Real Estate Investment Trust (REIT), a new form of investment tool will be launched in the first week of August. REIT is being introduced for investment in capital markets, which will enable small investors to reap profits from investments in real estate, which, so far, was open only to large investors.
An official source told Business Recorder that Securities and Exchange Commission of Pakistan (SECP) had framed necessary rules and forwarded to the Ministries of Law and Finance for vetting.
However, in the new finance bill, regulatory powers have been given to SECP, enabling it to announce the rules itself without referring the same to other ministries. Source said that right now SECP was involved in sorting out preliminaries and hopefully announce the launching of REITs in the first week of August.
The government of Pakistan is hopeful of attracting both domestic and foreign high net-worth investors after REIT laws are finally promulgated and is expecting three billion-dollar foreign direct investments (FDI) in real estate.
SECP plans to introduce "build-own-transfer" REITs initially, where REITs are dissolved once the project is completed and sold. It also plans to introduce rental REITs in the second phase of the plan once "build-own-transfer" REITs are stabilised.
REIT-style structure existed in the form of real estate Modarabas, eg twin towers Modaraba, which was a business failure. Minister of State for Finance Umar Ayub Khan, in his budget speech, had stated that to increase the use of REITs, it had been given tax concession.
For example the profit of REITs will be exempt from taxation upto 90 percent, upon distribution. The most important tax concession for REITs is that under this scheme, the sellers of property will be exempt from tax upto year 2010.
REIT scheme will consist of a closed-end collective investment scheme constituted as a unit trust fund, to be known as the REIT fund, vested in a trustee in terms of a deed of trust and managed by a REIT management company for the purpose of investment primarily in real estate for a definite or indefinite period.
The REIT management company will, through the deed of trust, provide for the REIT fund that is to vest in the trustee for the benefit of the unit holders of the said fund.
All transactions undertaken and property or assets acquired in furtherance of the objects of the REIT scheme will be undertaken or acquired, as the case may be, in the name of the trustee. The object of the REIT scheme will be to maximise the return for the unit-holders through prudent strategy of investment in, and development of, real estate.
Investment out of the REIT fund will only be made in real estate, real estate-related assets and non-real estate assets in Pakistan. At least 70 percent of the REIT funds will be invested in real estate and the remaining 30 percent in real estate-related assets and non-real estate assets. Not less than 90 percent of the annual audited accounting income arising out of the REIT scheme will be distributed to the unit holders as dividends in each financial year.
REIT funds or REIT assets will not be utilised, directly or indirectly, for:-Investment in vacant land and mortgages. However, there is no prohibition on the investment of REIT fund in vacant land that has been approved for development in order to develop such land and/or build thereon, provided such investment is not in a joint account or venture with others.
-Lending or making an advance not connected to objects or furtherance of the REIT scheme or for securing or guaranteeing or otherwise becoming directly or contingently liable for any obligation or indebtedness of any person.
-Acquiring any asset that involves the assumption of any liability that is unlimited, effecting a short sale in any security, purchasing any asset in a forward contract, purchasing any asset on margin, participating in a joint account with others in any transaction, trading in commodities or becoming involved in commodity contracts, acquiring any security of which another REIT fund, is the issuer, and making an investment in a company, which has the effect of vesting the management, or control over the affairs, of such company in the trustee.
The REIT is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. REITs originated in the United States in 1960 where there are approximately 200 publicly traded REITs today (January 2007), with assets totalling more than 475 billion dollars.
REITs are an efficient way for many investors to invest in commercial and residential real estate businesses. As an investment, REITs combine the best features of real estate and stocks. They give an investor a practical and effective means to include professionally managed real estate in a diversified investment portfolio.
According to one estimate, global real estate securities market stood at 733 billion dollars as at December 2003. Prior to 1990, REITs were operational only in four developed countries, but today they are functional in over 17 countries and the number is steadily increasing. REITs have outperformed in term of yield, most other major market benchmarks over three decades and with significantly less volatility.
The Asian REIT market in terms of growth is dominated by Japan, which alone has 32 J-REITS with a market capitalisation of 29.5 billion dollars. By comparison, it took the United States 34 years to reach 30 billion dollars in market capitalisation. Over the next 10 years, Asian REITs are expected to increase many times in size to nearly 900 billion dollars.
In India, REITs law enacted is called Real Estate Mutual Fund (REMF). In April 2004, the government of India lifted the embargo on venture capital funds investing in the real estate. As a result of this change, Indian and international funds are starting to invest in the property sector. The new FDI guidelines are expected to trigger a surge of foreign investment into the construction sector, perhaps, as much as 1.5 billion dollars in the next year and at an increasing pace after that.
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