Real Estate Investment Trust (REIT) is a trust fund based on the structure of a mutual fund that focuses on investment in real estate and derives income from such investments through dividends for its unit holders. Historically, REITs were registered for the first time in the USA in 1960 through the “Cigar Excise Tax Extension Act”, which contained the Federal tax legislation authorizing the formation of REITs in the United States. The idea of passing this legislation was to combine the best qualities of real estate and stock-based investment, allowing small investors to invest in income-producing real estate. This structure of REIT has served as a sample for more than 40 countries across the world (REIT, 2021).
This article by the Iqbal Institute of Policy Studies will discuss the types of REITs and the benefits of investing in REIT Schemes in Pakistan.
Types of REITs
The REIT Regulations 2015 have classified REITs based on Public-Private Partnership (PPP REIT) and Non- Public-Private Partnership (Non-PPP REIT). The PPP REIT refers to investment in a governmental project or infrastructure facility, while a non-PPP REIT means investment in development, construction, rehabilitation, refurbishment, maintenance and/or operation of any real estate situated on a single or multiple sites involving exclusive ownership, lease, utilities, and easement rights in accordance with the law.
The Non-PPP REIT schemes are further classified into three types:
Developmental REIT Scheme refers to a REIT scheme established to develop real estate for industrial, commercial or residential purposes. The proceeds of sale or rent are then distributed to the unit holders.
Rental REIT Scheme refers to investing in industrial, commercial or residential Real Estate to generate rental income. For such purposes, a constructed property is first bought by the REIT Management Company (RMC) and then rented out to generate revenues distributed amongst the unit holders.
A hybrid REIT Scheme refers to a REIT scheme that has combined the investment approaches for both developmental and rental REITs, giving the option of investing in properties and mortgages.
Benefits of Investing in REITs
There are multiple benefits for investing in REIT schemes since they are a total return on investments, providing high dividends and long-term capital appreciation. A REIT scheme investment is different from investing in a traditional real estate project because REITs must be listed on the stock exchange. This allows the investors to invest directly with the thriving economy and maximize the value of their investments. Perhaps the most important aspect of REITs is the highly liquid nature of investments, which allows the investors to invest their surplus capital in many properties without the risks of depreciation of assets and capital trap. Most importantly, the majority of the REIT Schemes are required to pay 90% of the taxable income to unit-holders and investors, making the REIT dividends much higher than an average investment.
Investing in REIT Schemes is a great and affordable way to invest in real estate and diversify your portfolio in terms of property. The updated REIT Regulations 2015 have diversified investment channels by giving investors multiple options regarding the types of REIT Schemes. Investors have the option to invest in a governmental project through PPP REIT Scheme or a private project through the Non-PPP REIT schemes, which are further divided into three types. The REIT Regulations have also made it mandatory for a REIT scheme to be listed on the stock exchange within three years of the registration of REIT. The dividends in REITs are much higher, as more than 90% of the income is distributed amongst unit holders. To conclude, REITs are the next big real estate trend in Pakistan in terms of portfolio diversification, liquid investment and high dividends with property appreciation in the long term.