INP-WealthPk

REIT: A Rising Trend in Real Estate Business

February 18, 2022

By Faiza Tehseen Islamabad, Feb. 18 (INP-WealthPK): The current government’s initiative to declare the construction sector as an industry has led to the emergence of real estate investment trusts (REITs) in Pakistan. The approximate size of real estate sector is between US$300 billion and US$400 billion. According to the Pakistan Economic Survey, construction industry accounts for 2.53 percent of GDP and employs at least 7.61% of the country’s labour force. Pakistan’s total GFCF (Gross fixed capital formation) amounted to US$40.570 billion in 2021, while the private construction sector’s GFCF grew by 4.0 percent. Real Estate Investment Trusts (REITs) – a safe alternative in the real estate business governed by a strong security bond under a regulatory framework – are putting down roots in Pakistan, albeit rather slowly. Related to the stock market, construction and real estate business, it offers a robust, constant annual dividend and potential for long-term investment and is going to play a vital role in the real estate sector in near future. In Pakistan, REITs are licenced by the Securities and Exchange Commission of Pakistan (SECP). The SECP has granted REIT licences for REIT schemes initially for the provincial metropolises. The REITs will now focus on villas, apartment buildings and other commercial developments rather than on regular rental schemes. To promote the real estate business in the country, the government has offered many incentives to the REIT sector in relation to capital gains tax on property transfer (to REIT scheme). There is no tax on the income generated from a REIT scheme if 90% of income is distributed, while the dividend received is taxed at 25%. In order to make the REIT schemes more attractive for developers and investors, the government has further lowered tax on the REIT dividend from 25% to 15% under new amendments. According to the Pakistan Real Estate Investment Trust Regulations 2015, there are three types of REITs in Pakistan: rental REIT, developmental REIT and hybrid REIT. A rental REIT concerns investment in residential or commercial properties to generate rental income which offers a perpetual revenue stream through dividends. Developmental REIT relates to investment in construction or refurbishment of residential, commercial or industrial properties, but it dissolves after sale of the developed properties and distribution of proceeds as dividends, while the hybrid REIT is a mixed portfolio of rental and development properties, which provides the investors with both capital gains as well as annuity-oriented returns. Types of REITs All these forms of REIT schemes enable small/big investors to invest in real estate through a professionally managed entity with manifold benefits like higher dividend distribution, a relatively safe investment as customer advances and property title reside in trust, broader investor portfolio with low-risk diversification, provision of easy exit to real estate investors, and daily pricing at REIT units as they are tradeable in the stock exchange. Currently, only one REIT scheme named Dolmen City REIT (DCR) has successfully completed over five years of operation. The number of companies licensed to undertake REIT schemes is eight in number. The SECP regularly consults with the stakeholders to introduce a wonderful model of REIT public-private partnership projects in Pakistan. Few business groups such as Younas Brothers’ Group (owners of lucky cement LTD), Fatima Group, Arif Habib Corporation, Liberty Group and Arif Habib Dolmen with the partnership of Silk Islamic Development REIT (managed by Silk Bank) are scheduled to launch a PKR3 billion commercial and apartment building section under the REIT scheme in Surjani town, a low-income area of North Karachi. TPL corporation is also planning a US$500 million mega project to finance three Karachi-based real estate projects i.e., a tech park, a high-end residential building and a gated seafront community marking one of the largest fundraisings in the history of Pakistan. ISE Towers REIT Management company (formerly Islamabad Stock exchange) has structured a “Rental scheme”, the first of its kind in the North region of Pakistan. The scheme is listed under the direct listing model of SECP. Zeeshan Shafique, the company secretary told Wealth-PK that the ISE Towers REIT will start proper functioning. The recent amendments to the REIT Regulations Act 2015 have paved the way for investors’ interest in this sector. The growth of REIT schemes will open new horizons for good governance, documentation and transparency in the real estate sector in accordance with Vision 2025. The Federal Board of Revenue (FBR) has also made this sector more attractive for business persons and investors through tax amendments. However, more amendments in the REIT schemes sector are still needed concerning the SPV (Special Purpose Vehicle) model.