Pakistan’s property sector is undergoing a profound transformation, thanks to innovative measures that enhance transparency, boost tax revenue, and instill confidence among investors. These initiatives enable easier finance access, support urban planning, and foster formal economy adoption, driving economic growth, job creation and sustainable development. The Securities and Exchange Commission of Pakistan (SECP) has spearheaded remarkable changes, aligning REITs regulations with global standards and introducing cost-efficient Special Purpose Vehicle (SPV) structures, which have attracted investors and improved transparency, liquidity and stability in the real estate market. This article explores the key developments that are reshaping the REITs industry and driving growth in Pakistan’s property sector.
Special Purpose Vehicle (SPV) Structure
To address practical challenges in property transfers and streamline operations, the concept of Special Purpose Vehicles (SPVs) has been globally embraced. In Pakistan, REITs are required to hold a 75% shareholding in the SPV, with at least 80% of the SPV’s assets and business dedicated to the real estate sector. The SPV structure promotes property transfer efficiency, accurate value determination after development, and effective risk diversification. This framework has been incorporated into new corporate and tax legislation, solidifying the foundation for REIT operations. Notably, the transfer of SPV shares to the REIT is exempt from tax, relieving tax burdens for SPV shareholders. Dividends received by the REIT from the SPV are also tax-exempt, further enhancing the attractiveness of investing in REITs. However, non-REIT shareholders of the SPV will be taxed at a rate of 35% on their received dividends.
Revitalizing the Real Estate Investment Landscape
Amendments to income tax laws have played a pivotal role in revolutionizing REIT schemes in Pakistan. Sellers of properties to REIT schemes now enjoy a temporary tax exemption on gains until June 30, 2023, providing a significant benefit to property owners and incentivizing their participation in REITs. Furthermore, the acquisition of properties by SPVs under REIT schemes also qualifies for this tax exemption, further enhancing the appeal of investing in REITs.
Tax Concessions Driving Growth
The amended income tax laws offer significant concessions for both REITs and SPVs. The income of REITs and SPVs remains tax-free if 90% of the profits are distributed. This provision has resulted in the rental income of Rental REITs being effectively taxed at a lower rate of 15% compared to 29% for companies and 25% for individuals. However, dividends received from REITs are subject to the normal applicable tax rate, ensuring a fair taxation framework.
Management and Strategic Investors
Under the current law, all REITs must be managed by companies incorporated under the Companies Act, 2017, known as REIT Management Companies (RMCs). In Non-PPP REITs, the RMC is required to hold 25% of the units of the REIT fund. Strategic Investors, as defined by the rules, have the opportunity to hold a minimum of 5% ownership in the REIT units, fostering a diversified investment landscape.
Conclusion
The SECP’s remarkable revamp of REITs regulations and the amended income tax laws have unleashed the transformative potential of Pakistan’s property sector. These groundbreaking changes focused on transparency, tax concessions, and efficient REIT structures, have paved the way for a new era of growth and investment opportunities in the country’s real estate market. As the industry continues to evolve, the positive impact of these measures will continue to drive economic progress, boost investor confidence, and propel Pakistan toward sustainable development.
The author is the Chief Executive of Securities Exchange Management Suite and a former General Manager, Pakistan Stock Exchange