SECP has recently announced amendments to the Real Estate Investment Trust (REITs) regulations. Market has received these changes with welcome arms and a few REIT management companies are already in the process of establishment. Right now, there exists only one active REIT in Pakistan and that is a rental. It was formed in 2015 right after the REITs regulations were announced, and since than there were certain changes in taxation that rendered REITs structure non-attractive.
Recently, the regulator is working with the industry to kick start REITs in Pakistan. Some regulatory changes were made and are sought to make REITs conducive. However, taxation anomalies persist. Unless the taxations are not brought back to pre-2015 levels, the REITs issuance will remain shy of its potential. Nonetheless, government is focused to promote construction and housing and within REIT is one formal way to promote in a sector that largely operates in shades of greys.
This grey economy in the real estate is one of the main reasons for REITs structure to not spur as its hard-to-find buyers and sellers with white money to transact in properties. Even if someone comes and operate with full disclosure, that person or entity ought to sell the real estate at discount to prevailing market prices. However, there exists properties where the owners opt to or have to opt for white, and these can find REITs structure optimal for development and transactions – such as properties owned or confiscated against bad loans by banks.
The fundamental issue of variation in official and market prices rages on. Nonetheless, some significant changes have been made - such as in existing REITs, additions in properties is allowed and REIT scheme can acquire a company – earlier it was mandatory to buy the property.
The overall REIT structure is to have two type of schemes of non-public private partnership (PPP) schemes and PPP schemes. Within non-PPP, there are options of rental, development, and hybrid REITs. These schemes can invest directly in real estate or through special purpose vehicles (SPVs). The PPP-REITs is for infrastructure development. That gives private investor an exit strategy and makes it easier for raising financing. This can help in building infrastructure projects such as roads, bridges, and dams.
In parallel to SECP, SBP is encouraging banks to invest and finance in REITs projects. The limits for banks to invest in REITs have increased from 10 percent of equity to 15 percent. Second, investment or financing in bonds/TFCs/Sukuk issued by REITs management companies are to be taken as part of 5 percent of loan book target in housing and construction. This also includes investment in units issued by REITs. These steps will encourage banks to take exposure in REITs. However, the risk weightage in REITs is still at 200 percent and experts are of the opinion to reduce it to 100 percent.
There are some taxation anomalies that still exits such as dividend income taxed at 25 percent which is higher than the dividend tax charged for mutual funds. Apart from these, the valuation tables are still required to be aligned with the market values for encouraging developers to come into the formal investment structures.
REITs can now arrange financing from banks; earlier they had to rely on own equity. The market participation in REITs is likely to increase. The existing one rental REIT can buy new properties. There are about 6-8 new players aiming to form RMCs and issue REITs. One big development REIT is in the conceptual phase with 12,000 apartments in Karachi and this will have mix use development – a combination of residential and commercial units. This is going to be a consortium of big business groups. Apart from this, number of asset management companies are thinking of forming REITs as well.
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