The ISE REIT has shown confidence in the proposed fixed tax scheme for developers/builders, which should bring the undocumented builders and developers into formal regime by registering themselves as REIT management companies.
Talking to Business Recorder here on Saturday, ISE REIT director Aftab Ahmad Chaudhry and former MD of Lahore and Islamabad Stock Exchanges, has proposed certain modifications in the Builders and Developers Special Procedures Rules 2019 and taken up the matter with the Federal Board of Revenue (FBR) and Securities and Exchange Commission of Pakistan (SECP).
The ISE REIT welcomes the PTI govt's efforts to boost the real estate and construction sectors through various under-planned initiatives. In this connection, the ISE Towers lauds the concept of introducing taxation reforms for the construction industry through the planned Builders and Developers Special Procedure Rules 2019 by the FBR, he said.
Chaudhry stated that all proposed measures for introducing reforms in ease of doing business, taxation and discounted credit schemes for the real estate sector should specially promote the transformation of undocumented builders and developers into REIT management companies.
He said accordingly the proposed Builders and Developers Special Procedures Rules 2019 should revolve around the REIT management companies and not the vice versa.
He informed that the ISE REIT has already taken up the matter of some changes in these rules both with FBR and the SECP. He also informed about a very positive and encouraging attitude of the SECP officials in improving the REIT Regulations so as to make these regulations more business-oriented. He said that ISE REIT had already proposed a new draft of REIT Regulations, 2019, which is under consideration of the SECP at the moment. He said during the last meeting on the same, SECP chairman Aamir Khan had himself acknowledged the consideration of more practical measures in the REIT framework.
He said after the introduction of new taxation and REIT regulations during the ongoing quarter, the government now also needs to introduce a discounted and easier credit scheme at the rate of about 6 percent, like SBP's other concessionary credit schemes in vogue.
If the current PTI government succeeds in offering all of the above three reforms then Pakistan can witness an era of unprecedented growth in the country, Chaudhry added.
Aftab Ahmad Ch said informal nature of the property market and un-conducive regulatory environment were main restrictions in its growth. He said one-third of country's households were without adequate housing and nearly half of Pakistan's urban dwellers are living in irregular settlements. Till 2019, the country's housing-deficiency was about 12 million houses. The supply was almost half against demand of about 700,000 houses a year. Besides the housing gap, the country's rental market was also under-developed leading to consumers' exploitation on account of increased cost of living.
Aftab Ahmad Ch stated that although the recent budgetary proposals relating to real estate purchases and disposals seem to bring the sector under greater financial scrutiny and tax incidence; however, the sector has been grossly under-documented. This sector represents a haven for tax avoidance and wealth concealment. According to one estimate, Rs 7 trillion remain parked in the sector.
Due to the norm of declaring property transaction values at a fraction of the actual values (owing to the higher transfer levies of about 6-8 percent), even clean money becomes black in the process of buying or selling of real estate. There is prevalence of non-recording of property transactions and property rights are often exchanged through bills of sale, powers of attorney and other informal documents. Establishment of Real Estate Investment Trusts (REITs) has already been permissible since 2008 when the SECP introduced the initial concept of REITs in the country. No REIT scheme was launched during 2008-2015 primarily due to stringent regulatory and taxation requirements. In 2015, the SECP introduced some marginal improvements in the regulatory framework leading to the launch of the only rental REIT scheme in Pakistan during 2015. Since then, no other REIT scheme has been set up as the sector still considers that the supportive regulatory, taxation and policy framework are missing.
Aftab Ahmad Ch was of the view that supporting REIT would help in documenting the conventional real estate sector. It would boost the construction sector activities in Pakistan that would result in the collection of increased revenue streams for the government. REITs would lead to an increase in the saving and investment ratios in the country. With more REIT scheme offerings, more employment and economic activity shall be generated in the country.
Therefore, REIT needs to be encouraged through incentives and support in the areas including regulatory reforms, balanced taxation framework and financing incentives. REIT Trustees may be allowed to 'create a charge and register the same with SECP' over the REIT properties instead of requiring the mandatory transfer of the property titles. This will enable REIT schemes to save excessive transfer costs. As an alternative to the requirement of a completion certificate from the relevant civic body, REIT regulations may also consider the sufficiency of a valid completion report issued by a PEC accredited engineering consultant appointed by a REIT project under Pakistan Engineering Council Act-1975.
The permissible businesses for REIT Schemes may be expanded to allow for hospitality/hotel/lodging, hospital/healthcare, warehouses and mortgages/loans businesses etc. Listing without public offer for such REIT schemes may be allowed which have attained a minimum of 100 unit holders, he said.