Property market on the Colombo bourse

The Securities and Exchange Commission (SEC) is to enable the formation of Real Estate Investment Trusts (REITs) to be listed, sending its rules to the Government Printer on Friday to be issued as a gazette, officials said.

REITs are an alternative investment scheme, which offers investors an opportunity to invest in the real estate sector without the hassle involved in acquiring real estate property. It’ll generate income by owning and operating an income-generating real estate. The primary source of income is lease rental while capital appreciation will be over a period of time.

This is the first new product to the introduced to the market in 23 years after corporate bonds were launched in 1997.

The process which started in 2014 (and been discussed for at least a decade) has come into fruition with the SEC permitting investments in real estate under the Unit Trust (UT) code. Many real estate owners/developers can immediately benefit from the Unit Trust based on REITs framework, which is now enabled under the capital market framework of the SEC.

“We sent the rules to be published on Friday,” SEC Chairman, Viraj Dayaratne told the Business Times. He said the restriction in the UT code prohibiting real estate investments was removed and a separate set of comprehensive rules establishing an operating REITs was sent to be gazzetted. Relevant measures were taken with comprehensive deliberations and consultations together with efficient engagement with other applicable agencies in order to gazette the rules relating to REITs which is officially termed as ‘Rules applicable to a Managing Company and a Trustee of a Unit Trust on Sri Lanka Real Estate Investment Trusts (SL-REITs)’. This came after the capital market regulator had a meeting with the UT industry, the Colombo Stock Exchange (CSE), banks, Chamber of Commerce and the National Chamber of Commerce.

Mr. Dayaratne added that the SEC formulated the REITs structure considering the unique Sri Lankan environment in which it is expected to operate and has brought in necessary enhancements to strengthen the regulatory framework. "Amongst them is the mandatory distribution of approximately 90 per cent of income, which is currently not a requirement for any of the listed entities. Further, due to the availability of the tax pass through mechanism to Unit Trusts, REITs also could benefit to be a viable business concept to Sri Lanka that will open new horizons for entrepreneurs to take the real estate industry to greater heights.”

The SEC has already established a mechanism where a panel of valuers is available to the SEC in the event the SEC requires an expert opinion in relation to valuation.

Mr. Dayaratne explained that only completed constructions with 20 per cent occupancy, generating an income will be admissible for REITs. "Already two companies have shown a keenness to set up REITs," Mr. Dayaratne added.

The REITs will be listed on the main board of the CSE and the initial listing will be like an initial public offering. Mr. Dayaratne said that the CSE in this regard, is preparing the listing rules of REITs.

This property- backed alternative platform offers unique benefits to the investing public and to the nation as a whole, he said. He listed out a host of benefits such as increased returns from growing property sector, capital appreciation reflected in the unit price, ability to minimise volatility through rental income distribution, liquidity added to market through listing, enhanced transparency and governance by being a listed entity, mandatory valuation to provide transparency, an effective hedge against inflation due to real estate asset backing, tax benefits from being a Unit Trust under tax pass through scheme, optimise land usage due to vertical high- rise building complexes and mixed developments, facilitation of planned urbanisation with controlled congestion, environmental benefits arising from above, employment creation, contribution to country’s capital formation, GDP growth and optimise capital allocation.

This is the best time to invest in REITs, he said noting that with the low interest rate environment people will embrace it.