BSEC moves for maiden Real Estate Investment Trust this year

A REIT is a trust that uses pooled capital of investors to purchase and manage income-producing real estate properties

April 16, 2022, 10:10 pm

Last modified: April 17, 2022, 03:46 pm

To offer people a structured real estate investment opportunity through the securitization of income-generating properties, the Bangladesh Securities and Exchange Commission (BSEC) is planning to introduce a Real Estate Investment Trust (REIT) by this year.

A REIT is a trust that uses pooled capital of investors to purchase and manage income-producing real estate properties.

“Right now we are framing the regulations for REITs with a target to introduce the first one by this year,” said Professor Shaikh Shamsuddin Ahmed, a BSEC commissioner.

His commission received well the industry proposals through a concept paper presented at a Dhaka Stock Exchange event last week.

City Bank Capital Resources Managing Director Ershad Hossain who delivered the keynote speech at the event told The Business Standard on Saturday, “In Bangladesh, we estimate a market ready to build REITs worth around Tk5,000 crore.”

With the economic boom and a burgeoning middle-class Bangladesh is seeing an ever-increasing number of first-time real estate buyers and the existing properties market is providing them with liveable homes or apartments, said Professor Ahmed.

But the market is not too convenient for the investors who want to own real estate to park their savings for a consistent income or a capital gain over time, he said, adding that the REITs would build a liquid market to offer an alternative asset class to such individuals, companies and funds.

Infographic: TBS

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Infographic: TBS

“REITs are going to add a new horizon in our capital market that had long been depending on equity products and very recently got momentum in publicly traded debt instruments,” said BSEC Chairman Professor Shibli Rubayat-Ul-Islam.

The Real Estate Investment Trusts would democratize the real estate market, as mutual funds did in the equity market, by allowing small sums to be collectively invested in a basket of real estate properties.

After debt instruments, REITs would be another asset class to offer portfolio investors diversifying opportunities, the BSEC chairman added.

How REITs work

REITs that were first launched in the US market in the 1960s run under relevant regulations where a sponsor company having at least three-fourths of its assets in real estate appoints a registered trustee firm to own and securitise its properties and govern the REIT, an appointed manager undertakes the operational responsibility of REIT to manage assets to generate income and capital gains, distribute dividends in exchange for a fee.

Globally, REITs are not allowed to own empty or farmlands and must invest at least 80% of the fund in accomplished real estate projects to ensure at least 51% of the REIT’s annual earning comes from rental or lease income.

REITs tend to own and manage properties used as commercial space, residential apartments, factories, warehouses, retail stores, hospitals, hotel resorts, timberlands, and many other diversified usages.

At least 90% of the annual income has to be distributed among the REIT unitholders to offer investors a decent dividend yield, while the proceeds from sales of properties in line with regulations need to be distributed as dividends unless it plans to reinvest the cash in other real estate assets.

“We are putting extra-ordinary emphasis on the transparency of REITs so that the valuation of assets can never be overstated and no related party transaction can hurt the public investors,” said BSEC Commissioner Shaikh Shamsuddin Ahmed.

His office would only allow big, reputed and reliable real estate players to float their REITs for the sake of performance and consistency and no public offer would take place at smaller than Tk100 crore.

Investors can invest as low as Tk5,000 in REITs for their share in the country’s real estate market, he hinted, adding that the listed units would offer liquidity to all investors as they can sell their units through the bourses any day.

Besides, the hassles of choosing the right property in terms of legal status, price, and income generation potential would be transferred to the professionals.

The global market

REITs are already popular in around 40 countries or regions, mostly in the developed economies of North America and Europe.

Professionally owned and managed global real estate properties are now worth over $10.5 trillion, according to an MSCI report last year.

City Bank Capital’s Ershad Hossain said in his concept paper, as of last December, 865 publicly-traded REITs combined market capitalization was at around $2.5 trillion.

Asia is the key growth center of REITs now as the number of listed REITs increased to 216 from 31 in the last 16 years in the region.

India and Pakistan have built their REITs in the last decade while Sri Lanka initiated the process in 2020 and Bangladesh has the full potential to catch up faster.

Globally, REITs as an asset class have been generating a decent double-digit annualized return in the long term which has been near to stocks and of course higher than fixed income securities.

REITs can give a big hand to the Bangladesh real estate sector through channeling both the local and foreign investments in properties, alongside helping build a vibrant and efficient properties market ecosystem to benefit all, said Ershad Hossain.

He, however, is concerned with the too-high costs here associated with trust deed registration, property ownership transfer and various taxes.

Like other developing countries, Bangladesh also needs to offer incentives through waiving such fees and taxes to build the market, he suggested.

Rev: Moin