Pakistan to see its first set of developmental REITs

Karachi: Pakistan is set to see the launch of its first set of developmental Real Estate Investment Trusts (REIT) as the country’s push in construction and housing sectors coupled with more favourable regulation and tax laws start to pay dividends.

Arif Habib Dolmen REIT Management Limited CEO Muhammad Ejaz confirmed to the Business Recorder plans to launch the ‘Silk Islamic Development REIT’ within a week, while the ‘Silk World Development REIT’ would follow soon after.

“Formalities are almost complete,” Ejaz told Business Recorder. “Within a week, the first one (Silk Islamic) would be finalised.”

Capital for the Rs8-billion REITs – located in Surjani Town in the north of the country’s biggest city that houses more than 20 million people – will be raised through private placement, added Ejaz.

“The consortium of investors taking part in the Islamic Development REIT include us (the REIT management company), Arif Habib Group, Yunus Brothers, Liberty Group, and Fatima Group.

Ejaz, an ex-banker who helped launch South Asia’s first rental REIT in 2015, said the key sponsor for the other part of the project is World Group. “We are operating as just a REIT management company in it.”

REIT management companies appreciate SBP’s decision

According to information available on its website, the World Group is “a 106-year-old business organization with group companies offices in Pakistan, UAE, KSA and the UK”, and has interests in sectors including autos, real estate among others.

The two REITs will feature plots and apartments, spread across residential and commercial areas with land acquisition to be complete in the next two to three months, according to the CEO.

“The plan is to purchase the land for the project partly from Silkbank Ltd. within two months,” said Ejaz.

“In the time that design and development work starts, we will work on uplifting the adjoining area.

"The REIT would be listed within three years."

Developmental and rental REITs

A rental REIT scheme is established for the object of making investments in commercial or residential real estate with a purpose of generating rental income. In a rental REIT, a fully-constructed property is first bought by the REIT management company and then rented out. The revenues derived are distributed among the unit holders.

In a developmental REIT scheme, land is acquired 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.

Reason for pursuing the REIT route

The Dolmen City REIT (listed as DCR on the Pakistan Stock Exchange) was launched amid much fanfare around six years ago, touted then as South Asia’s first rental REIT.

Since then, talk has been rife of Pakistan’s push to formalise its real estate not just as it closes in on parked black money, but also looks to promote tax collection from a traditionally low revenue-yielding sector, all part of official efforts to document the economy.

“The level of transparency and discipline required to conduct REIT transactions is extremely high. Investors are protected (through different regulations),” said Ejaz. “It’s much more favourable to introduce REITs now.”

His remark of favourable regulations and tax laws comes barely a few days after REITs became the subject of headlines when Finance Minister Shaukat Tarin announced a massive reduction in the rate of dividend tax, from 25% to 10%, in the budget proposals last month.

Apart from the added incentive – aimed largely at DCR unit holders for now – revamped regulations around setting up REITs and amended capital adequacy requirements have also made the environment “more conducive”.

“The SECP (Securities Exchange Commission of Pakistan) made it more conducive. You also need the support of the banks. The State Bank revised the risk weightage,” said Ejaz.

The SECP, through a number of amendments, introduced a new Public Private Partnership model under REITs, besides completely revamping the regulatory framework that was aimed at reducing entry barriers, cutting down regulatory approvals, and putting REITs at a level-playing field with the unorganised sector-led real estate projects.

Similarly, the SBP announced lowering the applicable risk weight to facilitate banks’ investment in REITs, propelling forward the government’s focus on the country’s housing and construction sectors.

“A key element to ensure sustainable increase in the construction of building activities is the provision of financing both to the supply and demand side players of the housing and construction sector,” said the SBP earlier.

The favourable regulations come in tandem with the SBP’s facilitation of housing finance including assigning mandatory targets to banks to increase financing for mortgages to builders and developers. “Banks are required to increase their housing and construction finance portfolios to at least 5 percent of their private sector advances by end December 2021,” the SBP had said.

The banks’ housing and construction finance portfolio has increased from Rs148 billion by the end of June 2020 to Rs202 billion in March 2021.