On resiste a linvasions des armees on ne resiste pas a linvasion des idees Victor Hugo 1852

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On resiste a linvasions des armees on ne
resiste pas a linvasion des idees(Victor Hugo -
1852)
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Nothing is as powerful as an idea whose time has
come
REITS
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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.

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GLOBAL REITS

• Globally, REITs is a rapidly growing asset class
  - market capitalization increased by 26 during
  the year 2007.
• US Market is in a state of contraction.
• Growth in the Asian market coupled with growing
  REIT sector in the UK has offset the effect of
  the US market decline.
• Total Real Estate owned by REITs globally is USD
  1.273 trillion.
• Note All figures relate to publically listed
  REITS.

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GLOBAL REITS

• Asia is widely regarded as the new REIT tiger.
• High dividend yields and stock premiums are main
  characteristics of Asian REIT.
• For instance Singapore has an annualized yield
  of 12, and REIT stocks trade at a 71 premium to
  NAV.
• Australia is the second largest REIT market in
  the world. Grew by 45 in 2007.
• Cross border investment flows is a key
  characteristics of Asian REITs.

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TOTAL REITS BY REGION
Note Decline in US partly recessionary and
partly owing to MA activity and conversion to PE.
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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.

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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.
• The taxation structure is also responsible for
  the build and abdicate culture i.e., no RE
  development is planned for rental purposes.
• Multiple licensing jurisdictions in each town
  with no overall urban planning or fiscal
  framework.

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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.
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IMPACT OF REITS ON THE RE 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 standards,
  professional fund management and trustee.
• 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.

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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.

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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.

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FEDERAL GOVERNMENT SUPPORT (FISCAL)

• The Federal Government, through Finance Act 2007,
  allowed REITs the tax pass through status (in
  line with mutual funds).
• Reduced tax on rental income to 5 (full and
  final settlement). This is a major incentive to
  promote transparent leases in Pakistan.
• To encourage transparent sale transactions, the
  Federal Government has provided exemption from
  tax to sellers of property to REITs (up to 2010).

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Status of Implementation of SECPs Recommendations

• Federal Government
• No progress on following two issues
• Abolition of CVT (should not have been imposed by
  the Federal Government. in the first place
  Provincial issue)
• Abrogation of Rent Control Law in Islamabad

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Status of Implementation of SECPs Recommendations

• Provincial Government (Legal)
• No progress on legal and fiscal issues
• Punjabs new draft Rent Law has the same basic
  deficiencies as the existing law
• Punjab has the highest concentration of
  historical towns in Pakistan
• Older parts of these towns are in drastic need of
  Urban Renewal, can only be done if Renovation
  is added to the reasons for eviction
• The figure of 10 as an annual rent increase
  needs to be abolished as it imposes an
  unnecessary hurdle in supply of rentable
  properties

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Status of Implementation of SECPs Recommendations

• Provincial Government (Fiscal)
• All the fiscal deliverables for REITs are
  contained in National Housing Policy 2001 and the
  Punjab Development Report 2005
• Owing to very high Property Tax Rates, Rental
  REITs are not feasible in Lahore only 1
  building with transparent leases in the whole
  town!!!
• Developmental REITs are more likely to emerge in
  the non-LDA parts of Lahore owing to very high
  Commercialization Fees (LDA)

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Status of Implementation of SECPs Recommendations
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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).

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Clearly the cost of delaying fiscal and legal
reform is very high as the current tax regime is
leading to the conversion of genuine white money
into black money. It is also one of the primary
reasons for RE development to remain a cottage
industry.
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HIGHLIGHTS OF REIT REGULATIONS, 2008
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Unit holders
Holding of units
Distributions
Acts on behalf of unit holders
Management Fee
REIT Management Company
REIT
Trustee
Trustee fees
Management Services
Ownership of assets
Net property Income (from rental or sale)
Management Services Company (maintenance of
properties)
REIT Assets (properties)
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REITs REGULATIONS, 2008

• Types of REIT Scheme Projects envisaged in the
  REIT Regulations
• Buy-Build-Sell REITs (Developmental REIT -
  popular form of RE investment in Pakistan).
• Rental REITs (Rental REIT - transparent leases
  are very rare in Pakistan).
• Trust Structure with following key players
• REIT Management Company (RMC)
• Trustee
• Unit Holders
• Listed Closed End Fund.

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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.

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REITs REGULATIONS, 2008

• Initially REITs would be allowed in
  Islamabad/Rawalpindi, Karachi, Lahore, Peshawar
  and Quetta.
• 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.

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CONCERNS AND ISSUES

• The good news is that the licensing window for
  REITs is now formally open.
• The bad news is that initially the success rate
  of REIT applications is likely to be low.
• RE development in Pakistan is a fragmented
  activity only one public listed company.
• Interest in REITs is very high. However, many
  aspirants lack requisite expertise. To develop
  this sector, foreign collaboration and joint
  ventures will be encouraged.

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AN IDEA WHOSE TIME HAS COME
REITs