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11 days ago

REIT rules to be revised to facilitate development of satellite cities

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The securities regulator considers some amendments to the recently approved REIT rules to pave the way for investments on development projects in "satellite cities".

The rules were formulated, keeping in mind that funds will go in rental projects but now the Bangladesh Securities and Exchange Commission (BSEC) thinks REIT funds should have scope to facilitate development in small metropolis surrounding the city corporations.

Due to the high land prices, flats are highly expensive in cities, built by realtors, and are beyond the affordability of a majority of the people living there, said Md. Lutful Kabir, a BSEC additional director.

People with limited income will be able to purchase flats in satellite cities and avail of the benefits of the main cities, he added.

A satellite city or satellite town is a smaller municipality or settlement that is part of a large metropolitan area and serves as a regional population and employment centre.

The BSEC wants to keep the provision of developing both residential and commercial projects.

Under the regulatory framework, REIT managers will raise funds from eligible investors through a public or private offer.

REIT is a fund or trust that owns and manages income-producing real estate, such as office buildings, shopping malls, apartments, hospitals, hotels, resorts, and industrial properties.

Units that will be issued to general investors as in the case of mutual funds will be traded in the secondary market too.

The BSEC is also considering a waiver relating to investment requirements. The rules provide for 80 per cent fund investment directly in the real estate sector within three years after a fund is floated.

According to the changes likely to be brought to the provision, if a fund manager fails to invest 80 per cent of the fund within the stipulated time, they would be allowed to increase indirect investment up to 40 per cent so that the fund does not remain idle.

Arif Khan, vice-chairman of Shanta Asset Management, said REIT would be a new product for investors. They will earn dividends and capital gains by trading in the units in the secondary market.

Challenges and risk factors

Even if REIT has the potential to offer benefits to investors and the real estate sector, it may still fail and fade into oblivion for a lack of knowledge about it.

The example of exchange traded funds (ETFs) is very much relevant in here.

The securities regulator had approved the rules of ETF and then LankaBangla Asset Management launched an ETF fund. But the fund's public portion was left undersubscribed.

Preferring anonymity, a senior official of the Dhaka Stock Exchange (DSE) said there were not sufficient awareness programmes and publicity regarding ETF.

REIT may not draw much public attention if people are not acquainted with the kind of products.

There are also risks associated with the fund management.

REIT funds will be managed the way mutual funds are managed. REIT managers will play the key role.

The country's mutual fund industry has lost investors' confidence significantly due to some unscrupulous fund managers. Such a scenario may be replicated in the case of REIT.

Wishing not to be named, an asset manager says REIT may lose the opportunity to gain ground if investors' rights are violated.

"There is huge scope of fraudulent activities in the real estate sector. So, the rule of law must be upheld to make REIT popular," he said.

Arif Khan, also a former commissioner of the BSEC, cited another risk factor. A project may incur a loss due to any mismatch between expected and practical value.

For an instance, if a REIT manager has purchased a commercial space targeting rental income, profit may decline or turn negative for rental income being lower than expected.

Another challenge lies in the valuation of assets. REIT funds' profitability will mostly depend upon proper valuation of assets.

Md. Lutful Kabir, an additional director of the BSEC, said asset valuation would be done conforming to the global standards.

"A survey will be required for the valuation of assets. Other controlled mechanisms have also been included in the rules," he said.

The trustees of REIT funds will be more empowered than that of mutual funds, he added.

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