LAHOR / KARACHI: Due to what is seen as a positive development in the real estate and capital markets sector, the State Bank of Pakistan on Wednesday lowered the risk weight for banks / DFIs from 200% to 100% on their investments in real capital units. Estate Investment Trusts (REITs) for five years to promote the development of housing finance and capital markets.
“To further support the development of the real estate sector, the State Bank amended its capital adequacy rules by significantly lowering the applicable risk weight from 200 percent to 100 percent on bank and FDI investments in REIT units,” SBP said circular…
In addition to revising the capital adequacy regime for banks ‘investments in REITs, the prospectus stated that banks’ investments (in REITs) would now be categorized as “Bank Book” rather than “Trade Book”. However, the central bank added that it “may revise this revised accounting after a five-year period based on bank risks and REIT sector performance.”
Halving Banks’ Risk Weights, DFI to REIT Assistance
According to the SBP, “With the changes in capital adequacy rules, banks and DFIs will now be able to increase their REIT investments without having to commit a relatively large amount of capital.
“This, in turn, will help banks to promote the development of the real estate sector in the country. The increased participation of financial institutions, supported by regulatory initiatives, will also encourage REIT managers to launch new REITs, which will further boost the government’s program to develop the housing and construction sectors, ”the statement said.
“This is a good move as the risk weight for bank investments in the real estate sector has been very high. Banks will now be able to increase their REIT investments without allocating relatively large amounts of capital. The move will facilitate investment in REITs and the potential launch of new REITs, ”said Samir Ahmed, CEO of Knightsbridge Capital Group. Dawn…
“This change in the approach to capital adequacy for banks’ investments in REITs has opened up new financing opportunities for REITs. This means that REITs can now receive funding from banks; they used to have to rely on their own capital. Market participation in the REIT is likely to increase, ”he said.
REITs are companies, like closed-end mutual funds, that own, manage, or finance income-generating real estate. They collect funds from the general public and institutions and use these funds by investing in real estate. REITs provide an investment opportunity that allows everyone to own and benefit from real estate, allowing them to invest in real estate portfolios the same way they invest in stocks.
“REIT shareholders earn a share of the income generated without actually going out or buying, managing or financing the property,” said Mr Ahmed.
REITs invest in a wide variety of real estate types including offices, apartment buildings, warehouses, shopping malls, hospitals, data centers, infrastructure, and hotels. Most REITs focus on a specific type of property, but some contain multiple types of property in their portfolios.
SBP previously amended the provisions of its existing prudential regulations to encourage more active participation of banks in REITs, which allowed them to increase investment in REITs by 15% of their capital, up from the previous limit of 10%.
What’s more, the SBP has also allowed banks to account for their investments in stocks, shares, bonds, TFCs and sukuk issued by REIT management companies in order to meet their mandatory housing and construction finance goals.
“The amendments to the SBP’s capital adequacy rules will encourage banks to contribute to a well-functioning capital market for the real estate sector,” the SBP said in a statement.
Tax problems remain
Welcoming the development, Arif Habib Dolmen Real Estate, which owns the country’s only REIT, said REITs are the most important instrument for the government to document real estate and ensure transparency in the sector.
Speaking from Karachi, Mohammad Ejaz, an analyst at Arif Habib Securities, said the SBP and SECP have contributed to encouraging the creation of a REIT in the country. “Now it is FBR’s turn to provide a conducive environment and facilitate REIT investment by addressing tax issues,” he said. During the clarification, he said that some tax anomalies, such as a 25% tax on dividend income, still exist.
“This should be reduced to 15% as REITs distribute 90% of their profits and are forced to compete with large, little-known and informal investors working in the country’s real estate sector. As the government focuses on encouraging construction and housing to boost the economy, REIT is one of the formal, documented ways to promote the real estate sector, which is largely gray-scaled. Taxation is the main reason why we don’t see a lot of REIT development. “
Published in Dawn, June 3, 2021