REAL ESTATE INVESTMENT
TRUSTS
Presented by:
SARWAT AFTAB
Director (REITs & New Initiatives)
Securities & Exchange Commission of
Pakistan
STRUCTURE OF THE
PRESENTATION
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History/Background of REITs
What is a REIT
Global Overview of REITs
Number of REITs by Region
Inherent Risks
Impact of REITs on the Real Estate Market
Impact of REITs on the Capital Market
Legal and Fiscal support received from the
Federal Government
STRUCTURE OF THE
PRESENTATION
• Status
of
Implementation
of
SECP’s
Recommendations
• Essential Deliverables
• Consultative Process followed by SECP
• REIT players
• Highlights of REIT Regulations
• Concerns and Issues
• International Affiliation - APREA
HISTORY/ BACKGROUND
OF REITS
• Real Estate Investment Trust ("REIT") is a term
that originated in the United States in 1960s to
describe
vehicles
used
for
collective
investments in real estate.
• REITs were initially created as a vehicle
through which small investors could gain
access to large-scale, income-producing real
estate properties.
• The concept quickly grew throughout the
world, and many countries introduced REITs in
their respective jurisdictions.
WHAT IS A REIT
Real Estate Investment Trust is a mutual fund
that invests in properties and derives income
from such investments for its unit holders.
Globally, REITs are open-end structures. In
Pakistan, initially closed-end structure is being
introduced owing to high redemption and
systemic risk.
REITs are very diverse - investments are in
office buildings, residential, shopping malls,
hospitals/ schools and industrial uses.
GLOBAL OVERVIEW OF REITS
•Investors still find REIT stocks attractive
primarily due to low beta, though dividend yields
have plunged in countries like the US.
•Globally, REITs is a rapidly growing asset class market capitalization increased by 26% during
the year 2007.
•Total Real Estate owned by REITs globally is
USD 1.273 trillion.
Note: All figures relate to publically listed REITS.
*Source: Global REIT Report 2007, Ernst & Young
**National Association of Real Estate Investment Trusts
GLOBAL OVERVIEW OF REITS
•As of 31 July 2008, the US Equity REIT market
capitalization = $283 billion
•As of 31 July 2008, US REITs own approximately $600
billion of commercial real estate assets, or 10 to 15
percent of total institutionally owned commercial real
estate
•125 REITs are traded on the New York Stock Exchange
Note: All figures relate to publically listed REITS.
*Source: National Association of Real Estate Investment Trusts
GLOBAL OVERVIEW OF REITS
•Asia is widely regarded as the new REIT tiger.
•High dividend yields and stock premiums are main
characteristics of Asian REIT.
•Singapore is currently the best REIT market in ASIA
and has an annualized yield of 12%.
•Japan REIT market boosted by increased activity in
Stock market and interest from foreign investors.
•South Korean REITs, though small in size, have
exhibited good stock prices and dividend yields due
to increasing office rentals and rising debt levels.
GLOBAL OVERVIEW OF REITS
•Australia - the second largest REIT market in the
world grew by 45% in 2007.
•Cross border investment flows
characteristics of Asian REITs.
is
a
key
•Malaysia has taken lead in introducing Islamic REITs.
•Italy, Philippines and India amongst those who are in
the process of adopting REITs.
Note: All figures relate to publically listed REITS.
*National Association of Real Estate Investment Trusts
TOTAL REITS BY REGION
2006
2007
North
America
253
195
EMEA
59
102
Asia
75
83
Pacific
64
68
(Europe, Middle
East and Africa)
Note: Decline in US partly recessionary and partly owing to M&A activity & conversion to PE.
Source: Global REIT Report 2007, Ernst & Young
INHERENT RISKS
•Currently no method of price discovery in the RE
Sector.
•Only a handful of properties in Pakistan with
transparent leases. Antiquated rent control laws.
•History of scandals in the RE Sector (Co-operative
Societies, Twin Towers Modaraba, etc.).
•Differential between the “real price” and the
“recorded price” can be as high as 900%– e.g.
Karachi.
INHERENT RISKS
•Tax load on land as high as 28% - e.g. Lahore.
•Land value can be higher than Southern Europe –
e.g. Islamabad.
•Tax regime is leading to the conversion of genuine
white money into black money.
•General tendency is “build and abdicate”– i.e., no
RE development is planned for rental purposes.
•Multiple licensing jurisdictions in each town with no
overall urban planning or fiscal framework.
The two year research process revealed
decades of fiscal neglect (at the
provincial level).
SECP, therefore, had two options:
- wait for fiscal and legal reform in the
provinces – i.e. delay REITs for several
years; or
- launch REITs with appropriate firewalls.
IMPACT OF REITS ON THE
REAL ESTATE MARKET
•Improve price discovery for both rental and sale
transactions.
•Promote development of long-term rental market. In RE,
money is mainly made by transacting in ‘open’ plots – no
real benefit to the economy or to society.
•Capacity building - modern valuation
professional fund management and trustee.
standards,
•Promote high quality construction as promoters will seek
long-term revenues rather than the current practice of
‘build and abdicate’ – i.e. reduce speculative activities.
•Increase supply of residential and commercial properties.
IMPACT OF REITS ON THE
CAPITAL MARKET
•Alternate asset class which will increase the supply
of securities with the combined benefits of an
‘equity security’ and ‘real estate’.
•Provide real estate upsides to non-property owning
segments of society.
•Will broaden and diversify the mutual fund industry.
•Units of the Scheme listed and traded on the Stock
Exchange (therefore greater corporate governance
and liquidity for investors).
•FDI flows will be enhanced as this product will
provide a structure to a largely unregulated market
segment.
FEDERAL GOVERNMENT
SUPPORT (LEGAL)
 RE is a provincial subject. The pace of progress
could not be dictated by the Federal
Government/ SECP. Therefore, it was crucial that
the Commission be given enhanced regulatory
control and fast track remedial capability
through improved legal empowerment.
 The Federal Government (June 2007) greatly
enhanced our powers to deal with the NBFC
sector through a series of amendments in
Section 282 of the Companies Ordinance.
FEDERAL GOVERNMENT
SUPPORT (FISCAL)
 The Federal Government, through Finance
Act 2007, allowed REITs the tax pass through
status (in line with mutual funds).
 To encourage transparent sale transactions,
the Federal Government has provided
exemption from tax to sellers of property to
REITs (up to 2010).
Status of Implementation of
SECP’s Recommendations
SECP’s Recommendations
Status
Provincial
Abrogation/drastic amendments to Rent Control Laws
X
New Law development – Condominium Law
X
Reduction in transaction costs (stamp duties, registration and commercialization fees and other levies)
X
Federal
Tax pass through status (Parallel to mutual funds) on 90
distribution of income
√
Reduction in tax (on rental income to 5%)
X
Reduction in CVT on all RE transactions
X
Tax waiver for sale of properties to REITs (till 2010)
√
ESSENTIAL DELIVERABLES
•Transaction Costs
•Federal
-Elimination of 2% CVT on all RE transactions.
•Provincial
- Downward revision of Stamp Duty and Registration Fee.
- Drastic downward revision of Commercialization charges.
- Change in method of calculation of Commercialization fees/
property taxes to a covered area formula with zero tax for
aesthetics (e.g. parks, fountains) and utilities (car parks,
toilets).
-Elimination of differential in property tax applicable on rented
and owner-occupied property.
•The total tax load on a RE transaction should not exceed 4-5% international best practices.
It may be noted that all these fiscal reforms are ‘revenue-neutral’.
These reforms already in NHP 2001, Punjab Development Report 2005
(World Bank) and the Housing Advisory Group of State Bank (2007).
CONSULTATIVE PROCESS
FOLLOWED
REITs Public Consultation
International stakeholders
Valuers and Trustees
6%
13%
Federal and Provincial Govt.
3%
2%
Housing Advisory Group,
SBP
Chartered Accountants
6%
Lawyers
8%
33%
7%
Asset Managers
Bankers
Business Groups
7%
9%
6%
Credit Rating agencies
National Institutions
CONSULTATIVE PROCESS
FOLLOWED
Several meetings held with the leading local valuers of
real estate to discuss the issues and their solutions.
In addition two day long consultative sessions were also
held with other stakeholders including representatives of
Federal and Provincial governments, developers and
financial market participants.
The regulations were notified on January 31, 2008.
Two launching ceremonies were also conducted in this
regard on February 4, 2008 and February 6, 2008 in
Lahore and Karachi respectively.
HIGHLIGHTS OF REIT
REGULATIONS, 2008
Unit holders
Holding of units
REIT
Management
Company
Distributions
Acts on behalf
of unit holders
Management Fee
REIT
Trustee
Trustee fees
Management Services
Ownership of
assets
Management
Services
Company
(maintenance of
properties)
Net property
Income (from rental or sale)
REIT Assets
(properties)
REITs REGULATIONS, 2008
The REITs are subject to compliance with the provisions of:
REIT Regulations 2008
http://www.secp.gov.pk/divisions/Portal_RNI/pdf/REIT_Regulat
ion_2008.pdf
NBFC Rules
http://www.secp.gov.pk/divisions/portal_nbfc/nbfc_laws.asp#li
st
Relevant provisions of the Companies Ordinance 1984
http://www.secp.gov.pk/corporatelaws/pdf/CompaniesOrdinan
ce1984_Apr08.pdf
Listing Regulations of the relevant stock exchange
http://www.kse.com.pk
Code of corporate governance would also be applicable
http://www.secp.gov.pk/corporatelaws/pdf/CodeofCorporateGo
vernance.pdf
REITs REGULATIONS, 2008
Two types of REIT schemes are envisaged in the
REIT Regulations namely Developmental REIT
and Rental REIT.
- Developmental REIT scheme will focus on
development of property and then selling it on
profit. The sale proceeds will be distributed
amongst the unit holders as dividends.
- Rental REIT scheme will invest in income
generating properties. The rentals so received
will be distributed as dividend to the unit
holders.
REITs REGULATIONS, 2008
The minimum fund size of a REIT Scheme shall
be Rupees Five (5) billion.
RMC shall maintain at least 20% of the units of
the REIT Scheme and a maximum of 50%.
Real Estate along with necessary approvals to
be provided by the RMC.
Initially
REITs
would
be
allowed
in
Islamabad/Rawalpindi,
Karachi,
Lahore,
Peshawar and Quetta.
REITs REGULATIONS, 2008
No taxation if 90% of the income of the REIT is
distributed.
A REIT Scheme shall undertake only one Real
Estate project.
RMC may undertake more than one scheme.
Portfolio of buildings allowed for Rental
REITs.
International Affiliation - Asian Public
Real Estate Association (APREA)
SECP is presently an associate member of APREA and
Mr. Salman Ali Shaikh, Commissioner Specialized
Companies Division is a member of the Governing Board
of APREA.
APREA is a non-profit association that represents the
listed real estate sector in Asia-Pacific.
Its objective is to create a market based on international
best practices that will facilitate local, regional and
international investment in the sector. This includes the
development of a robust reporting and corporate
governance structure to promote investor confidence.
SECP joined the members’ club to improve cross-border
links and benefit from networking opportunities.