S STRATEGIC FINANCIAL ANALYSIS AND DESIGN
ASSIGNMENT#5
SUBMITTED TO Dr. Arsalan hashmi
SUBMITTED BY SONHERA SHEIKH
PROGRAM MBA
COURSE ID 1 105897
STUDENT ID 6606
1. What is a Real Estate Investment Trust (REIT)? Why are REITs not very common
in Pakistan?
A real estate investment trust (REIT) is a company owning and typically
operating real estate which generates income. Most REITs specialize in a
specific real estate sector,focusing their time, energy, and funding on that
particular segment of the entire realestate horizon.
The concept of Real Estate Investment Trust has not taken off in Pakistan so
far. Rightnow there is only one REIT – Arif Habib's Dolmen REIT – listed on the
stock exchange.Up till 2015, REITs were governed by 2008 regulations, which
were replaced by 2015 regulations by SECP and while new regulations were
considered business friendlier than2008 regulations, REITs activity has been
lukewarm even under new regulations; manyREIT projects have been shelved in
the last two years. During the 2008-2015 only nineorganizations had applied to
register as REIT Management Company (RMC) and onlyone was successfully
launched.
2. Briefly
discuss the problems faced by Arif Habib Dolmen REIT Management
Limited (AHDRML) in launching the first REIT in Pakistan.
Activities to establish a REIT regulatory regime in Pakistan started in 2005, when
Prime Minister Shaukat Aziz showed interest in bringing this global investment
vehicle to Pakistan. Based on the market response and feedback, SECP amended the
REIT regulations in June 2010. Under these amendments, some of the stringent
requirements were relaxed for the REIT ManagementCompanies (RMCs). For
example, the fund size and capital requirements were reduced. However, many
problems still remained.
REIT Regulations 2008 were not very practical. The minimum fund size required was
PKR 5 billion, which was quite large. The regulations also required that the real estate
property must be approved by SECP prior to bringing it into the REIT Scheme. This
was problematic since public knowledge of strong interest in the property before the
transaction was likely to impact the negotiation dynamics and property prices.
Another problem is the regulation restricted ownership by any single investor to a
maximum of 10 per cent. Hence, a REIT could not issue more than 10 per cent units
for any property and payment had to be made mostly in cash. This was another
impediment in establishing REITS. For a Developmental REIT, risks were even
greater since the project had to be developed first before any income was generated,
which under the interest rate scenario would be even less attractive for investors.
Hence, this attempt to launch a REIT by Arif Habib-Dolmen did not materialize and
in fact no other REIT could be launched in Pakistan even after the regulatory
amendments.
REITs in Pakistan due to some of these regulatory and technical issues, the regulatory
framework failed to generate sufficient interestof property owners, REIT management
and property management companies to establish REITs in Pakistan.
3. Discuss the challenges that continue to curtail the expansion of REITs in
Pakistan? Also explain how the Government of Pakistan can facilitate the
development of REITs in future.
During the development of the real estate projects, many challenges emerged for Arif
Habib Group and Dolmen Group.
The challenges encountered in launching of the REIT were even more daunting.
Transfer taxes that accrued on the transfer of a property to the REIT scheme were
quite high, reaching around 5 per cent– 6 per cent of the value of the property.
Another challenge was to inform the public and stimulate investor interest in the
REIT units. Traditionally, investor dynamics in the real estate sector and the
capital markets of Pakistan were quite different.
The timing of the launch compounded the problems, considering the fact that the
yields on risk-free government securities were quite high compared to rental
yields. Structuring the offer to yield attractive returns was another challenge.
A few months back in June 2015, highlighting the regulatory and legal challenges
faced during the process and many lingering issues still confronting this nascent
sector. Ejaz realized that the group, as a leading player in the sector, had a crucial
role to play in lobbying for further changes in the regulation to pave the way for
future launches.
As per the regulations, the real estate had to be approved by the SECP which was
quite a tedious process. To establish the ownership of the property, SECP
required a written confirmation from Karachi Development Authority (KDA), the
lessor of the property. It also required a confirmation about whether construction
was completed as per requirements of the Sindh Building Control Authority.
4. Analyse whether the Dolmen City REIT (DCR) offers investors an attractive
investment avenue in the real estate sector of Pakistan.
Yes the Real Estate for DOLMEN CITY REIT scheme was obtained from Securities
& Exchange Commission of Pakistan (here in after referred to as the “SECP” or the
“COMMISSION”) under Regulation 6 of the repealed REIT Regulations 2008 (Now
REIT Regulations 2015). More importantly, Ejaz wanted a nod from the Board for
launch of a different REIT structure in 2016 to capitalize on the immense opportunity
in the real estate sector of Pakistan.
