Re It

8/3/2019 Re It

1/28

On resiste a linvasions desarmees; on ne resiste pas a

linvasion des idees(Victor Hugo - 1852)

8/3/2019 Re It

2/28

Nothing is as powerful as an idea

whose time has come

REITS

8/3/2019 Re It

3/28

WHAT IS A REIT

Real Estate Investment Trust is a mutual fundthat invests in properties and derives incomefrom such investments for its unit holders.

Globally, REITs are open-end structures. InPakistan, initially closed-end structure is beingintroduced owing to high redemption andsystemic risk.

REITs are very diverse - investments are inoffice buildings, residential, shopping malls,hospitals/ schools and industrial uses.

8/3/2019 Re It

4/28

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.

8/3/2019 Re It

5/28

GLOBAL REITS

Asia is widely regarded as the new REIT tiger.

High dividend yields and stock premiums aremain characteristics of Asian REIT.

For instance: Singapore has an annualizedyield of 12%, and REIT stocks trade at a 71%premium to NAV.

Australia is the second largest REIT market inthe world. Grew by 45% in 2007.

Cross border investment flows is a keycharacteristics of Asian REITs.

8/3/2019 Re It

6/28

TOTAL REITS BY REGION

2006 2007

NorthAmerica

253 195

EMEA(Europe, MiddleEast and Africa)

59 102

Asia 75 83

Pacific 64 68

Note: Decline in US partly recessionary and partly owing to M&A

activity and conversion to PE.

8/3/2019 Re It

7/28

INHERENT RISKSCurrently no method of price discovery in the RESector.

Only a handful of properties in Pakistan with

transparent leases. Antiquated rent control laws.

History of scandals in the RE Sector (Co-operativeSocieties, Twin Towers Modaraba, etc.).

Differential between the real price and therecorded price can be as high as 900% e.g.Karachi.

8/3/2019 Re It

8/28

INHERENT RISKSTax 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 genuinewhite money into black money.

The taxation structure is also responsible for the

build and abdicate culture i.e., no REdevelopment is planned for rental purposes.

Multiple licensing jurisdictions in each town with no

overall urban planning or fiscal framework.

8/3/2019 Re It

9/28

LAHORE KARACHI

Rate of Levy Cost in Rs. Rate of Levy Cost in Rs.

Cost of Land 8 kanal - 1 bn - 1.2 bn

Registration Fee 1% 10 m 1% 12 m

Stamp duty 2% 20m 3% 36 m

Transfer Fee (Lhr)/

CDGK Tax (Khi)

1% 10m 1% 12 m

Commercialization Fee 20% 200m Rs. 8000 persq, yard =2.67 % in thiscase

32 m

CVT 2% 20 m 2% 24 m

Expediting payments Approx. 2% 20 m 4% 50 m

Total Additional Cost 28% 290 m 13.67% 166 m

8/3/2019 Re It

10/28

8/3/2019 Re It

11/28

The two year research process revealeddecades of fiscal neglect (at the provinciallevel).SECP, therefore, had two options:

- wait for fiscal and legal reform in theprovinces i.e. delay REITs for several

years; or- launch REITs with appropriate firewalls.

8/3/2019 Re It

12/28

IMPACT OF REITS ON THERE MARKET

Improve price discovery for both rental and saletransactions.

Promote development of long-term rental market. In RE,

money is mainly made by transacting in open plots noreal benefit to the economy or to society.

Capacity building - modern valuation standards,professional fund management and trustee.

Promote high quality construction as promoters will seeklong-term revenues rather than the current practice ofbuild and abdicate i.e. reduce speculative activities.

Increase supply of residential and commercial properties.

IMPACT OF REITS ON THE

8/3/2019 Re It

13/28

IMPACT OF REITS ON THECAPITAL MARKET

Alternate asset class which will increase the supplyof securities with the combined benefits of anequitysecurity and realestate.

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 StockExchange (therefore greater corporate governance

and liquidity for investors).

FDI flows will be enhanced as this product willprovide a structure to a largely unregulated marketsegment.

8/3/2019 Re It

14/28

FEDERAL GOVERNMENTSUPPORT (LEGAL)

RE is a provincial subject. The pace of progresscould not be dictated by the FederalGovernment/ SECP. Therefore, it was crucial thatthe Commission be given enhanced regulatory

control and fast track remedial capabilitythrough improved legal empowerment.

The Federal Government (June 2007) greatly

enhanced our powers to deal with the NBFCsector through a series of amendments inSection 282 of the Companies Ordinance.

8/3/2019 Re It

15/28

FEDERAL GOVERNMENTSUPPORT (FISCAL)

The Federal Government, through Finance Act 2007,allowed REITs the tax pass through status (in linewith mutual funds).

Reduced tax on rental income to 5% (full and finalsettlement). This is a major incentive to promotetransparent leases in Pakistan.

To encourage transparent sale transactions, theFederal Government has provided exemption fromtax to sellers of property to REITs (up to 2010).

8/3/2019 Re It

16/28

Status of Implementation ofSECPs Recommendations

Federal Government

No progress on following two issues:

Abolition of CVT (should not have been imposedby the Federal Government. in the first place Provincial issue)

Abrogation of Rent Control Law in Islamabad

S

8/3/2019 Re It

17/28


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

UrbanRenewal, 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 insupply of rentable properties

S f I l i f

8/3/2019 Re It

18/28


Provincial Government (Fiscal)

All the fiscal deliverables for REITs are contained in NationalHousing Policy 2001 and the Punjab Development Report 2005

Owing to very high Property Tax Rates, Rental REITs are notfeasible in Lahore only 1 building with transparent leases inthe whole town!!!

Developmental REITs are more likely to emerge in the non-

LDA parts of Lahore owing to very high CommercializationFees (LDA)

S f I l i f

8/3/2019 Re It

19/28


SECPs Recommendations StatusProvincial

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 90distribution of income

Reduction in tax (on rental income to 5%)

Reduction in CVT on all RE transactions X

Tax waiver for sale of properties to REITs (till 2010)

8/3/2019 Re It

20/28

ESSENTIAL DELIVERABLESTransaction 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 foraesthetics (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).

8/3/2019 Re It

21/28

Clearly the cost of delaying fiscal andlegal reform is very high as the currenttax regime is leading to the conversionof genuine white money into blackmoney.

It is also one of the primary reasons forRE development to remain a cottageindustry.

8/3/2019 Re It

22/28

HIGHLIGHTS OF REIT

REGULATIONS, 2008

8/3/2019 Re It

23/28

REITREIT

Management

Company

Trustee

Unit holders

REIT Assets(properties)

Management Fee

Management Services

Ownership ofassets

Net propertyIncome (from rental or sale)

Acts on behalfof unit holders

Trustee fees

Holding of units Distributions

ManagementServicesCompany

(maintenance of

properties)

8/3/2019 Re It

24/28

REITs REGULATIONS, 2008Types of REIT Scheme Projects envisaged in the REITRegulations:

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.

8/3/2019 Re It

25/28

REITs REGULATIONS, 2008

The minimum fund size of a REIT Schemeshall be Rupees Five (5) billion.

RMC shall maintain at least 20% of theunits of the REIT Scheme and a maximumof 50%.

Real Estate along with necessaryapprovals to be provided by the RMC.

8/3/2019 Re It

26/28

REITs REGULATIONS, 2008

Initially REITs would be allowed inIslamabad/Rawalpindi, Karachi, Lahore,Peshawar and Quetta.

No taxation if 90% of the income of the REIT isdistributed.

A REIT Scheme shall undertake only one RealEstate project.

RMC may undertake more than one scheme.

Portfolio of buildings allowed for RentalREITs.

8/3/2019 Re It

27/28

CONCERNS AND ISSUES

The good news is that the licensing window forREITs is now formally open.

The bad news is that initially the success rateof REIT applications is likely to be low.

RE development in Pakistan is a fragmentedactivity only one public listed company.

Interest in REITs is very high. However, manyaspirants lack requisite expertise. To developthis sector, foreign collaboration and jointventures will be encouraged.

8/3/2019 Re It

28/28

AN IDEA WHOSE TIME HASCOME

REITs

Documents

Re It