Understanding the REIT Business
What is REIT?
REIT is a mutual fund that focuses on investment in properties and real estate and derives income from such investments for its unit holders who are individuals as well as corporates/ institutions. REIT Scheme is a listed closed end scheme registered with SECP under REIT Regulations 2015. REITs in Pakistan have a trust structure. The trust structure consists of trustees, the REIT Management Company (RMC) and unit holders.
The trust is established by the RMC and the trustee under Trust Act. A REIT Management Company identifies a project and raises public money through an Initial public offering (IPO).
Types of REITs:
Developmental REIT Scheme: a REIT Scheme established for investments in Real Estate with the objective of development of such Real Estate for industrial, commercial or residential purposes, through construction or refurbishment, and its subsequent sale.
Rental REIT Scheme: a REIT Scheme established for the object of making investment in industrial, commercial or residential Real Estate with the purpose of generating rental income from it. In a Rental REIT, a fully constructed property is first bought by the RMC and then rented out.
Hybrid REIT Scheme: a REIT Scheme which has both Developmental component as well as a Rental component.
CDC’s Role in a REIT:
Like Mutual Funds, CDC also plays the role of a Trustee in a REIT. As a Trustee, CDC undertakes the custody of all the assets of the Scheme including property along with its legal title, investments and its ancillary income on behalf of the unit holder. CDC also ensures that the assets as well as the income is being utilized by REIT Management Company (RMC) as per the requirements stipulated in Regulations, Trust Deed and Business Plan.
Among various other operational responsibilities, all the instructions of RMC including investment settlements, rent collections, dividend as well as expense payments are executed by Trustee in accordance with the provision of applicable Law. As a Trustee, CDC is under strict obligation to exercise due diligence in its role in order to protect the interest of the unit holder.
Apart from this, Trustee is also required to issue reports on quarterly as well as annual basis to the unit holder to indicate the level of compliance and the extent of violations (if any) by RMC in comparison to the Business Plan.