Real Estate Investment Trust is still a mystery for most people unfamiliar with the term. Yet, knowledgeable people at stock exchanges are excited by the launch of a new asset class that they believe would receive widespread acclaim.

REIT regulations were first released by the Securities and Exchange Commission of Pakistan (SECP) in the winter of 2008. Following feedback from the public, amendments were made and the new rules were issued in 2010. Top people in the real estate business say that consultations are currently underway between the chief regulator and the stakeholders on some issues that need to be settled.

In essence REIT is venturing into unchartered territory: the real estate. The potential for all stakeholders is enormous. While sponsors of real estate projects would be able to raise money from the public in a documented manner, investors are expected to receive healthy returns along with the safety of their investment. REIT, a form of mutual funds could float Initial Public Offerings (IPOs) to finance real estate projects. When the rules were first issued the minimum size of the REIT management companies (RMCs) was set at a huge Rs5 billion; the response was disappointing as no one was willing to put that kind of money in a new asset class.

The regulator later cut back the size to Rs2 billion. The interest still remained subdued, which pushed regulators to further reduce the maximum size to Rs500 million. Investors in large real estate projects have started to come forward.

“But the heavy initial investment required for the REIT funds was not the only reason for delay in its take-off”, says a real estate tycoon, who argues the sector is dependent to a great extent on the wealth generated at the stock exchanges. He elaborated: “As the Pakistani stock markets have rebounded from the bottom of the pit following the crash of 2008 and are currently seeing an unprecedented boom, the funds have started to flow to the commodities and the real estate markets”.

The SECP has already issued licences to three parties for REIT Management Companies (RMCs): Arif Habib REIT Management; AKD REIT Management and Eden Developers REIT Management. Mega construction projects with Arif Habib include the Naya Nazimabad in which several other stock brokers are also partners. Dolmen City is another important project with the party. AKD is heading towards the construction of its prestigious project 'Creek Terraces” and Eden Developers are working on their project in Lahore.

Mohammad Ejaz, chief executive of Arif Habib REIT Management contends that REIT funds would receive warm response from investors when they are launched for public subscription. One of the reasons, he says, is that while investment in real estate is essentially illiquid, investment through REIT funds in the sector would be liquid. As in mutual funds, the investor could enter and exit on his perception about the viability and profitability of the projects that any fund wishes to undertake.

Mohammad Ejaz observed that REIT equity would basically earn revenue from rent and the profits would be shared with the investing public. The REIT rules in the first stage permit financing real estate projects in the five major cities: Karachi, Islamabad, Lahore, Peshawar and Quetta.

But people privy to the ongoing consultations of the regulator with the stakeholders say that not only the shrinkage in size of RMCs is under consideration, but also allowing financing of projects in other cities, and perhaps outside the country. Some major construction tycoons are known to have huge investments in real estate projects in the United Arab Emirates, mainly Dubai.

Most people associated with the real estate business admit that that there are several disconcerting matters with the real estate, foremost being the need for documentation.

Others include tax issues. But most believe that once things are lined up and real estate projects under REIT management come under regulations, it would help in triggering boom in the construction industry. All allied industries, like cement, iron and steel, glass and others would share the fruits. The success of REIT funds as an asset class all over the world is source of encouragement to the sponsors.

A senior official of the REIT department at the SECP said that documentation was surely a major problem obstructing the progress of the project. “Due to the absence of documentation, it is very difficult to put value to a piece of land, which prevents its price discovery”, he explained.

He observed that one of the reasons for the slow progress in the product was the high discount rate, which dried up flow of funds. The SECP official, who wanted to remain anonymous, said that with the decrease of minimum size of RMCs from current Rs500 million, sponsors of small and medium-sized projects would also be able to benefit.

He expected the maiden IPOs for REITs to be floated in the first half of next year. Since banks are forbidden to finance real estate and mutual funds and they cannot invest in the sector, REIT funds have wide scope for raising funds from investors through the stock market.

The SECP’s REIT department executive said that licences for RMCs were being issued after a thorough evaluation of ‘fit and proper’ criteria.

RMCs, he said, would be well-regulated and trustees, from amongst banks or other institutions, would keep close watch on their workings.

The chief regulator would monitor, analyse and assess viability of the projects to be undertaken by REIT funds listed at the stock exchanges and where public money is involved. But like the private limited companies, private construction sector would continue to remain out of the loop.

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