Consultations with the stakeholders on draft rules for setting up real estate investment trust (REIT) have been initiated by the Security Exchange Commission of Pakistan(SECP).

"Last Thursday, we held an important meeting in Karachi with the stakeholders to discuss the draft rules. We will now be holding meetings with stakeholders in Lahore and Islamabad very shortly after which the REIT rules will be notified", said a senior official of the SECP, Mr Salman Ali Sheikh.

REITs will be high-profile organisations which will mobilise substantial funds from commercial banks, investment companies and through stock exchanges.

"The public faces many problems in acquiring inexpensive land and loans at low interest rate for constructing houses and commercial buildings. With the setting up of REITs, most of these problems are expected to be solved", Mr Salman believed. The commercial banks' exposure to housing finance has been increased from five to 10 per cent of net advances but it is still considered very low.

But for the consultation with stakeholders, all the related work, Mr Sheikh said, has been completed by the SECP paving the way for an early notification about "the much-needed" REIT rules.

Responding to a question, he said Real Estate Investment Trust Regulations, 2007 are proposed to be made by the SECP in exercise of the powers conferred by section 282B (2) of the Companies Ordinance, 1984.

The proposed trusts, Mr Sheikh said, will help arrange subordinated loans to meet any shortfall in the commercial or residential projects.

A formalised structure of REIT will allow raising money from public, through issuance of securities listed on stock exchanges in order to invest in real estate business. Participants will be allowed to invest in a professionally managed portfolio of real estate to diversify risk with the ease of immediate conversion of securities into cash.

REIT will serve to open up real estate market to small investors. It will be a tax effective vehicle and it will not have to pay tax in case 90 per cent of its profits are distributed to the participants, thereby maximising dividends.

The draft rules are conducive and practicable for investment, given the prevailing market practices in the real estate industry, because it has taken into account the relevant factors.

Housing demand, a major component of the construction sector, has responded to changes in population and incomes. However, the supply of housing does not match with the rise in demand resulting in supply shortages and rising prices.

Pakistan had 19.3 million housing units in 1998 as compared to 12.6 million in 1980. The housing need was estimated to be equal to 24.9 million units in 2004, resulting in shortage of 5.5 million houses.

The share of construction and housing sector in gross domestic product has varied over time. Its share of construction sector increased from 3.8 in 1995-96 to 5.3 per cent in 2002-03 and the share of housing sector increased from 5.5 in 1995/96 to 6.2 per cent in 2002-03. The limited availability of finances is also a critical bottle-neck affecting the supply of houses.

According to the officials, an annual investment of Rs200-Rs300 billion will be required to meet the growing housing demand--against the current level of Rs3-4 billion. This is significantly lower than 10-15 per cent of GDP in other developing countries.

Distortions in the land market due to unregulated working of housing societies, ambiguity in property rights-tax laws, lack of implementation of property laws, and red tape are affecting the efficiency of land market.

All these factors coupled with a lack of consumer protection laws have contributed to escalation in prices of real estate in major cities. The lack of standards, limited enforcement of existing materials standard and the inefficient design manufacturing has affected the quality of construction.

Productivity is low due to concentration of unskilled labour, lower quality of inputs and lack of training facilities.