The real estate sector has come under the government’s scrutiny, which is trying to formalise the sector with ongoing money laundering probe, Supreme Court’s proceedings against Bahria Town’s Malik Riaz, attempts to bring overseas investors into the tax ambit, and finally appointing a new authority as the Director General for immovable property (DG IMP), which was long due since the Finance Act 2018.
More on the appointment of DG IMP in the coming days; let’s first look at government’s latest attempt to document and institutonalise the sector, where the Security and Exchange Commission SECP has made some amendments to the regulatory framework for real estate investment trusts. SECP has revamped the Real Estate Investment Regulations, 2015 to incentivise growth of the REITs, regularise the country’s real estate sector and promote documentation; and according to market sources, these revisions are progressive.
Up till 2015, REITs were governed by 2008 regulations, which were replaced by 2015 regulations. During 2008-2015, only nine organisations 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, reducing the minimum stake of RMC in a REIT scheme from 20 percent to five percent, introduction of strategic investor concept, and reducing the minimum fund size requirement of Rs2 billion. Even after the changes, the activity on the REITs side has been banal.
Now the latest amendments to the 2015 regulations are largely for the developmental REITs, where unlike rental REITs that make investment in residential or commercial real estate for generating rental income, land is acquired by the REIT for the purpose of development of commercial, industrial, residential real estate through construction or refurbishment and subsequently sold or rented; the proceeds from sale/rent of the property are then distributed to the unit holders. The revisions include details on the eligibility criteria to invest in a REIT scheme, introduction of the concept of private investors, and requirement of valuation from two independent valuers at the time of transfer of the property to a REIT scheme. However, the most significant of the changes that could encourage developmental REITs pertain to the relaxation in financing capacity of the REIT management companies (RMCs) as developmental REITs are highly leveraged. Plus, the REITs have been allowed a grace period for mandatory listing, while the requirement of the approval of the unit holders in decision making has also been prescribed for greater participation.
The government is trying to promote developmental REITs especially post CPEC launch where investment in the real estate sector was expected. Another incentive for developmental REITs came from the Budget FY19 that reduced the tax on dividends for institutional investors from 25 percent to 15 percent, where previously tax on dividends on developmental REIT investments was increased to 25 percent in the FY16 budget. Similarly, tax on dividend by a rental REIT scheme to an individual tax-filing investor was reduced from 12.5 percent to 7.5 percent. The concept of Real Estate Investment Trust has not taken off in Pakistan, and there is only one REIT at the moment - Arif Habib’s Dolmen City REIT –which is a rental REIT listed on the stock exchange. However, a favourable tax regime should help the REIT-landscape, and together the efforts to bring transparency in the sector should ideally attract investment in the sector.