Initiating real estate fund to require Tk200cr, challenges in asset valuation

While anyone will be allowed to initiate a Real Estate Investment Trust (REIT) fund, the initial stage requires a minimum investment of Tk200 crore. This investment will be directed towards the real estate sector, aligning with the draft rule formulated by the stock market regulator, which aims to create a new avenue for investors.

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.

The Bangladesh Securities and Exchange Commission (BSEC) unveiled the draft of the Real Estate Investment Trust Rules 2024 on Monday, inviting public opinions by 11 February.

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.

Ershad Hossain, managing director at City Bank Capital Resources, who was involved in formulating the draft rule, told The Business Standard 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.

Ershad 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.

"The commission is 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 a BSEC officer seeking anonymity.

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 draft rule, a minimum of Tk200 crore will be required to establish a REIT, and sponsors, whether individually or collectively, are obligated to subscribe to a minimum of 20%. 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.

Regulatory frame for valuers

According to the draft rules, the BSEC will establish a panel of valuers, from which the trustee of the fund 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 lapsed 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.

Ershad Hossain said there exists a distinction in the valuation methodology between land and buildings or flats. Therefore, if the valuer possesses relevant experience, the report is likely to be accurate.

Similarly, the bank's designated valuers adhere to a conservative approach when conducting valuations. These valuers are also eligible for appointments in this context, he added.

Fund manager

The REIT fund will operate as a mutual fund. Mainly, the asset manager and alternative investment manager are 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 the minimum net worth of 75% of 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 be winded up if 66% of the unit holders vote and if 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.

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