The minimum fund size required was PKR 5 billion which was quite large The

The minimum fund size required was pkr 5 billion

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The minimum fund size required was PKR 5 billion, which was quite large. The regulations also required that the real estate property must be approved by SECP prior to bringing it into the REIT Scheme. This was problematic since public knowledge of strong interest in the property before the transaction was likely to impact the negotiation dynamics and property prices. This requirement was
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132 Asian Journal of Management Cases 15(2) seen by major investment bankers as over-regulation and detrimental to the development of REITs in Pakistan. Due to some of these regulatory and technical issues, the regulatory framework failed to generate sufficient interest of property owners, REIT management and property management companies to establish REITs in Pakistan. Based on the market response and feedback, SECP amended the REIT regulations in June 2010. Under these amendments, some of the stringent requirements were relaxed for the REIT Management Companies (RMCs). For example, the fund size and capital requirements were reduced. However, many problems still remained. There was a restriction on REITs borrowing, which could hinder their growth. In addition, Ejaz commented: Under the REIT regulations 2010, 20 per cent of the real estate fund had to be owned by the RMC, effectively making a fund manager a significant investor as well. If a real estate was to be brought into a REIT scheme, payments for it could generally be made either through cash or issuance of REIT units. However, the regulation restricted ownership by any single investor to a maximum of 10 per cent. Hence, a REIT could not issue more than 10 per cent units for any property and payment had to be made mostly in cash. This was another impediment in establishing REITs. It became obvious that an outside property could be brought into a REIT scheme primarily through direct ownership of property. AHDRML submitted an application under the 2010 amended regulations in an attempt to provide lead in this important catalyst of real estate development in Pakistan. However, a major challenge for the RMC was to offer an attractive yield to excite investors’ interest in the REIT. Recalling his professional experiences, Ejaz observed: Throughout the world rental REITs yield 150–200 basis points above the five-year government bonds. In the case of Pakistan, the yield on five-year Pakistan Investment Bonds (PIBs) in 2010 2 was between 12 per cent– 14 per cent. This was a tough benchmark for any rental REIT to meet. For a Developmental REIT, risks were even greater since the project had to be developed first before any income was generated, which under the interest rate scenario would be even less attractive for investors. Hence, this attempt to launch a REIT by Arif Habib- Dolmen did not materialize and in fact no other REIT could be launched in Pakistan even after the regulatory amendments.
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