Why Has REITs Concept Not Taken Off in Pakistan?



Lately, it has been observed that the activity pace in real estate sector across Pakistan have been slowed down but it could not shake the trust of real investors. Moreover, the sector has undergone some key developments that can invite more and more new investors in the sector. For instance, Pakistan real estate sector is said to take benefits from China Pakistan Economic Corridor (the initiative taken by Pakistan and China). Also the rationalization of taxes and the efforts to bring transparency in the sector can entice both local and foreign investors to invest in the market.

One of the emerging ways to bring real estate investment is through Real Estate Investment Trust (REIT). REIT is a security that sells like a stock and invests money in real estate directly or indirectly. Its purpose includes bringing real estate and construction sectors in the formal economy, providing structure and discipline to infrastructure and construction projects. Moreover, it allows developers to raise finance for projects beyond their financial capacity, enhance saving rates and provide investment channels to smaller investors, who cannot afford investing in bigger residential or commercial projects.

Despite being such a lucrative investment option, it has been all gloom and doom for REITs in Pakistan. REIT has neither been widely accepted in Pakistan nor its concept been taken off so far. Currently, only one REIT – Arif Habib' s Dolmen REIT – is listed on the stock exchange. Until 2015, REIT was governed by 2008 regulations which were replaced by 2015 regulations by SECP. New regulations were warmly welcomed by investors as they were business friendlier than 2008 regulations.

Key changes to 2008 regulations included reducing the paid-up capital of RMCs from Rs200 million to Rs50 million, and the minimum stake of RMC in a REIT scheme was reduced from 20 percent to 5 percent. Strategic investor concept was also introduced who could hold 20 percent stake in a REIT scheme. Moreover, minimum fund size requirement of Rs2 billion was reduced to bring in line with the listing regulations of stock exchanges. However, these amendments could not bring any positive change – REITs activity continued to be lukewarm even under new regulations.

Many REIT projects have been held back in the last two years. During the time span of 2008-2015, only nine organizations had applied to register as REIT Management Company (RMC) but only one company (Arif Habib' s Dolmen REIT) was successfully launched. Real estate experts believe that a favorable tax regime can help in having more and successful REITs.

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