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Pakistan eases restrictions for banks to invest in real estate

Real Estate investing

As Per in Saama and Business Recorder dated 03-06-2021

The SBP has now amended capital adequacy regulations to facilitate banks and DFIs investment in Real Estate Investment Trusts (REITs). It has reduced the applicable risk weight from 200% to 100% for banks and DFIs investments in the units of REITs.

REITs are companies that raise funding from the general public and institutions such as banks, and deploy these funds through investment in real estate properties.

The price of property will increase if cheap house loans are offered, said a source, who asked for anonymity. “But it would happen if demand increases due to cheap loans and supply, meaning housing units remain limited just as before.

“But the State Bank and government policies will also push the supply of housing units to rise,” the source said. “That will keep the price of houses in check.”

The increase in construction activity will increase income of the people in the sector and related industries. When they will spend after earning through this sector and industries, people associated with other industries would benefit too.

Following the State Bank’s policy — the change in the capital adequacy regulation — banks and DFIs will now be able to increase investment in REITs without the need to allocate a relatively large amount of capital.

The central bank expects investment from banks to promote development of the real estate sector in the country.

“The enhanced participation of financial institutions, backed by regulatory initiatives, would also encourage REIT Management Companies to launch new REITs, providing further boost to the Government’s agenda for development of housing and construction sectors,” the SBP said in a statement.

The central bank also amended its regulations for banks to invest in REITs more by increasing the cap to 15% of their equity from the previous limit of 10%.

“The amendments in capital adequacy regulations will further incentivize banks to contribute towards a well-functioning capital market for the real estate sector,” the State Bank said.

It has also allowed banks to count their investment in shares, units, bonds, TFCs or Sukuks issued by REIT Management Companies towards the achievement of their mandatory targets for housing and construction finance, which is 5% of the total loans they extend.

Only one REIT – Arif Habib Dolmen REIT is listed at the Pakistan Stock Exchange (PSX) and functioning at the moment.

According to the Securities and Exchange Commission of Pakistan, five new REITs have registered with them in the last two years. A total of 10 REITs are currently registered with the SECP, with two more in the pipeline.

 

Real Estate Investment Trusts (REITs) management companies have lauded amendment in Basel Capital Adequacy framework for REITs by the State Bank of Pakistan (SBP.

The State Bank, on Wednesday announced some favourable changes in the Basel Capital Adequacy framework for Real Estate Investment Trusts ‘REITs’. The changes will allow banks to book greater exposure in REITs, facilitate the development of Housing Finance as well as Capital Market in the country.

These recommendations were submitted by REIT Management companies in Pakistan submitted to the State Bank of Pakistan earlier this year.

It is a positive development that now, Banks’ investment in REITs will now require them to set aside less capital against risk emanating from this investment activity.

Moreover their investment in REITs shall now be categorized in the “Banking Book” instead of “Trading Book”.

REITs are a key instruments for the government to achieve documentation, transparency and promoting real estate development in the country. Effective participation by banking companies will support this structure and provide confidence to the market.

The REIT Management Companies have thanked the SBP and consider this as an important milestone towards the development of REIT industry in Pakistan.

 

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