ISLAMABAD, March 13 Arif Habib and Aqeel Karim Dhedhi (AKD), two of the country's richest brokers who have a say in the Pakistani stock markets, have now officially entered the real estate business.

After a thorough process that witnessed years of delay, the Securities and Exchange Commission of Pakistan (SECP) here on Friday granted permission to Arif Habib REIT Management Company Limited and the AKD REIT Management Company Limited to become the country's first two REIT management companies.The commission had received four applications for the formation of the real estate investment trusts, which also included a school chain from Lahore. But, after a year of scrutiny, the commission rejected the other two applications “owing to non-fulfilment of regulatory requirements”.

A real estate investment trust (REIT) company requires real estate with a minimum value of Rs5 billion.

REITs are a new product to Pakistani capital market and the enabling law for real estate investment trusts was notified by the SECP last year. Under this law, the mega real estate projects can be securitised and investors can trade units on the stock exchange.

Pakistan is supposed to be having a reasonable market for REITs, but over the last more than two years investors had adopted the wait-and-see approach due to political instability and deteriorated law and order situation which kept the stock markets hostage.

In fact, the size of the minimum investment is huge (Rs5 billion minimum) and investors were thinking twice before venturing into the new realm, an SECP official told Dawn. But, the process of formation of REITs, the SECP official believes, is slow everywhere keeping in view the size of the money involved. Malaysia took more than seven years to register only 22 REITs so far. In Europe, the Middle East and Africa (EMEA) the number of REITs is just around 100.

Despite several legal and tax-related hurdles at the provincial and federal levels, experts still see a potential market for REITs.

The SECP officials also believe that there are several organisations that owned real estate and were best suited for launching RMCs i.e., the Pakistan Railways, hotel and school chains, shopping malls and owners of commercial buildings.

For the time being, REITs are being close-ended and can be set up in Karachi, Lahore, Peshawar, Quetta and Islamabad only.

The SECP believes that certain legislations were required and some others were needed to be removed and amended at the provincial level to promote the new product.

At present, there is no method of price discovery in the real estate sector. Only a handful of properties are with transparent leases. Real estate is a vehicle for turning of black money into white.

A report, prepared by the SECP experts, has found up to 900pc of differential between the real price and recorded price of real estate in Karachi. Another issue is the tax load that is as high as 28 per cent.

The report says the price of eight kanal of land in Lahore is around Rs1 billion these days, while a plot of similar size and location is priced at Rs1.2 billion in Karachi. The registration fee for eight kanal is Rs10 million or one per cent of the total value of the land each in Lahore and Karachi.

The stamp duty on this much land is Rs20 million (two per cent of the total land value) in Lahore and Rs36 million (three per cent of the total land value) in Karachi. Buyers have to pay Rs10 million as transfer fee on eight kanal in Lahore and Rs10 million in Karachi. Commercialisation fee of this land in Lahore is Rs200 million (20pc of the land value).

In Karachi, commercialisation fee is Rs8,000 per square yard that can take the commercialisation fee amount to Rs32 million.

Moreover, the government has imposed two per cent Capital Value Tax (CVT). The overall tax load on registration and commercialisation of eight kanal is 28 per cent i.e. Rs290 million in Lahore and Rs166 million in Karachi. The experts also found that the land value in Islamabad can be higher than land in Southern Europe.

The SECP has recommended the federal government to abolish CVT as it was a provincial matter. The commission also seeks abrogation of rent control law in Islamabad. The central government has already provided exemption from tax to sellers of property to REITs till 2010 and reduced the tax on rental income to five per cent, which are positive signs.