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Fools build houses and wise men live in them: SBP extends banks/DFIs investment limit for REITs

The central bank added that it may review this revised treatment after a period of five years based on the banks’ exposure and performance of the REITs sector.

The State Bank of Pakistan (SBP) on Wednesday announced further relaxation to banks and development finance institutions to increase investment in real estate investment trusts (REITs) to boost housing and construction sector.

SBP amended its capital adequacy regulations by significantly lowering the applicable risk weight (from 200 to 100 percent) on banks/ DFIs’ investments in the units of real estate investment trusts (REITs) “in order to provide further support to the development of real estate sector.”

“With the changes in capital adequacy regulations, banks/DFIs will now be able to increase their investments in REITs without the need to allocate a relatively large amount of capital,” said the SBP. “This will, in turn, help banks to promote the 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 a further boost to the government’s agenda for the development of housing and construction sectors.”

REITs are asset management companies that own or finance income-producing real estate across a range of property sectors.

These asset management companies raise funding from the public and institutions by floating various kinds of funds. REITs deploy funds by investing in real estate properties thereby enhancing the investment in the housing and construction sector to contribute to economic growth and development.

The units of listed REITs are tradable on stock exchanges and offer a number of benefits to investors. SBP has also relaxed restrictions, in existing regulations, on seeking financing against shares of listed group companies. It will enable investors in raising liquidity for further investment in new business opportunities and ventures leading to greater economic activity.

SBP has been taking a number of regulatory steps to enhance banks/DFIs’ participation in housing and construction sectors through their financing and investment activities, In line with government’s various initiatives for the development of housing and construction sector.

SBP had amended certain provisions of its existing prudential regulations for corporate and commercial banking to encourage enhanced participation and investment of banks/DFIs in the REITs that enabled banks/DFIs to make higher investments in REITs to the tune of 15 percent of their equity as against the previous limit of 10 percent. Moreover, SBP has allowed the banks to count their investments in shares/units/bonds/term finance certificates/sukuks issued by REIT management companies towards the achievement of their mandatory targets for housing and construction finance. The amendments in SBP’s capital adequacy regulations will further incentivize banks to contribute towards a well-functioning capital market for the real estate sector.

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