Pakistan launches South Asia’s first real estate investment trusts

At a time when Indian realtors and investors are struggling to start real estate investment trusts (REIT) in the wake of regulatory complications and tax uncertainties, Pakistan has gone a step ahead to launch South Asia's first REIT at a premium of 10% to the offer price, reported ET.

Pakistan-based Dolmen City came started its REIT offering earlier this month that got subscribed 1.7 times. It owns a commercial property which has a mix of mall and office space. The firm expects a net income of $21.9 million in first year while dividends are expected at $20.7 million. This was also the first REIT listing in Pakistan.

A REIT is a financial instrument where the underlying asset is real estate. The rental income from the property assets are distributed by the trust as dividends to the investors or unit holders of the trust.

Interestingly, yields for the Dolmen City REIT's investors in the first year are a percentage point lower than the current yields on Pakistan's government securities (GSec) that are now trading at 9.75%.

REITs notes trade at positive spread across the world. This was based on estimation of rental income from the asset, 90% of which have to be distributed back to investors. But even then, there were few global investors who bit the story -- only 0.6% of HNIs/Institution allocation.

Pakistan has streamlined the process significantly to make it attractive for investors. For example, their REITs attract a withholding tax of 10% (in-line with Mutual fund taxation) with no further tax liability for individual investors.

Moreover, the regulators there have agreed to concessional tax regime for transfer of an asset into a REIT with significant reduction in stamp duty across the region.

In comparison to India -- despite the recent relaxations on taxability like MAT exemption, tax pass through to REIT - and simplification of structuring, the REIT controlled special purpose vehicles (SPV) are still subject to corporate and dividend distribution tax (DDT) which limits the pass through nature of REITs.

This makes it imperative on the SPV to restructure to reduce the tax blow. According to analysts, while debt infusion at SPVs could improve the yields of the instrument, a simplified structure allowing tax pass through would improve transparency and improve visibility of returns to investors.
(Image: Indiatimes)