The Mutual Fund Association of Pakistan (MUFAP) is of the opinion that the requirement of minimum equity of the REIT Management Company (RMC) of Rs 500 million, REIT (Real Estate Investment Trust) scheme of Rs 2 billion and minimum 20 percent of REIT scheme units be held by RMC are "extremely" high. And, this will restrict this industry to only a few large wealthy groups and land developers, keeping those with managerial skills but with limited financial capacity out.
Securities and Exchange Commission of Pakistan (SECP) has proposed amendments in the existing REIT regulations and invited comments on the draft amendments. In a detailed argument, MUFAP has cited international best practices.
It is proposed that the requirement of minimum equity of RMC should be Rs 200 million and REIT scheme should be Rs 1 billion. The Management Company's main job is managing the REIT and not investing in it. Therefore we propose that the minimum requirement on RMC to hold units of REIT scheme should be 5 percent of outstanding units for a minimum period of three years.
Further, says MUFAP, the management fee offered to RMCs (1 percent for Developmental REITs on the initial REITs fund size and 3 percent of annual operating income for Rental REITs) is very low. This will limit the industry to only those investors who set up RMCs to (i) benefit exclusively from the tax-free status of REITs; and/or (ii) make money through irregular and illegal means such as buying property for the REIT scheme at a lower price and selling it to the REIT at a higher price or indulge in over-invoicing in the construction/administration of the REIT.
For those who wish to manage the business purely based on their managerial and technical skills with high degree of integrity and ethics it will not be feasible to launch REIT schemes at such a low management fee and that also linked to initial value of the REITs Fund rather than its prevailing Net Asset Value (NAV). Internationally, RMCs are at liberty to define their own management fee structures.
MUFAP proposes that the RMCs should be allowed to charge a maximum fee of 5 percent per annum on the Net Asset Value of the REIT, and also charge up to 15 percent of out-performance versus a pre-defined benchmark as agreed with the Trustee. It is pointed that at present the regulations do not allow existing Asset Management Companies (AMCs) to manage REIT schemes.
It needs to be understood, says MUFAP, that borrowing against REITs assets plays an integral part in the growth and profitability of the REIT industry. Not allowing any leveraging is against the international practice and will impede the growth of the industry. MUFAP warns that developmental REITs may carry a high level of risk and therefore in case of pure developmental REITs, the public offer, if any, should be limited to only to qualified and sophisticated investors as may be defined by SECP.