Transcript Slide 1

On resiste a l’invasions des
armees; on ne resiste pas a
l’invasion des idees
(Victor Hugo - 1852)
REITS
“Nothing is as powerful as an idea
whose time has come”
WHAT IS A REIT
Real Estate Investment Trust is a mutual fund
that invests in properties and derives income
from such investments for its unit holders.
Globally, REITs are open-end structures. In
Pakistan, initially closed-end structure is being
introduced owing to high redemption and
systemic risk.
REITs are very diverse - investments are in
office buildings, residential, shopping malls,
hospitals/ schools and industrial uses.
GLOBAL REITS
•Globally, REITs is a rapidly growing asset class
- market capitalization increased by 26% during
the year 2007.
•US Market is in a state of contraction.
•Growth in the Asian market coupled with
growing REIT sector in the UK has offset the
effect of the US market decline.
•Total Real Estate owned by REITs globally is
USD 1.273 trillion.
Note: All figures relate to publically listed REITS.
GLOBAL REITS
•Asia is widely regarded as the new REIT tiger.
•High dividend yields and stock premiums are
main characteristics of Asian REIT.
•For instance: Singapore has an annualized
yield of 12%, and REIT stocks trade at a 71%
premium to NAV.
•Australia is the second largest REIT market in
the world. Grew by 45% in 2007.
•Cross border investment flows is a key
characteristics of Asian REITs.
TOTAL REITS BY REGION
2006
2007
North
America
253
195
EMEA
59
102
Asia
75
83
Pacific
64
68
(Europe, Middle
East and Africa)
Note: Decline in US partly recessionary and partly owing to M&A
activity and conversion to PE.
INHERENT RISKS
•Currently no method of price discovery in the RE
Sector.
•Only a handful of properties in Pakistan with
transparent leases. Antiquated rent control laws.
•History of scandals in the RE Sector (Co-operative
Societies, Twin Towers Modaraba, etc.).
•Differential between the “real price” and the
“recorded price” can be as high as 900%– e.g.
Karachi.
INHERENT RISKS
•Tax load on land as high as 28% - e.g. Lahore.
•Land value can be higher than Southern Europe –
e.g. Islamabad.
•Tax regime is leading to the conversion of genuine
white money into black money.
•The taxation structure is also responsible for the
“build and abdicate” culture – i.e., no RE
development is planned for rental purposes.
•Multiple licensing jurisdictions in each town with no
overall urban planning or fiscal framework.
LAHORE
KARACHI
Rate of Levy
Cost in Rs.
Rate of Levy
Cost in Rs.
Cost of Land – 8 kanal
-
1 bn
-
1.2 bn
Registration Fee
1%
10 m
1%
12 m
Stamp duty
2%
20m
3%
36 m
Transfer Fee (Lhr)/
CDGK Tax (Khi)
1%
10m
1%
12 m
Commercialization Fee
20%
200m
Rs. 8000 per 32 m
sq, yard =
2.67 % in this
case
CVT
2%
20 m
2%
24 m
Expediting payments
Approx. 2%
20 m
4%
50 m
Total Additional Cost
28%
290 m
13.67%
166 m
The two year research process revealed
decades of fiscal neglect (at the provincial
level).
SECP, therefore, had two options:
- wait for fiscal and legal reform in the
provinces – i.e. delay REITs for several
years; or
- launch REITs with appropriate firewalls.
IMPACT OF REITS ON THE
RE MARKET
•Improve price discovery for both rental and sale
transactions.
•Promote development of long-term rental market. In RE,
money is mainly made by transacting in ‘open’ plots – no
real benefit to the economy or to society.
•Capacity building - modern valuation
professional fund management and trustee.
standards,
•Promote high quality construction as promoters will seek
long-term revenues rather than the current practice of
‘build and abdicate’ – i.e. reduce speculative activities.
•Increase supply of residential and commercial properties.
IMPACT OF REITS ON THE
CAPITAL MARKET
•Alternate asset class which will increase the supply
of securities with the combined benefits of an
‘equity security’ and ‘real estate’.
•Provide real estate upsides to non-property owning
segments of society.
•Will broaden and diversify the mutual fund industry.
•Units of the Scheme listed and traded on the Stock
Exchange (therefore greater corporate governance
and liquidity for investors).
•FDI flows will be enhanced as this product will
provide a structure to a largely unregulated market
segment.
FEDERAL GOVERNMENT
SUPPORT (LEGAL)
 RE is a provincial subject. The pace of progress
could not be dictated by the Federal
Government/ SECP. Therefore, it was crucial that
the Commission be given enhanced regulatory
control and fast track remedial capability
through improved legal empowerment.
 The Federal Government (June 2007) greatly
enhanced our powers to deal with the NBFC
sector through a series of amendments in
Section 282 of the Companies Ordinance.
FEDERAL GOVERNMENT
SUPPORT (FISCAL)
 The Federal Government, through Finance Act 2007,
allowed REITs the tax pass through status (in line
with mutual funds).
 Reduced tax on rental income to 5% (full and final
settlement). This is a major incentive to promote
transparent leases in Pakistan.
 To encourage transparent sale transactions, the
Federal Government has provided exemption from
tax to sellers of property to REITs (up to 2010).
Status of Implementation of
SECP’s Recommendations
Federal Government
No progress on following two issues:
•Abolition of CVT (should not have been imposed
by the Federal Government. in the first place –
Provincial issue)
•Abrogation of Rent Control Law in Islamabad
Status of Implementation of
SECP’s Recommendations
Provincial Government (Legal)
• No progress on legal and fiscal issues
• Punjab’s new draft Rent Law has the same basic
deficiencies as the existing law
• Punjab has the highest concentration of historical
towns in Pakistan
• Older parts of these towns are in drastic need of
“Urban Renewal”, can only be done if “Renovation” is
added to the reasons for eviction
• The figure of 10% as an annual rent increase needs to
be abolished as it imposes an unnecessary hurdle in
supply of rentable properties
Status of Implementation of
SECP’s Recommendations
Provincial Government (Fiscal)
• All the fiscal deliverables for REITs are contained in National
Housing Policy 2001 and the Punjab Development Report 2005
• Owing to very high Property Tax Rates, Rental REITs are not
feasible in Lahore – only 1 building with transparent leases in
the whole town!!!
• Developmental REITs are more likely to emerge in the “nonLDA” parts of Lahore owing to very high Commercialization
Fees (LDA)
Status of Implementation of
SECP’s Recommendations
SECP’s Recommendations
Status
Provincial
Abrogation/drastic amendments to Rent Control Laws
X
New Law development – Condominium Law
X
Reduction in transaction costs (stamp duties, registration and commercialization fees and other levies)
X
Federal
Tax pass through status (Parallel to mutual funds) on 90
distribution of income
√
Reduction in tax (on rental income to 5%)
Reduction in CVT on all RE transactions
√
X
Tax waiver for sale of properties to REITs (till 2010)
√
ESSENTIAL DELIVERABLES
•Transaction Costs
•Federal
-Elimination of 2% CVT on all RE transactions.
•Provincial
- Downward revision of Stamp Duty and Registration Fee.
- Drastic downward revision of Commercialization charges.
- Change in method of calculation of Commercialization fees/
property taxes to a covered area formula with zero tax for
aesthetics (e.g. parks, fountains) and utilities (car parks,
toilets).
-Elimination of differential in property tax applicable on rented
and owner-occupied property.
•The total tax load on a RE transaction should not exceed 4-5% international best practices.
It may be noted that all these fiscal reforms are ‘revenue-neutral’.
These reforms already in NHP 2001, Punjab Development Report 2005
(World Bank) and the Housing Advisory Group of State Bank (2007).
Clearly the cost of delaying fiscal and
legal reform is very high as the current
tax regime is leading to the conversion
of genuine white money into black
money.
It is also one of the primary reasons for
RE development to remain a “cottage
industry”.
HIGHLIGHTS OF REIT
REGULATIONS, 2008
Unit holders
Holding of units
REIT
Management
Company
Distributions
Acts on behalf
of unit holders
Management Fee
REIT
Trustee
Trustee fees
Management Services
Ownership of
assets
Management
Services
Company
(maintenance of
properties)
Net property
Income (from rental or sale)
REIT Assets
(properties)
REITs REGULATIONS, 2008
•Types of REIT Scheme Projects envisaged in the REIT
Regulations:
•Buy-Build-Sell REITs (Developmental REIT popular form of RE investment in Pakistan).
•Rental REITs (Rental REIT - transparent leases are
very rare in Pakistan).
•Trust Structure with following key players:
•REIT Management Company (RMC)
•Trustee
•Unit Holders
•Listed Closed End Fund.
REITs REGULATIONS, 2008
The minimum fund size of a REIT Scheme
shall be Rupees Five (5) billion.
RMC shall maintain at least 20% of the
units of the REIT Scheme and a maximum
of 50%.
Real Estate along with necessary
approvals to be provided by the RMC.
REITs REGULATIONS, 2008
Initially REITs would be allowed in
Islamabad/Rawalpindi,
Karachi,
Lahore,
Peshawar and Quetta.
No taxation if 90% of the income of the REIT is
distributed.
A REIT Scheme shall undertake only one Real
Estate project.
RMC may undertake more than one scheme.
Portfolio of buildings allowed for Rental
REITs.
CONCERNS AND ISSUES
•The good news is that the licensing window for
REITs is now formally open.
•The bad news is that initially the success rate
of REIT applications is likely to be low.
•RE development in Pakistan is a fragmented
activity – only one public listed company.
•Interest in REITs is very high. However, many
aspirants lack requisite expertise. To develop
this sector, foreign collaboration and joint
ventures will be encouraged.
REITs
AN IDEA WHOSE TIME HAS
COME