A Real Estate Investment Trust (REIT) is a fund that invests income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation.
REITs allow individuals to invest in large-scale properties in a similar way they invest in other industries through purchase of shares. A REIT combines a pool of money from individuals and institutions to buy real estate projects. The ownership of the real estate is divided into units and each financial contributor is called a unit holder. The Unit holders of a REIT scheme earn a share of the income produced through the real estate property without actually having to go out buy property.
REIT Regulatory Framework in Pakistan was introduced by Securities and Exchange Commission of Pakistan (SECP) in January 2008 which was subsequently repealed and replaced by REIT Regulations 2015. These regulations are comprehensive with the principal focus on the protection of interests of general investor in a REIT Scheme.
In Pakistan “REIT Scheme” means a listed closed-end fund registered under Real Estate Investment Trust Regulations 2015. The three types of REIT schemes introduced by SECP in Pakistan
- Developmental REIT – A Developmental REIT Scheme invests in real estate to develop it for Industrial, Commercial or Residential purpose through construction or refurbishment.
- Rental REIT – A Rental REIT Scheme invests in commercial or residential Real Estate to generate rental income.
- Hybrid REIT – REIT Scheme having both a portfolio of buildings for rent and a property for development.
How REIT Works:
Benefit to Investors:
- Investment Diversification: Diversification aims to reduce portfolio volatility for investors. Adding REITs to an investment portfolio reduces risk since REITs have little correlation with other assets, including stocks and bonds.
- Favorable Dividend Pay-out Policy: REITs have to distribute at least 90% of its profits as dividends to the unit holders to avail tax exempt status. High payout reduces the risk of management for investors.
- Debt Free Investment: REITs are wholly equity financed and only unsecured borrowing is permitted under the regulations.
- Transparency: REITs follow the same rules and regulations of disclosure as other public listed companies.
- Liquidity: The REIT are required to be listed at the stock exchange which provides investors the option to exit anytime. Moreover, REIT units are priced by the stock market each day and readily respond to the changes in market sentiments.