REITs – as slow as it gets

The activity in the real estate sector recently might have been slow-paced of late, but the sector has seen some key developments that can stir up investment in the sector. For one, benefits of China Pakistan Economic Corridor CPEC will flow to the real estate industry. Also, the rationalisation of taxes and the efforts to bring transparency in the sector can attract foreign investors and overseas residents to the market.

One way of real estate investment is through Real Estate Investment Trust (REIT). It is a security that sells like a stock and invests in real estate directly or indirectly. Its raison d’etre include bringing real estate and construction sectors in the formal economy, providing structure and discipline to infrastructure and housing projects, allowing developers to raise finance for projects beyond their financial capacity, enhance saving rate and provide investment avenues to smaller investors.

Despite all these benefits, it has been all gloom and doom for REITs in Pakistan. The concept of Real Estate Investment Trust has not taken off in Pakistan so far. Right now there is only one REIT - Arif Habib’s Dolmen REIT – listed on the stock exchange. Up till 2015, REITs were governed by 2008 regulations, which were replaced by 2015 regulations by SECP. And while new regulations were considered business friendlier than 2008 regulations, REITs activity has been lukewarm even under new regulations; many REIT projects have been shelved in the last two years. During the 2008-2015 only nine organizations had applied to register as REIT Management Company (RMC) and only one was successfully launched.

Key changes to the 2008 regulations included reducing the paid-up capital of RMCs from Rs200 million to Rs50 million, while the minimum stake of RMC in a REIT scheme was reduced from 20 percent to five percent. Strategic investor concept was introduced who could hold 20 percent stake in a REIT scheme. Also, minimum fund size requirement of Rs2 billion was reduced to bring in line with the listing regulations of stock exchanges.

A favourable tax regime can help in having more REITs. However, those at the helm have not been able to lift REIT investment. And one factor for the negligible progress has been the increased taxes. The federal budget for 2015-16 limited the capital gains tax exemption to developmental REITs for residential purpose only, while Dolmen REIT and many others in the planning stage are rental REITs. Also tax on dividends on REIT investments was increased to 25 percent in the FY16 budget, which also hindered the development of REITs. Even after new regulations, the application process itself remains quite cumbersome.