Real Estate Investment Trust: Arif Habib Group holding back new schemes

Chairman says conglomerate shying away due to inconsistent tax policy

KARACHI: Owing to an inconsistent tax policy regarding the Real Estate Investment Trust (REIT), the Arif Habib Group is holding back the launch of as many as eight new schemes worth Rs22 billion.

Addressing a press briefing on Tuesday, group chairman Arif Habib said his conglomerate was shying away from launching new REIT schemes because of tax rates changes enacted in the last federal budget.



Through its collective investment structure, a REIT scheme pools investors’ funds for onward investment in the real estate sector.

REITs help small investors take exposure to real estate, which is otherwise illiquid and capital intensive. Its units are traded like ordinary securities on the stock exchange while investors receive dividends on a regular basis.

“Shortly after the launch (of the country’s first REIT), Finance Act 2015 made two changes, which hinder the launch of new REIT schemes. These changes need to be reversed and incentives to REITs should be restored,” Habib said while referring to Dolmen City REIT that was listed on the Pakistan Stock Exchange (PSX) in June last year.

One of the four REIT management companies registered in Pakistan, Arif Habib Dolmen REIT Management is the first, and so far the only company to have launched a REIT scheme in South Asia.

“Inconsistent tax policy is the primary reason for the Arif Habib Group to stay away from launching new REIT schemes,” Habib said.

CGT exemption

The federal budget for 2015-16 limited the capital gains tax (CGT) exemption to ‘developmental REITs for residential purpose’ only - a measure that, according to Habib, is enough to make the whole transaction ‘uneconomical’.



A developmental REIT deals with real estate acquisition for purchase/construction as opposed to a rental REIT that generates returns from rents. Each of the planned REIT schemes of the Arif Habib Group is of the rental kind.

The structure of a REIT is such that it requires an additional transaction of ‘transfer of property’ to a trustee in order to protect the interest of ordinary investors. This transaction converts the ownership of the original seller into REIT units that are securities tradable on the stock exchange. This results in “paper gains” for the seller mainly because the transaction is carried out at the market value.

As per the law, at least 90% REIT profit is distributed each year as taxable dividend. In contrast, non-REIT entity faces no compulsion of transferring property to a trustee or handing out dividends annually. “Imposition of CGT on this paper gain renders the transaction uneconomical ab-initio. Exemption from income tax granted to this gain, which was available until June 2015, is the most critical starting point to promote REITs in the country,” Habib said.

Moreover, limiting the tax exemption to “developmental REITs for residential purposes” creates confusion: an overwhelming majority of developments fall in the category of mixed-use developments, which means residential projects with a commercial/retail component.

“The current limited exemption cripples REITs’ potential, as many opportunities entail commercial developments such as malls, offices and warehouses, which are ideal avenues for REIT involvement,” he added.

Tax on dividends

Speaking on the occasion, Arif Habib Dolmen REIT Management CEO Muhammad Ejaz said the tax on dividends for corporates on REIT investments was increased to 25% in the last budget, which has halted the development of REIT schemes.

He said it should be brought down to 10%, which is the tax rate charged on dividends received from a stock fund. “Even at the proposed lower rate of dividend taxation at 10%, the government’s revenue will be 18% higher if companies invest through REITs,” he said while presenting a hypothetical illustration of the proposed revision in the tax rate on dividends.

Published in The Express Tribune, May 18^th, 2016.

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