Based on the experience and fund managers reluctance to launch REITs under the

Based on the experience and fund managers reluctance

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Based on the experience and fund managers’ reluctance to launch REITs under the 2010 regulatory framework, SECP repealed the earlier regulations and replaced them with the REIT Regulations 2015. 3 REIT Regulations 2015 brought down the minimum fund size requirement in line with the listing requirement on the stock exchanges. Other regulatory changes provisioned an REIT scheme to be registered before the transfer of property, enabling the REIT to carry out the purchase transaction by issuing units to the seller of the real estate. The RMCs unit-holding requirement was also reduced from 20 per cent to 5 per cent. According to REIT Regulations 2015, an ‘REIT Scheme’ had to be a listed closed-end fund. Mortgage REITs were not allowed. Only equity REITs classified into the following three categories were permitted to fund sponsors: Developmental REIT, Rental REIT and Hybrid REIT. Ejaz lauded the new regulations as a significant advancement over the previous, and a step in the right direction. However, he noted that there were several areas in the regulatory framework that still required improvement. Ejaz reflected: For example, there is still a lacuna—minimum 25 per cent of the units must be issued through an IPO. If some- one transfers a real estate to the REIT, only 75 per cent of units could be issued to it, remaining consideration (in cash) could be paid after the IPO and it takes about 2–3 months for the process to complete. Another area that required to be revisited by the regulator was the SECP approval requirement before a property could be brought into the REIT. SECP as a regulator should provide the necessary guidelines related to property
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Seyyed et al. 133 acquisition, but leave the business decisions to the fund managers—removing the requirement of SECP approval before it could be incorporated in the REIT. In addition, not allowing the use of leverage under the new regula- tions significantly limited the financing opportunities for REITs. AHDRML filed the application for the registration of DCR, comprising Dolmen Mall and Harbour Front properties, two premier properties in Karachi’s Clifton area. However, many challenges had to be overcome in launching the first listed REIT in Pakistan. Other Challenges During the development of the real estate projects, many challenges emerged for Arif Habib Group and Dolmen Group. The model for the two properties was built-to-rent. Recalling those circumstances, Ejaz said, ‘In our experience, if you develop and sell a plot, after five years the adjacent undeveloped plot’s value would be the same as the developed property, thus reducing incentive for developers’, referring to the steep upward trend in real estate prices in Pakistan. Traditionally, the general preference of small local businesses in Pakistan was to own shops rather than rent them. Even if a business was not very successful, the rise in the real estate price would generate positive returns. Hence, starting a shopping
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