REIT: A SOLUTION TO CAPITAL AND HOUSES SHORTFALLS
Tariq Ahmed Saeedi (firstname.lastname@example.org)
Apr 13 - 19, 2009
Recently, Security and Exchange Commission of Pakistan (SECP) has issued licences of real estate assets management to two assets management companies-Arif Habib and AKD securities. Under the licence, the companies will design real estate investment trusts (REIT) to mobilize funds from stock markets to invest in real estates projects. Just like mutual fund, REIT is a security that is traded in the capital market. Introduced three years back, REIT has not taken off in Pakistan because of several problems that include lacklustre performance of all three stock markets.
According to funds experts, insufficient infrastructure and public unawareness are main obstacles that have delayed REIT takeoff. However, funds are focussing on small investors to attract large population and asset managers will have new units offer for sale by end-year or next year. Head of Corporate Finance, AKD Securities, Imtiaz Haider said his company would launch REIT within six months. "Positively in less than six months, we will launch REIT," he told this scribe. However, it depends on registration of fund, he added.
Real estate modarabas have been vehicle for investment in real estate in Pakistan, but there are some shortcomings and limitations. KASB in its report on REIT ascribed high registration charges, large undocumented portion of real estate market, inadequate foreclosure laws, and poor land records management to structural problems in operational real estate investment. About benefits of REIT, Imtiaz said backing of securities with tangible assets, e.g. property would help minimize chances of speculative trading. Above all, small investors will have opportunity to participate in high-valued and large capital required real estate ventures such as tract of commercial land and construction projects.
They can earn dividends on shares in properties with having portfolios managed by fund mangers. Participation of small investors indirectly in real estate will help regularizing the market. Real estate market is not regulated enough to remove volatility of prices in its value. When pooled investment will maintain liquidity positions in real estate assets, it would bring shift in control of prices from unregulated market forces to genuine determinants. The unit trust will operate under the guidelines and regulations devised for non-banking finance institution by the SECP.
Complete functioning of the fund would actually settle on amendments in regulations. Since seemingly there are plenty of spaces where regulations are needed in real estate market, the specialized mutual fund would not escape regulation faultfinding session before becoming a popular security at par with other existing open and close end funds. Need of regulations in real estate market is essential for two important reasons. Firstly, lack of proper land management records increases chances of exploitation by unscrupulous elements of people. Proper management minimizes probability of illegal sale of lands by land mafia and encroachers.
This would also require surveillance and monitoring mechanism that could be supported by technology utilization. Low rate of computer literacy and underutilized information technology in land and revenue department makes monitoring duties dull and sluggish. Though it is difficult for the government to keep an eye constantly on lands, yet it is important to regularize real estate market. Secondly, while shortfall in housing units indicates an opportunity for construction and allied industry, it augments responsibility of the government towards provision of low cost houses to people in addition to prevent their fleecing in the hand of profiteering private constructors whose code of conducts should be deigned by the government.
Moreover, government should ensure availability of basic amenities around construction site before issuing no objection certificate. It is commonly observed that constructed apartments are not given in possession because of unavailability of utilities. This results in sufferance of real owners. Apart from this, it is still incomprehensible that what is it that sets value of, for instance, plot or residential and commercial apartments. Normally, provincial land department has value estimation of commercial and residential plots, but if one compares the value estimated by the government and that by the market, he would be surprised to note a gigantic difference between the two.
Similarly, for housing projects, it is not cost-plus method that determines price of a housing unit but these are mysterious market trends that pull up or down prices. There are anomalies in real estate market in the country, said Imtiaz. He said REIT would bring change in the market. He said REIT would help guide price trend in the real estate market.
Talking about requirement of total size of investments, he said aggregate investments in real estate close and open-end funds should not be less than Rs. 5 billion according to preliminary rule. In many countries, these securities have brought about restructuring of real estate markets and increased participation of small investors who normally could not afford to get effects of investment in high scale real estate schemes. Moreover, it helped eliminate logjam in housing sectors in those countries. Generation of funds from stock market specifically for the purpose of buying plots and purchasing properties to earning rent revenue or for the reason of investing in construction projects would in any case give a boost to real estate market in Pakistan. At this time of liquidity crunch and when investors are unenthusiastic to risk their money in new construction, public can enthuse to save their money in real estate projects through safe and professionally managed mutual funds. Small investments in pool could set in huge capital for exacting construction development. REIT can become a hope to right problems pertaining to shortfall of housing units in the country and structural weakness of the real estate market. Progress of construction industry also reenergizes wheel of tedious industrial production.