Attracting small investors to REITs: Tax Advisory Council to devise mechanism

The Tax Advisory Council (TAC) has decided to devise an effective mechanism for attracting small investors to make the 'Real Estate Investment Trusts' (REITs) schemes a success. Sources told Business Recorder here on Tuesday that the issue would be discussed in the next meeting of the TAC, to be held on January 13, 2010, at Federal Board of Revenue (FBR).
The TAC and tax authorities would review the objectives of REITs for removing road blocks to make them investor-friendly. The Securities and Exchange Commission of Pakistan (SECP) has introduced two types of REITs schemes providing opportunity to the general public to pool funds for making investment in the real estate sector. Despite tax exemption, the REITs are unable to attain required level of investment.
According to sources, the investment in REITs would enable the tax officials to determine the actual value of property in different areas. In case of REITs, accurate valuation would be made on the basis of actual declarations made by the organised sector. REITs in Pakistan were introduced in the form of trust where the property itself would be vested in the name of the trustee and REIT Management Company (RMC) would look after the real estate on behalf of the unit holders.
Besides, the FBR would be in a position to unearth under-valuation of property made by unorganised sector. Therefore, it is necessary to introduce changes in laws, particularly Income Tax Ordinance 2001, for proper valuation of immovable property by the provinces, sources said.
According to REIT regulations, the schemes are two-pronged ie, Developmental and Rental. In a developmental REIT, the RMC will undertake a construction project and, after selling the property, the sales proceeds will be distributed among the unit holders. The "RMC" means a REIT management company licensed by the Commission as a NBFC to launch REIT Scheme and provide REIT Management Services.
As for Rental REIT, the RMC will buy a portfolio of properties and rent it out. The unit holders will receive returns through annual dividend out of the rental income. In case of a Developmental REIT Scheme, the aggregate of borrowings from financial institutions and capital markets and customer advances, shall not exceed 60 percent of the REIT Fund and shall be in accordance with the policy stated for this purpose in the constituent documents.
In case of a Rental REIT Scheme, an RMC may borrow from financial institutions and capital markets, provided the aggregate borrowing shall not at any time exceed 30 percent of the REIT Fund. The SEPC has said that the REITs have been provided a tax exemption, if 90 percent of the income is being distributed. The REITs will initially be allowed in Islamabad/Rawalpindi, Karachi, Lahore, Peshawar or Quetta.