Real Estate Investment Trusts in Pakistan

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July 26, 2007 the Securities and Exchange Commission of Pakistan (REITS & New Initiatives Wing Specialized Companies Division) announced they were introducing the concept of Real Estate Investment Trusts in Pakistan. On January 31, 2008 they issued rules for establishing REITs under issued Real Estate Investment Trust Regulations, 2008 (S.R.O. 94(I)/ 2008, making them a specialized investment vehicle. This was announced February 6, 2008.

Apparently they did not require a separate law to do this, as is usual for countries just starting with REITs. Instead, they cite the authority granted to them by sub-section (2) of section 282B of the Companies Ordinance, 1984 (XLVII of 1984).

Legal Rules for Real Estate Investment Trusts in Pakistan

In Pakistan, REITs are required to adhere to the trust structure. The properties belong to the unit holders, vested in the name of the name of the trustee, with the REIT management company (RMC) managing them in trust for the unit holders. The RMC must have at least a 20% stake in the company, and a maximum of 50%, and does receive management fees. REITs do not pay taxes so long as they distribute 90% of profits to shareholders. They do plan to allow full foreign ownership and repatriation of profits. They must own at least 5 billion rupees worth of properties. They are currently allowed to operate only in allowed in Islamabad/Rawalpindi, Karachi, Lahore, Peshawar and Quetta.

To encourage the formation of REITs, the government gave real estate owners who sell properties to a REIT a tax holiday through 2010.

In addition to the REIT Management Companies (RMC) there are specific project known as REIT "Schemes." (Evidently, in Pakistan English the word "scheme" does not have the same negative connotation it does in the United States.)

There are two types of REIT Schemes. They are Developmental and Rental.

After completing a development project (which may be industrial, residential or commercial), through construction or refurbishment, it is sold. Those companies distribute the profits to the unit holders.

Rental REIT Schemes own and manage rental properties (commercial real estate or residential) on behalf of unitholders, who receive a stream of dividends from the dividends from rental profits.

I'm not sure why they thought requiring developmental projects to be limited was a good idea. Income investors will be interested only in Rental REIT Schemes.

Pakistan studied the beginning of Real Estate Investment Trusts in Malaysia. In 2009 the SECP reduced the stamp duty and registration fee for REIT properties in Punjab and Sindh provinces. In Punjab it was reduced from 2% to 0.5%. In Sindh it was reduced from 3% to 0.5%.

REITs in Pakistan are Beginning

The SECP received four initial requests to form Real Estate Investment Trust management companies in Pakistan, and took a year to scrutinize them. Two of those were rejected for failure to meet regulatory requirements. They must have at least 50 million rupees at the time of application. Within thirty working days of the registration of the REIT Scheme, they must increase their capital to at least five hundred million rupees.

However, two companies were approved: Arif Habib REIT Management Company Limited and AKD REIT Management Company Limited. Arif Habib and Akeel Karim Dhedi (AKD) are two of the country's leading stockbrokers.

Arif Habib is part of a larger holding company which is still forming and promoting more Real Estate Investment Trusts in Pakistan. Mr Habib said in a December 2010 interview he expected his REITs to invest mainly in social and low-cost housing, because there is a shortage of good living spaces in the country. He also he expected medium term returns (from 3 to 7 years) to average 30%.

He expected to get the first REIT actually launched early in 2011, though as of this writing it hasn't happened. It will be based in the port city of Karachi.

It's encouraging that the process of forming REITs in Pakistan is moving forward. A study done in 2005 found the picture for real estate investment in Pakistan rather discouraging. It produced low returns (from 3 to 5% - negative in real terms). Law favored tenants, making it hard to foreclose on them when necessary. Recording of property ownership was not kept up, so many times two different parties claimed ownership to the same tract of land.

Yet Pakistan has a large population, most of them very poor, and large shortages of affordable housing. The home construction industry could not keep up with the need. Therefore, the government is hoping that having publicly listed in the real estate markets will help make them more efficient, providing more housing to the population, partly by attracting foreign -- especially Gulf region -- investment. Net foreign investment in Pakistan has fallen dramatically in They also hope that those Pakistani citizens who can afford to invest will do so, providing them with additional revenue from dividends. They also wish for greater transparency, because according to news accounts, their real estate sector has a lot of corruption, including major scandals.

Hopefully, there will be Real Estate Investment Trusts in Pakistan soon, and everyone from the organizers, the investors and the tenants will benefit.

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