Real Estate Investment Trust (REITs)

Presentation Layout 2 Introduction of Real Estate Investment Trusts (REITs) REIT Regulations Issuers’ Viewpoint Investors’ Viewpoint

Introduction of REITs 3 A Real Estate Investment Trust (REIT) is a trust that uses pooled capital of large number of investors to purchase, develop and manage real estate assets In essence, it works like a closed-end mutual fund and like any other collective investment scheme it is a pass-through vehicle for tax purposes Units of a REIT fund are listed / traded on a stock exchange REITs allow participants to invest in professionally-managed real estate properties, enabling them to take exposures in real estate while maintaining the liquidity and benefits of the capital markets

REIT Regulations 4 REITs Regulatory Framework was introduced by SECP in January 2008 and subsequent amendments have been incorporated in June 2010 These regulations are comprehensive with the principal focus on the protection of interests of general investor in a REIT Scheme The SECP has introduced REITs as Listed, Closed-end Unit Trusts of three types: a) Developmental, b) Rental, and c) Hybrid Minimum fund size of Rs. 2 billion for Development and Rental REIT Schemes and Rs. 3 billion for Hybrid REIT Scheme

REIT Regulations 5 Real Estates under the management of a REIT Scheme may only be located in federal and provincial capitals Only unencumbered properties with full ownership allowed for consideration of REIT REIT Schemes are prohibited from borrowing / leveraging Valuation of the real estate to be carried out initially at the time of Registration and subsequently once every quarter by a professional Valuer

Issuers’ Viewpoint 6 REITs allow equity type fund raising for modern and large real estate projects from institutional and retail investors, both local and foreign REITs bring transparency to operational and development cost management REITs allow to unlock the value of properties, which is one of the major asset on books of many companies. These assets are recorded at historical cost, which are usually well below their market values REITs are tax efficient: The ‘Income from Property’ is now taxable as part of total income at normal rates as amended under Finance Act However Income of a REIT is tax exempt provided 90% of it is distributed to the Unit holders

Investors’ Viewpoint 7 REITs help diversify an investment portfolio. Real estate values don’t generally correlate to stock prices REITs allow general public or small investors to invest in the real estate sector, which conventionally requires a sizeable capital investment. REITs allow investors to gradually increase their investment from the secondary market based on their ability to allocate funds REIT is a new avenue of low risk (unlevered) attractive returns for investors. REITs must pay out at least 90 per cent of their income as dividends which translates to an attractive dividend yield for the investors In addition to dividend growth based appreciation (as tenancy agreements have an escalation clause), the hallmark of REITs is capital appreciation REITs are close to being Shariah Compliant structures Project Risk needs to be recognized in Developmental REITs

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