The apex regulator, Securities and Exchange Commission of Pakistan, last Wednesday approved the ‘Dolmen Mall and related property’ scheme, setting into motion the launch of a long-awaited new class of asset, the Real Estate Investment Trust/Treaty.

A REIT is a closed-end mutual fund that invests in real estate. Most of its features are similar to those of equity and money market mutual funds. The ‘REIT Fund’ would conduct an initial public offering (IPO) to allow the public to subscribe to its units.

REIT regulations were first released by the SECP in the winter of 2008. After receiving feedback from the public, amendments were made and new rules were issued in 2010. Yet, nothing transpired over the next three years.

One reason was that the initial rules stipulated the minimum size of REIT funds to be a staggering Rs5bn. No one was willing to put that kind of money in a yet unproved success story. The regulator later cut down the minimum fund size to Rs2bn and reduced the capital requirement for REIT management companies (RMCs) to Rs200m from Rs500m.

But the heavy investment required for REIT funds was not the only reason why investors remained on the sidelines; lack of cash was also a factor. “The booming stock market has multiplied investors’ gains in the last three years, and the market is flush with liquidity. Funds are in search of best investment options, and thus REITs have come alive,” says a real estate tycoon.

But sponsors of real estate projects with stockpiles of cash are not really falling over one another to enter REITs for fear of treading into, what essentially is, an unchartered territory. A source familiar with the affairs said the SECP has also issued licences to three other parties, but they have yet to come up with a viable scheme.

Nasim Beg, chairman of the Arif Habib REIT Management Company Limited — the asset managers of the just-approved scheme — told Dawn that there are three categories of REITs: development REITs, rental REITs and hybrid REITs. “‘Dolmen Mall and related property’ is a rental REIT scheme,” Beg said.

He explained that the property, which overlooks the Arabian Sea in Clifton, is worth Rs22.5bn and it has already been rented out, with its yearly rental income amounting to Rs2.5bn. After the IPO, slated to be in about a month or two, the unit holders would be entitled to their share in the income, which would be Shariah-compliant and inflation-adjusted, Beg said.

“As the rent of the property rises, the income would grow and provide unit holders a still higher return.” He asserted that since the scheme was ‘asset-based,’ it carried low business risk.

The asset class would provide a new investment opportunity to banks, mutual funds and individuals, but critics say undervaluation of land on paper will prove to be a hurdle

Beg believes that REIT funds would receive a warm response from investors when they are launched for public subscription. One reason is that while real-estate investment is essentially illiquid, investment through REIT funds would be liquid just as in the case of other mutual funds, since investors will be entitled to enter and exit REIT funds at will, he said.

An analyst chipped in: “As banks and mutual funds are forbidden from investing in the real estate sector, REIT funds provide an avenue for them to do so”.

Akif Saeed, commissioner of the SECP’s specialised companies division, told this scribe that REIT is a recognised investment tool in many developed countries like the US, UK, Australia, Malaysia and Japan. Mutual funds, Modarabas, corporations, banks and other investors would have access to a new asset class that would enable them to diversify their investments and manage their risks.

In order to encourage REIT investment, income from the sale of immovable property to REITs was exempted for three years in the 2007-08 budget.

A property dealer in the know of things said the regulator would initially permit the financing of real estate projects in five major cities.

Yet a stakeholder, who wished to remain anonymous, sighed. “The biggest hurdle in the corporatisation of the property market remains the determination of the ‘clean title’ of the property and its valuation.”

Documentation could remain a major problem obstructing the progress of REITs projects, he said. “Due to the absence of proper documentation, it is very difficult to value a piece of land or property, which prevents its price discovery.”

He also believed that ‘developmental REITs’ and ‘hybrid REITs,’ at least, were unlikely to make a swift beginning. His reason: real estate is ‘undocumented,’ and that the prices on paper are quoted at a fraction of their real worth.

“As the real property worth will have to be disclosed, who will sell it to REIT managers given that the taxman could put the seller in trouble for not having paid taxes in the past on the true value?” he asked a very pertinent question.

Published in Dawn, Economic & Business, January 19th , 2015

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