BSEC approves rules, paving way for real estate investment

The Bangladesh Securities and Exchange Commission (BSEC) yesterday approved the Real Estate Investment Trust Fund Rules 2024 to create financing opportunities in the real estate sector through the capital market and to open up new areas of investment.

While anyone will be allowed to initiate a Real Estate Investment Trust (REIT) fund, the initial stage requires a minimum investment of Tk200 crore, which will be directed towards the real estate sector, according to the rules.

Stakeholders say engaging in the real estate sector through trust funds introduces inherent risks. A contentious debate surrounds the asset valuation methods employed in the country.

REITs, introduced to the US market in the 1960s, operate under specific regulations. In this framework, a sponsor company, possessing a minimum of three-fourths of its assets in real estate, designates a registered trustee firm to own and securitise its properties, thereby overseeing the REIT. An appointed manager assumes operational responsibility for the REIT, managing assets to generate income and capital gains and distributing dividends in exchange for a fee.

A local investment banker said that the new venture will play a role in the development of the real estate sector.

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. Income will be generated by renting them or providing services.

He said, however, that the true essence lies in the valuation of the asset in this scenario, making it a critical factor. This is precisely where the significant challenge unfolds.

He said the rules contain multiple provisions to safeguard against manipulation in the valuation process.

Individuals can invest as little 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 holdings through bourses any day.

According to the rules, the rest will raise money through public or private offers. The figure will be Tk300 crore for investments in real estate projects in city corporation areas.

The duration of any fund is mandated to be a minimum of 15 years.

A minimum of 80% of the REITs must be directly invested in real estate, while a maximum of 20% may be allocated for investment in government securities. The annual registration fee for the funds will be 0.05% of their size. In the event of failure to pay the fee, the funds will have to pay Tk50,000 per month.

A REIT fund is permitted to declare cash dividends solely from its realised income. However, it is stipulated that a minimum of 90% of the realised income on an annual basis must be distributed as dividends.

According to the draft rules, the BSEC will establish a panel of valuers, from which the fund's trustee can appoint a valuer.

The valuer shall not be appointed for a consecutive period exceeding three years and may not be re-appointed for the REIT fund until two years have elapsed since their last retirement.

The fund manager, trustee, or any of their directors or key executives must not be considered connected persons with the valuer.

The valuer must not possess any financial, professional, or other interests that could compromise its ability to provide impartial professional services to the REITs.

The valuer is prohibited from holding units of the REIT fund for which it has been appointed as a valuer.

The REIT fund will operate as a mutual fund. The asset manager and alternative investment manager are mainly eligible to operate the fund. But they have to secure a licence from the BSEC to do the job.

As per the rules, the REIT fund manager must have a paid-up capital of at least Tk20 crore. In the case of joint ventures with foreign firms, the minimum paid-up capital is Tk30 crore. Besides, they should maintain a minimum net worth of 75% of the total paid-up capital.

The fund manager shall be entitled to an annual management fee of a maximum of 1% of the year-end net asset value of the REIT.

The REITs will wind up if 66% of the unit holders vote and 70% of the fund remains uninvested without any reasonable ground over one year.

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

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.