REAL ESTATE INVESTMENT TRUSTS

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REAL ESTATE INVESTMENT TRUSTS

• Presented by
• SARWAT AFTAB
• Director (REITs New Initiatives)
• Securities Exchange Commission of Pakistan

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STRUCTURE OF THE PRESENTATION

• 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

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STRUCTURE OF THE PRESENTATION

• Status of Implementation of SECPs
  Recommendations
• Essential Deliverables
• Consultative Process followed by SECP
• REIT players
• Highlights of REIT Regulations
• Concerns and Issues
• International Affiliation - APREA

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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.

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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 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

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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

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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.
• National Association of Real Estate Investment
  Trusts

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GLOBAL OVERVIEW OF REITS

• Australia - the second largest REIT market in the
  world grew by 45 in 2007.
• Cross border investment flows is a key
  characteristics of Asian REITs.
• 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

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TOTAL REITS BY REGION
2006 2007
North America 253 195
EMEA (Europe, Middle East and Africa) 59 102
Asia 75 83
Pacific 64 68
Note Decline in US partly recessionary and
partly owing to MA activity conversion to
PE. Source Global REIT Report 2007, Ernst Young
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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.
• 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.

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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 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 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).
• 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
SECPs Recommendations Status
Provincial
Abrogation/drastic amendments to Rent Control Laws X
New Law development Condominium Law X
Reduction in transaction costs (stamp duties, registra-tion and commercialization fees and other levies) X
Federal
Tax pass through status (Parallel to mutual funds) on 90 distribution of income v
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) v
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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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CONSULTATIVE PROCESS FOLLOWED
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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.
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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
The REITs are subject to compliance with the
provisions of REIT Regulations 2008
http//www.secp.gov.pk/divisions/Portal_RNI/pdf/RE
IT_Regulation_2008.pdf NBFC Rules
http//www.secp.gov.pk/divisions/portal_nbfc/nbfc_
laws.asplist Relevant provisions of the
Companies Ordinance 1984 http//www.secp.gov.pk/co
rporatelaws/pdf/CompaniesOrdinance1984_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/CodeofCor
porateGovernance.pdf
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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.

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

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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.

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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.
International Affiliation - Asian Public Real
Estate Association (APREA)