Business Magnate highlights significance of REIT schemes

Arif Habib says increase in rate of dividend tax to 25 per cent a big disincentive for investors;New REIT schemes would have resulted in Rs 22 bln investment had tax incentives not been withdrawn

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Arif Habib pictured in 2012 as he takes a turn at bat near his 2,100-acre development in the north of Karachi.picture courtesy Bloomberg

The real estate, which accounts for two-thirds of the world’s total wealth, is one of the most secured and profitable investment avenues yet it has traditionally remained out of reach of small investors who lack resources and liquidity, thus limiting the benefits of investment only to large financial institutions and wealthy individuals.

This equation, however, changed in the 1960s when the then American President Dwight D Eisenhower signed a law to introduce Real Estate Investment Trust (REIT) schemes with an objective to provide all investors, particularly small savers, with an equal opportunity to invest in real estate projects.

Fast forward to 2015, Pakistan became the first country in South Asia to introduce the real estate investment and trading instrument in this part of the world, by courtesy of successful initial public offering (IPO) of the Dolmen City REIT by Arif Habib REIT Management Limited.

Dolmen aerial view
Dolmen City Mall Clifton is the first REIT project to list on the local bourse

REITs are a highly regulated corporate structure that pool funds and undertake real estate development and investment activities. In REITs, investors can invest according to their financial ability and trade their holdings on the stock exchange.

But even before the REITs, which are still a new concept in Pakistan, could set their feet on ground, the government withdrew all the incentives given to this sector at the time of its launch, putting a full stop to what could have become a game-changer for all stakeholders.

“Shortly after the launch of REIT, the Finance Act, 2015 made two changes to the REIT regulations which hindered the launch of new schemes,” Arif Habib, Chairman of Arif Habib Group and Muhammad Ejaz, CEO Arif Habib Dolmen REIT Management Limited, told a group of journalists at a joint press conference at the Arif Habib Centre on Tuesday.

Addressing a pre-budget media briefing on direct and indirect importance of Real Estate Investment Trusts (REITs) for the economy, Habib said the government has increased the rate of dividend tax from 10 per cent to 25 per cent for companies investing in REITs which is a big disincentive for large investors.

Giving further details, the business magnate said there were two types of REITs: developmental and rental. “Both were exempt from capital gains tax [initially], but that was later restricted only to the developmental REITs and that, too, for residential projects,” he added.

The government’s withdrawal of tax incentives to REITs is the main reason why no new scheme was launched this year, Habib said referring to eight new rental REIT projects his company had planned – if materialised that would have resulted in an investment of Rs 22 billion.

Highlighting significance of REIT schemes, Habib said REITs could be ideal instrument for small investors, for they give good return and are hedged against inflation – especially when other instruments are not giving enough return. Moreover, he said, these schemes are transparent thus a useful instrument for the documentation of the real estate sector.

“Because of REITs, the government can have a better idea of the actual [transaction] value of properties across Pakistan as a lot of real estate transactions are done with under invoicing,” he said. The instrument can also help increase market capitalisation of the local bourse, he added – the Dolmen City REIT alone helped increase market capitalisation by $220 million.

Construction and Housing is the mother industry and helps trigger activities in 30 to 40 other sectors, ranging from manufacturing to services, Muhammad Ejaz, the CEO, said.

Real estate is the biggest employer of unskilled labour and needs to be developed, he said during a brief presentation on the country’s real estate situation. Pakistan’s real estate sector in only 2 per cent of the country’s GDP, he said, stressing it should be up to 10 per cent of the economic output.

Expanding the discussion further, Habib said if supported, the real estate sector can expand to $60 billion since banks are not providing mortgage financing and REI0Ts are a good alternate to doing real estate projects – Pakistan’s Mortgage-Debt-to-GDP ratio is one per cent indicating the lack of finance for housing project.

“REITs bring transparency and documentation of real estate,” Habib said, adding “the case for small investor was ideal and the government should watch this sector for a while before taxing it”.

The Arif Habib Group’s chairman further said they have submitted their proposals regarding taxation on REITs, and added the government should review these proposals while making policy. “These changes need to be reversed and incentives to REITs should be restored,” he said.

If the government reverses these changes, the company can do at least four new projects this fiscal year, Ejaz said, concluding the company paid Rs 300 million in taxes at the launch of its first project and would have paid as much in taxes had those eight projects been launched.