Taxation regime affecting REITs: AHG withholds $225 million investment plan

18 May, 2016

Arif Habib Group (AHG), Pakistan's leading conglomerate, has withheld a plan to invest about $ 225 million or Rs 22 billion in the growth-hungry country's real estate sector, it emerged Tuesday. The much-needed investment, which was to be made in the shape of launching at least eight Rental Real Estate Investment Trusts (REITs) on the pattern of Dolmen City REITs, was set back apparently by the government's ill-thought-out taxation policies that put the maiden real estate venture to a "huge disadvantage".
In June last year, Dolmen City Shopping Mall at Clifton turned into South Asia's first rental REITs which, according to AHG Chairman Arif Habib, is expected to announce over 10 percent dividend for its shareholders in the first year. AHG had provided Rs 4 billion financing for the construction of Dolmen Mall.
"We (at AHG) had filed applications for eight REITs projects worth about Rs 22 billion. $ 225 million," Muhammad Ejaz, chief executive officer at Arif Habib Dolmen REIT Management Limited, told a group of journalist at Arif Habib Center here. Ejaz accompanied his group chairman Arif Habib who held a pre-budget discussion with reporters on the direct and indirect importance of REITs for the economy.
Arif, former chairman of now-defunct Karachi Stock Exchange, recommended to the federal government to reinstate, in FY17 budget, Capital Gains Tax (CGT) exemption on sale of property to all types of REITs as was available till June 2015 under Section 99A of the Second Schedule of Income Tax Ordinance 2001 (ITO 2001).
Also, the business tycoon deems beneficial for real estate, the country's largest asset class, the reclassification of investment in REIT units as investment in stock fund instead of money market or fixed income fund under second proviso of Part I-Division III of ITO 2001's first schedule. "It is unclear whether the objective of the change in section 99A was to exclude residential projects with a commercial/retail component which are overwhelmingly common," added Ejaz of Dolmen REIT.
Further, he said the lawmakers also were required to make two "revenue-neutral consequential" changes to the Finance Bill 2015-16: Readjustment of rate of advance tax on dividends made at par with that of stock funds and exemption of REIT transactions under Section 236(C) and 236(K) of ITO 2001.
At its arrival, Arif said, the government incentivised investors by exempting from income tax the sale of REIT property and those declaring 90 percent of their profit with shareholders as dividend. "Unfortunately, part incentives were withdrawn by the government (in the last fiscal budget)," he said adding "And so we see no REITs coming up this year".
Terming construction as a mother industry which triggers economic activity in 40 manufacturing and services sectors of the economy, CEO Ejaz said the government had created "huge disadvantage for REITs through limiting CGT exemption to developmental REITs for residential purpose only and increasing 10 to 25 percent dividend tax for corporates on REIT investment.
This, he said, made REITs investors hold their investment plan back at least for the current year. "At least 3-4 of our (REITs) projects would have materialised this year had this taxation problem not been there," he told a questioner. The Dolmen REITs executive replied in affirmative when a reporter asked if AKD Group also was facing the same problem. "They are working on developmental REITs."
The otherwise revenue-conscious government, Ejaz said, lost at least Rs 300 million direct and indirect taxes which his firm, Dolmen REIT, had contributed to the national kitty as upfront taxes while being launched. Suggesting the government not to go for "quick policy changes", Arif recalled that Dolmen City REIT had added $ 220 million market capitalisation to Pakistan Stock Exchange. Underlining potential of the industry, Ejaz said the real estate was contributing 6 and 15 percent to Gross Domestic Product of India and the United States. On the contrary, housing sector in Pakistan was adding only 2 percent, $ 6.5 billion, to the GDP.

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