struc­ture are required to be prop­erly doc­u­mented so as to reflect the actual money con­sid­er­a­tions paid, i.e. Mar­ket price for land, con­struc­tion mate­ri­als and labor. How­ever, despite all such dif­fi­cul­ties and prob­lems, the gov­ern­ment is hope­ful that REITs struc­ture will help in reg­u­lat­ing the exist­ing frag­mented and infor­mal prop­erty devel­op­ment mech­a­nism and bring forth effi­ciency in price dis­cov­ery mech­a­nism of real estate and yield improved mar­ket val­u­a­tion of prop­erty prices, besides enhanc­ing the liq­uid­ity of the real estate mar­ket.

Saeed Khan Baloch is a free­lance writer with vast expe­ri­ence in the field of print media. He also con­tributes to for­eign media and his exper­tise is in busi­ness, eco­nom­ics and related issues.

This arti­cle was orig­i­nally pub­lished in the print edi­tion of Val­uemag, issue 1, May 2008.

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