SOHAIL SARFRAZ

Islamabad: Chairman and Board of Directors of ISE Towers REIT Management Company Limited (ISE REIT) strongly proposed establishment of a separate regulatory authority to monitor real estate sector, simplification of SECP laws, policy reforms and balanced tax approach to attract new investment in REITs.

Addressing the press conference here on Tuesday, Chairman and Board of Directors of ISE REIT highlighted the issues faced by the real estate investment trust (REITS) sector and proposed supportive framework for its development.

Zahid Latif Khan, Chairman ISE REIT briefed to the media that ISE Towers REIT Management Company Limited formerly known as Islamabad Stock Exchange Limited was established as Non-banking Finance Company (NBFC) in January 2016 upon merger of three stock exchanges of the country. ISE REIT plans to launch REIT scheme in Islamabad in the near future. A https://www.sec.gov/investor/alerts/reits.pdfREIT owns and typically operates income-producing real estate or real estate-related assets.  REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership without actually having to go out and buy commercial real estate. The income-producing real estate assets owned by a REIT may include office buildings, shopping malls and apartments etc. The Chairman was confident that the ISE REIT will be beneficial for all stakeholders.

Sohail Altaf, Director ISE, said that the real estate market was the most heavily invested sector in Pakistan, offering a huge potential for the nations’ economic development having worth of around $700 billion. The combined direct contribution of construction and housing sectors to the country’s GDP has been higher than 9% over the past decade. Around forty (40) industries are associated with the construction sector which has a spillover effect in a large number of vertically integrated sectors such as cement, steel, wood, cables, ceramics, etc. The Chairman added that due to restricted legal frame work, REIT sector could not flourish to a laudable extent.

Aftab Ahmad Ch. Director ISE REIT gave a detailed presentation on the issues faced by the REIT sector and proposals for the growth of the same. He stated that real estate sector was beset mainly by speculative investors having exorbitant growth of 126% between 2012-2018 showing the extent of speculation in real estate market. The other factors hindering the growth were absence of clean titles, restrictive building codes, problematic construction regulations and involvement of multiple entities adding costs and delays to the construction and property development projects. According to 2018 World Bank’s Doing Business report, it takes nearly 7 months to register a property in Pakistan although builders argue that such period goes up to 16 months for high-rise projects adding project costs upto 30%.

Aftab Ahmad Ch. said that informal nature of the property market and unconducive regulatory environment were main restrictions in its growth. He said that one third of country’s households were without adequate housing and nearly half of Pakistan’s urban dwellers were living in irregular settlements. Till 2019, the country’s housing-deficiency was about 12mn houses. The supply was almost half against annual demand of about 700,000 houses a year. Besides the housing gap, the country’s rental market was also under-developed leading to consumers’ exploitation on account of increased cost of living. During CY-11-17 alone, housing rent inflation benchmark recorded an average annual increase of 7%.

Aftab Ahmad Ch stated that although the recent budgetary proposals relating to real estate purchases and disposals seem to bring the sector under greater financial scrutiny and tax incidence, however, the sector has been grossly-under-documented. This sector represents a haven for tax avoidance and wealth concealment. According to one estimate, Rs7trillion remain parked in the sector.

Due to the norm of declaring property transaction values at a fraction of the actual values (owing to the higher transfer levies of about 6-8%), even clean money becomes black in the process of buying or selling of real estate. There is prevalence of non-recording of property transactions and property rights are often exchanged through bills of sale, powers of attorney and other informal documents. Establishment of Real Estate Investment Trusts (REITs) is already permissible since 2008 when the SECP introduced the initial concept of REITs in the country. No REIT Scheme was launched during 2008-2015 primarily due to stringent regulatory and taxation requirements. In 2015, the SECP introduced some marginal improvements in the regulatory framework leading to the launch of the only rental REIT scheme in Pakistan during 2015. Since then, no other REIT scheme has been set up as the sector still considers that the supportive regulatory, taxation and policy framework are missing.

Aftab Ahmad Ch was of the view that supporting REITs would help in documenting the conventional real estate sector. It would boost the construction sector activities in Pakistan that would result in the collection of increased revenue streams for the Government. REITs would lead to an increase the saving and investment ratios in the country. With more REIT scheme offerings, more employment and economic activity shall be generated in the country. Therefore REITs need to be encouraged through incentives and support in the areas including regulatory reforms, balanced taxation framework and financing incentives. REIT Trustees may be allowed to ‘create a charge and register the same with SECP’ over the REIT properties instead of requiring the mandatory transfer of the property titles. This will enable REIT schemes to save excessive transfer costs. As an alternative to the requirement of a completion certificate from the relevant civic body, REIT regulations may also consider the sufficiency of a valid completion report issued by a PEC accredited engineering consultant appointed by a REIT project under Pakistan Engineering Council Act-1975. The permissible businesses for REIT Schemes may be expanded to allow for hospitality/hotel/lodging, hospital/healthcare, warehouses and mortgages/loans businesses etc. Listing without public offer for such REIT Schemes may be allowed which have attained a minimum of 100 unitholders.

Aftab Ahmad Ch proposed that “Income from Property” of a Company whose primary source of revenue is “Income from Property / Rental income” should be treated as “Income from business”. Accordingly, all expenses incurred wholly and exclusively for the purpose should be allowed against rental income under Section 15A of ITO 2001, and provision for set off of losses against rental income should also be also allowed. The above proposal has not been considered in the Finance Bill 2019. We therefore suggest that proposal may be taken into account in the larger interest of the economy. Finance Bill, 2019 proposes to withdraw initial allowance on building which is currently available at the rate of 15% of the cost of building. The objective of initial depreciation allowance was to give some relief to the developer by allowing the 15% cost of the building as an expense in first year. Therefore it is suggested that initial depreciation allowance should remain available to encourage real estate sector.

Masoom Akhter Director ISE explained that the Finance Bill, 2019 proposes to extend the exemption on profit and gains on sale of immovable property to a Rental REIT Scheme upto June 30, 2021, whereas profit and gains on sale of immovable property to Developmental REIT is already exempted till June 2020. We appreciate that the Government has given this relief to REIT Sector through this exemption, however we suggest that for a sustainable growth of REIT Sector, exemption on profit and gain on sale of immovable property to REIT Scheme should be available to all types of REITs at least for ten years i.e. till June 30, 2030.

Through Finance Bill, 2019, rate of tax on dividend is proposed to be increased to 25% in the case of a person receiving dividend from a company where no tax is payable by such company due to exemption of income or carry forward of business losses or claim of tax credits. Since income of a REIT Scheme is exempt subject to distribution of 90% profit, therefore, dividend from REIT Scheme will attract 25% tax rate whereas previously this rate was 15%. We therefore suggest that either treatment of dividend income is to be ensured i.e. 15%, or ideally, the investments in REITs should be incentivized by offering a flat 10% tax rate on dividend income.

Syed Mukhtar Hussain Jaffery, Director ISE said that SECP under the Companies Act-2017 was mandated to regulate the instances of acceptance of advances by real estate companies engaged in real estate projects. The Commission should be tasked to draft the proposed Real Estate Regulatory Oversight Authority Act. After enactment, the administration of the Act may be assigned to SECP as it is already overseeing the real estate companies under the Companies Act.

The presentation ended at an interactive question-answer session. The session was attended by a large number of real estate experts, ISE REIT shareholders, brokers and media persons.