REIT regulations revisited

The latest notification about the Real Estate Investment Trust (REIT) Regulations 2015 by the SECP through its SRO 328(1)2015 to replace Regulations 2008 appears to be a great leap forward in the real estate market of the country. The REIT Regulations envisage primarily two types of schemes namely, Developmental REIT schemes for construction of properties and Rental REIT schemes for renting out completed properties. Through notification of the new Regulations, the paid up capital requirement of REIT Management Companies (RMCs) has been reduced from Rs 200 million to Rs 50 million. To include mid-sized properties into REIT schemes, the minimum fund size requirement was brought down to bring it in line with the listing regulations of stock exchanges. Further, the minimum stake of RMC in a REIT scheme has been reduced from 20 percent to 5 percent and the concept of strategic investor has been incorporated who will hold a 20 percent stake in a REIT scheme. Other salient features of the REIT Regulations 2015 include simplification of approval process and allowing performance fee for REIT managers. A criterion for rental track record has been prescribed for REIT eligible properties and REIT could now also be established in cities either than provincial and federal capitals. Fund raising from Pre-IPO investors has been allowed in the name of Trustee after registration of a REIT scheme subject to its sharing of a business plan. Customer advances would be received through banking channels and in the name of Trustee only, subject to certain disclosure requirements.
The new REIT regulations announced by the SECP have been finalised after extensive public consultations to adequately cover investor risks and make the regulatory framework more conducive and practicable. To incentivize the setting up of REIT, the requirements for their working and establishment have been eased to a great extent. The new regulations were considered necessary as the old regulations were, more or less, a failure due to their unattractiveness which could be gauged from the fact that only five funds were established under its ambit. The major reason for limited success of previous regulations was cumbersome requirements for establishing a REIT company which could only be met by big groups. While these groups were subjected to a rigorous criteria, there were almost no restrictions on other housing schemes mushrooming all over the country, where nobody even bothered to check the ownership of land and frauds of all kinds were rampant. Unfortunately, however, the average households with limited means were the worst hit as they are usually more gullible and keen to have a house of their own while the real estate sector is largely undocumented and rife with malpractices. It is quite clear that the new regulations have been specifically designed to address the concerns of ordinary buyers and other key players in the real estate sector. The reduction in paid-up capital requirement of RMCs, lowering of their minimum stake in a REIT scheme, the concept of strategic investor and broadening the scope of operation of the REIT management companies to more cities and towns are of course huge steps toward enlarging the functioning of REIT companies and encourage other housing companies to join the list. Since the buyers of property from a developmental REIT scheme would also be adequately protected as the advances from the customers could only be received through banking channels and in the name of Trustee, the new regulations could give the needed confidence to the buyers, boost the development of real estate sector and ultimately go a long way in meeting the acute housing shortage in the country. However, to make the REIT a successful experience, there was an urgent need for the provincial governments to enforce the land-related laws in letter and spirit to avoid the possibility of litigation or fraud. Besides, since the net impact of the fresh regulations is hard to measure, the REIT framework needs to be monitored closely to make the necessary changes if and when required. This is important because a proper and fully reliable arrangement between the government authorities, housing companies, and customers could play an instrumental role in ensuring the provision of roofs over the heads of most of the citizens of the country.